<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                   FORM 10-K
(Mark One)
 
[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [FEE REQUIRED]
 
For the fiscal year ended          December 31, 1997
                           -----------------------------------------------------
 
                                      OR
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
For the transition period from
                               -------------------------------------------------

                                   33-98436
Commission file number             33-98434
                       ---------------------------------------------------------

                      SULLIVAN BROADCASTING COMPANY, INC.
                                      AND
                       SULLIVAN BROADCAST HOLDINGS, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)
   58-1719496
                   Delaware                            04-3289279
     -------------------------------------     ---------------------------
        (State or other jurisdiction of               (IRS Employer
        incorporation or organization)             Identification No.)

                      18 Newbury Street, Boston, MA  02116
                      ------------------------------------
               (Address of principal executive offices)(Zip code)

     Registrant's telephone number, including area code (617) 369-7755
                                                        --------------

     Securities registered pursuant to Section 12(b) of the Act:  NONE

     Securities registered pursuant to Section 12(g) of the Act:  NONE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes X.   No __.
                                               -          

Sullivan Broadcasting Company, Inc. has 10 1/4% senior subordinated notes (which
were originally issued under the name A-3 Acquisition, Inc.) and 9 5/8% senior
subordinated notes (which were originally issued the name Act III Broadcasting,
Inc.)  which have been registered under the Securities and Exchange Act of 1933
(the "Securities Act").  Sullivan Broadcasting Company, Inc.  does not have any
equity securities registered under the Securities Act. As of March 15, 1998,
Sullivan Broadcasting Company, Inc. was a wholly owned subsidiary of Sullivan
Broadcast Holdings, Inc. The capital stock of Sullivan Broadcasting Company,
Inc. is not publicly traded and does not have a quantifiable market value.

Sullivan Broadcast Holdings, Inc. has 13 1/4% senior accrual debentures (which
were originally issued under the name A-3 Holdings, Inc.) which have been
registered under the Securities Act. As of March 15, 1998 Sullivan Broadcast
Holdings, Inc. had the following capital stock outstanding: 1,201,577 shares of
Class B-1 Common Stock, 6,158,211 shares of Class B-2 Common Stock and 1,021,872
shares of Class C Common Stock. The capital stock of Sullivan Broadcast
Holdings, Inc. is not publicly traded and does not have a quantifiable market
value.
<PAGE>
 
                                 TABLE OF CONTENTS
 
                                                                   PAGE
PART I
 
  Item 1.     BUSINESS                                                3
  Item 2.     DESCRIPTION OF PROPERTIES                              23
  Item 3.     LEGAL PROCEEDINGS                                      24
  Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    24
 
 
PART II
 
  Item 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS                                   24
  Item 6.     SELECTED FINANCIAL DATA                                25
  Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS                   26
  Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA            34
  Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE                   35
 
PART III
 
  Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT     35
  Item 11.    EXECUTIVE COMPENSATION                                 36
  Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT                                        41
  Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS         43

PART IV

  Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
               REPORTS ON FORM 8-K                                   43


SIGNATURES                                                           46

                                       2
<PAGE>
 
ITEM 1. BUSINESS

OVERVIEW

  All of the outstanding capital stock of Act III Broadcasting, Inc., a Delaware
corporation ("Act III"), was acquired by A-3 Acquisition, Inc., a Delaware
corporation ("A-3"), on January 4, 1996 (the "Acquisition").  As described
further below, Sullivan Broadcasting Company, Inc. is the successor by merger to
A-3 and Act III.

          Sullivan Broadcast Holdings, Inc., a Delaware corporation, formerly
known as A-3 Holdings, Inc. ("Holdings"), and its wholly-owned subsidiary, A-3,
were formed by ABRY Broadcast Partners II, L.P. ("ABRY") to acquire all of the
outstanding stock of Act III pursuant to a stock purchase agreement dated as of
June 19, 1995 (as amended, the "Stock Purchase Agreement") by and among A-3, Act
III, Act III Communications, Inc. and certain other stockholders of Act III.
Upon the consummation of such Acquisition, A-3 merged (the "Merger") with Act
III, with Act III surviving such Merger (the "Surviving Company"). In the
Merger, the name of the Surviving Company was changed from Act III Broadcasting,
Inc. to Sullivan Broadcasting Company, Inc. ("SBC").  Holdings currently owns
100% of the outstanding capital stock of SBC.

  On February 23, 1998, Holdings entered into a Plan of Merger with Sinclair
Broadcast Group, Inc. (the "Sinclair Merger").  Under the terms of the Sinclair
Merger, 100% of the issued and outstanding common stock of Holdings will be
acquired by means of a merger. The Sinclair Merger is subject to approval of the
FCC and is expected to close prior to August 1998.

          This integrated Form 10-K is filed pursuant to the Securities Exchange
Act of 1934, as amended, for each of Sullivan Broadcast Holdings, Inc., a
Delaware corporation, and its wholly owned subsidiary, Sullivan Broadcasting
Company, Inc., a Delaware corporation.  Unless the context requires otherwise,
references to the "Company" refer to both Sullivan Broadcast Holdings, Inc. and
Sullivan Broadcasting Company, Inc.  Sullivan Broadcast Holdings, Inc. is a
holding company with minimal separate operations from its operating subsidiary,
Sullivan Broadcasting Company, Inc.  Separate financial information has been
provided for each entity, and, where appropriate, separate disclosures.

THE COMPANY
-----------

  The Company owns, operates and/or programs nine television stations affiliated
with the Fox Broadcasting Co. ("Fox") (collectively, the "Fox Stations"), one
television station affiliated with the American Broadcasting Companies, Inc.
("ABC") (the "ABC Station"), one low power television station affiliated with
the United Paramount Network ("UPN") (collectively, "the Owned Stations") and
two independent television stations that the Company programs under Local
Marketing Agreements ("LMA"), also referred to as the Time Brokerage Agreements,
(collectively, the "Stations").  With its nine owned Fox affiliates, the Company
is one of the largest owners of Fox-affiliated stations in the United States.
During 1997, four of the nine Fox affiliated stations also received programming
from UPN under secondary affiliation agreements, while the one owned independent
station and the two stations programmed pursuant to LMAs remained primary UPN
affiliates.  In addition, the Company operates the only U.S. television station
to broadcast Fox programming into the Toronto, Ontario market (WUTV). The
following are the Stations and their respective markets:

                                       3
<PAGE>
 
                                                            PRIMARY/
                                                           SECONDARY
  Station                    MARKET                       AFFILIATION
  -------                    ------                       -----------

OWNED STATIONS
    WUTV          Buffalo, NY/Toronto, Ontario              Fox/UPN
    WZTV          Nashville, TN                             Fox
    WXLV          Greensboro/Winston Salem/High Point, NC   ABC
    WRGT          Dayton, OH                                Fox/UPN
    WVAH          Charleston/Huntington, WV                 Fox/UPN
    WRLH          Richmond, VA                              Fox
    WUHF          Rochester, NY                             Fox/UPN
    WTAT          Charleston, SC                            Fox
    WMSN          Madison, WI                               Fox
    WPNY          Utica, NY                                 UPN
    WFXV          Utica, NY                                 Fox
 
LMA STATIONS
    WUPN          Greensboro/Winston Salem/High Point, NC   UPN
    WUXP          Nashville, TN                             UPN

  The Company selected and acquired the Stations based on the size and growth of
their respective markets and their broadcast revenues, number of competitors,
retail sales and programming inventory, as well as availability of other
programming in the market. Specifically, the Company sought and acquired
independent stations in designated market area ("DMA") markets ranked generally
between 30 and 100. See "Ratings."  Each of the Stations broadcast over-the-air
and transmit over the cable systems operating within its market. Approximately
68%, in the aggregate, of the television households within the Stations' U.S.
markets are served by cable.

STRATEGY

  The Company's selective acquisition of strong, independent stations in medium-
sized markets, combined with its experienced management, has provided the
Company with a strong market niche in television broadcasting. The Company's
strategy is centered upon the following:

        Operate in Markets with Limited Competition.  In seven of the Company's
ten markets, the Company competed against only three or fewer other commercial
television stations as set forth in the Nielsen Station Index dated November
1997.  As a result, the Company believes it achieves higher advertising revenues
and lower programming costs due to less competition for programming, viewers and
advertising sales.  In addition, since there are four major commercial networks
(ABC, CBS, NBC and Fox), the Company believes that should there be network
affiliation changes within any market, the Company would not be left without a
major network affiliation in such market even if its present affiliation was
terminated.  In six of the Company's ten

 

                                       4
<PAGE>
 
markets, the Company's Station(s) is the only viable commercial UHF station.
Therefore, in the event of regulatory changes allowing common ownership of VHF
and UHF stations in the same market, the Company's UHF station may be a part of
any combination of UHF and VHF stations in such market, either by virtue of the
Company's acquiring a VHF station or selling its UHF station.

        Develop Programming Franchises and Station Identities.  In order to
maximize its share of advertising revenues in each of its markets, the Company
seeks to create distinctive identities for each of the Stations by developing
programming franchises targeted to specific demographic groups which the Company
believes are attractive to its advertising clients.  Both Fox and UPN provide
programming which is designed to attract young adults, teens and children.  The
Company also seeks to improve its ratings among key demographic groups by
broadcasting high quality off-network and first-run syndicated programming.
With respect to non-network programming, the Company focuses on acquiring cost
efficient programs which provide good ratings and, therefore, high advertising
revenues, relative to the cost per show.  Independent and Fox-affiliated
stations are typically the largest consumers of syndicated programming.
Therefore, because the Company's Fox-affiliated stations are predominantly in
markets without a competing commercial independent station, there is little or
no competition for the purchase of such programming in such markets, which the
Company believes results in lower costs for such programming.

        Pursue In-Market LMAs and Acquisitions.  In its existing markets, the
Company believes that it can attain significant growth in its share of market
revenues and in operating cash flow through the utilization of LMAs and, if
current law is changed to allow ownership of more than one television station in
a market, through acquisitions.  There can be no assurance that there will be
any such change in law.  By programming more than one station in a market, the
Company believes it will be able to increase its revenues by attracting new
advertisers and increasing its share of existing customers' advertising budgets
by offering attractive sales packages that combine the programming strengths and
commercial inventories of both stations.  In addition, the Company believes it
will be able to realize economies of scale in marketing, programming, overhead
and capital expenditures.  The Company currently programs television stations in
the Greensboro/Winston Salem/High Point, North Carolina market (WUPN) and in the
Nashville, Tennessee market (WUXP) under LMAs (the "WUPN LMA" and the "WUXP
LMA", respectively).  The Company will consider acquisitions that would help to
further diversify revenues and operating cash flow.  The Company will seek
television stations which operating performance management believes it can
improve through the application of its business strategies.

        Emphasize Local Sales.  The Company's advertising sales strategy centers
upon increasing its sales of local, and in the case of WUTV, Canadian,
advertising.  As compared to revenues from national advertising, revenues from
local advertising generally are more stable and, due to a lower cost of sales,
more profitable.  The Company seeks both to attract new advertisers to
television and to increase the amount of advertising by existing local
advertisers by operating experienced local sales forces with strong community
ties, producing commercials for local clients and targeting small businesses
with potential for growth.  From 1993 through 1997, the percentage of the
Company's total gross advertising revenues from local sales increased from 55.6%
to 59.6%.

        Maximize Group Efficiencies.  With operations presently in ten markets,
the Company has been and will continue to achieve certain efficiencies with
respect to programming purchases, advertising sales and operating costs.  In
addition, group marketing ad sales enable each

                                       5
<PAGE>
 
Station to expand its base of advertisers and to obtain attractive terms from
national sales representatives. See "Advertising Sales." The Company controls
overall operating costs by maintaining a centralized corporate management
structure, which provides programming, financial and marketing support to each
Station.

        Capitalize on Changes in Method of Audience Measurement.  A.C. Nielsen
Co. uses one of two methods to measure a television station's actual viewership.
In larger DMAs, ratings are determined by a combination of meters connected
directly to selected television sets and periodic surveys ("Sweeps" or "Ratings
Periods") of television viewers through a manual diary system.  In smaller DMAs,
only periodic surveys are completed.  Typically, viewership of Fox affiliates
and independent stations is under-reported in "diary markets" because members of
the target audience of these stations (children, teens and young adults) do not,
on a regular basis, maintain an accurate diary of the programs they watch as
well as older viewers.  A switch from diary measurement to metered measurement
in a market generally results in a significant increase in reported viewership
for Fox affiliates and independent stations.  Nielsen has announced that it is
in the process of converting diary markets to metered markets, generally in
order of market size.  Metering commenced in Nashville in July 1997 and the
Company has entered into an agreement with Nielsen to commence metering in the
Greensboro/Winston- Salem/High Point markets in April 1998.  As a result of this
switch, the Company has experienced a significant increase in reported
viewership for its Nashville stations.

PROGRAMMING

  Fox provides each Fox Station with approximately 15 hours of prime-time
programming per week, including Melrose Place, King of the Hill, The Simpsons
and The X-Files.  In addition, Fox provides each Fox Station with approximately
25 hours per week of non-prime time programming, including National Football
League games, National Hockey League games, Major League Baseball and children's
programming via the Fox Children's Network ("FCN").  ABC provides the ABC
station with approximately 22 hours of prime-time programming and approximately
35 hours of non-prime-time programming per week.  Prime-time programming
provided by ABC includes Monday Night Football, Home Improvement, The Drew Carey
Show and NYPD Blue, while non-prime-time programming includes Good Morning
America, ABC World News Tonight, ABC College Football and All My Children.

  The Company, through its affiliation with FCN, acquires television programming
for children, including animated programs, for broadcast on the Fox Stations.
Each of the Fox Affiliation Agreements (as defined, see "Network Affiliation
Agreements") includes the right to broadcast FCN programs, generally for morning
and afternoon children's programming.  The Company believes FCN programs have
been successful in these periods, thereby increasing the Fox Station's overall
ratings.  The Company also broadcasts Disney animated programming for children
on some of its Stations.

  The Company has secondary affiliation agreements with UPN for a five-year term
ending on January 15, 2000, pursuant to which UPN may provide up to 10 hours
(and is currently providing six hours) of prime-time quality programming per
week.  Such secondary UPN Affiliates are WUTV (Buffalo), WRGT (Dayton), WVAH
(Charleston/Huntington) and WUHF (Rochester).  In Nashville (WUXP),
Greensboro/Winston-Salem/Highpoint (WUPN) and Utica (WPNY), the Company has
primary UPN affiliation agreements.

                                       6
<PAGE>
 
  Non-network programming hours at the Stations are programmed with a mix
(customized for each market) of syndicated off-network reruns and first-run
shows, movies, sports, talk shows, and other entertainment programs. In 1997,
WTAT (Charleston), WRLH (Richmond), WZTV (Nashville) and WUHF (Rochester) were
the four Fox Stations broadcasting local newscasts. WTAT and WRLH's newscasts
are produced by the CBS and NBC affiliated stations, respectively, in those
markets, WZTV's newscast is produced by the Nashville ABC affiliate, and WUHF's
newscast, which launched in December 1997 is self produced. WXLV, being an ABC
affiliate, broadcasts daily local news programming in the morning, early evening
and at 11 p.m.

  Non-network programming is purchased by the Stations from various program
suppliers such as Paramount Communications, Inc., Time Warner Entertainment
Company, L.P., Twentieth Century Fox Film Corporation, Sony Pictures
Entertainment, Inc., and The Walt Disney Company.  The Company believes it has
been able to improve its ratings among key demographic groups due to the
availability of high quality off-network and first-run syndicated programming.
UPN and Fox-affiliated stations are the largest consumers of syndicated
programming which, based on there not being additional competing commercial
independent stations in most of the Company's markets, results in there being
less competition for the purchase of syndicated programming.

  The Company's agreements for programming, other than that received from Fox,
ABC and UPN, typically have a four to five-year license term with payments
generally made over the same term.  Such agreements are either licensed for cash
only, barter only or a combination of cash and barter.  Under a barter
agreement, in exchange for the right to air the program, the program supplier
retains a percentage of the advertising time as consideration for telecasting
rights for the program, which it then sells for its own account, and the Company
retains the remainder of the advertising units in the program.

NETWORK AFFILIATION AGREEMENTS

  Fox.  Each of the Fox Stations is affiliated with Fox pursuant to a
substantially identical affiliation agreement (the "Fox Affiliation
Agreements").  Each Fox Affiliation Agreement provides the specified Fox Station
with the right to broadcast all programs transmitted by Fox, including NFL
football, NHL hockey, Major League Baseball and FCN programming.  The amount of
programming provided by Fox to its affiliates has increased from a total of five
hours on two nights per week in July 1987 to 40 hours on seven days and nights
per week (including 15 hours of prime-time programming) in 1997.  Fox prime-time
programming is intended to appeal to a target audience of 18 to 49 year old
adults.  In exchange for the right to broadcast its programs, Fox has the right
to sell nationally approximately 60% of the advertising inventory in such
network programs and to retain the advertising revenues from the sale of that
time.  The Fox Stations are entitled to sell the remainder of the advertising
time and retain the associated advertising revenues.

  Each Fox Affiliation Agreement is for a term ending on July 15, 1998, except
for WUTV's and WFXV's Fox Affiliation Agreements, which end on December 1, 1998
and October 3, 1998, respectively.  Each Fox Affiliation Agreement is renewable
for five years at the discretion of Fox and upon acceptance by the specified Fox
Station.  The Fox Affiliation Agreement for each Fox Station may be terminated
generally:  (a) by Fox upon (i) a material change in such Fox Station's
transmitter location, power, frequency, programming format or hours of
operation, with 30 days written notice, (ii) acquisition by Fox of a television
station in the same market, with 60 days written notice, (iii) assignment or
attempted assignment by such Fox Station of the Fox Affiliation Agreement in a
manner contrary to the terms thereof, with 30 days written notice, (iv) three or
more unauthorized preemption's of Fox programming within a 12-month period, with
30 days

                                       7
<PAGE>
 
written notice, or (v) failure by Fox and such Fox Station to agree upon
retransmission consent terms or "must carry" status with respect to cable
television companies, with 30 days written notice; or (b) by either Fox or such
Fox Station upon occurrence of a force majeure event which substantially
interrupts Fox's ability to provide programming or such Fox Station's ability to
broadcast the programming.

  ABC.  WXLV entered into a 10-year affiliation agreement with ABC (the "ABC
Affiliation Agreement") on March 23, 1995.  Under the ABC Affiliation Agreement,
WXLV has the right to broadcast all programs transmitted by ABC. In exchange for
ABC network provided programming, ABC has the right to sell nationally (and
retain the revenues therefrom) approximately 50% of the advertising time for
non-primetime network provided programming, and 70% of the advertising time for
network provided primetime programming.  The ABC Station sells the remainder of
the advertising time and retains the revenues therefrom.  WXLV is compensated by
ABC depending on the quantity of network programming it airs "in pattern" (i.e.,
within ABC prescribed time-periods).  The ABC Affiliation Agreement provides for
annual network compensation payments of $350,000.

  The ABC Affiliation Agreement may be terminated by ABC upon (i) a material
change in the ABC Station's transmitter location, power, frequency, programming
format or hours of operation, with 30 days written notice; (ii) an assignment or
attempted assignment by the ABC Station in a manner contrary to the terms
thereof, with 30 days written notice; or (iii) unauthorized preemptions of ABC
programming which exceed 50 half-hours per year, after receiving written notice
of such unacceptable preemptions from ABC and failing to comply within 90 days
after such notice.

  UPN. WUTV, WRGT, WVAH and WUHF maintain secondary affiliation agreements with
UPN, and WUXP, WUPN and WPNY have primary affiliation agreements (all
hereinafter collectively referred to as the "UPN Affiliation Agreements").  UPN
provides six hours of primetime quality programs (two hours per night for three
nights per week), including the newest Star Trek series - Star Trek: Voyager.
The secondary UPN Affiliation Agreements are for five years through January 15,
2000, however WUTV's UPN secondary affiliation will terminate in April of 1998,
and permit UPN to provide up to 10 hours of primetime quality programming per
week over its term.

ADVERTISING SALES

  General. Television station revenues are primarily derived from local,
national and, in the case of WUTV, from Canadian advertising.  Advertising rates
are based upon a program's popularity among the viewers time sold (see
"Ratings"), the number of advertisers competing for available time, the size and
demographic composition of the respective daypart desired and the availability
of alternative advertising media in the market area.  Declines in advertising
budgets, particularly in recessionary periods, adversely affect the broadcast
industry, and as a result may contribute to a decrease in the revenues of
broadcast television stations.  The Company seeks to manage its advertising spot
inventory efficiently and effectively in order to maximize advertising revenues
and the return on programming costs.  Subject to availability, Stations can sell
advertising time up to 52 weeks in advance.  The Company's advertising sales
strategy centers upon increasing its sales of local advertising.  As compared to
revenues from national advertising, revenues from local advertising are
generally more stable and, due to a lower cost of sales, more profitable.  From
1993 through 1997, the percentage of the Company's total gross advertising
revenues from local sales increased from 55.6% to 59.6%.

                                       8
<PAGE>
 
  National Sales.  Approximately 40.4% of the Company's total gross advertising
revenues in 1997 came from national advertisers.  Typical national advertisers
include General Mills, Inc., Hasbro, Inc. and General Motors Corporation.  The
Company can provide advertising time on all of the Stations to national
advertisers, offering bulk buying power and an attractive geographic and
demographic package to such sponsors. National advertising time is sold through
representation agencies retained by the Company. All of the Stations except WUHF
are currently represented by Seltel, Inc. ("Seltel") pursuant to substantially
identical agreements. The Company believes that the representation of its
Stations by the same agency increases the Company's ability to effectively sell
national advertising. Blair Television currently represents WUHF as its
exclusive national sales representative under an agreement that is scheduled to
expire one year from notice of cancellation by WUHF.

  Local Sales.  Approximately 59.6% of the Stations gross advertising revenues
in 1997 came from local advertisers. Typical local advertisers include car
dealerships, retail stores and restaurants. The Company seeks to both attract
new advertisers to television and to increase the amount of advertising by
existing local advertisers by operating experienced local sales forces with
strong community ties, producing commercials for local clients and targeting
small businesses with potential for growth.  Local advertising time is sold by
account executives at each Station.  The Company places a strong emphasis on the
size and experience of its local sales staff and maintains a comprehensive, on-
going training program for account executives and managers and utilizes
performance-based compensation plans and sales contests.  In addition, the
Company strives to increase local advertising by increasing the Stations'
presence in their respective local communities through participation in various
co-promotions with community businesses, such as sponsorship of children's
expos, children's clubs and other high-profile promotional tie-ins.


THE COMPANY'S TELEVISION STATIONS

  The following table sets forth general information for each of the Stations as
of November 30, 1997 unless otherwise noted:
<TABLE>
<CAPTION>
                                                   Approximate         Total         Weekly
                                     Approximate      Market        Commercial       Evening      Date of
                        Market         Market       Television     Broadcasters     Ratings/    Acquisition/   Channel
Station    DMA(1)        Area        Population   Households(2)    in Market(3)     Share(4)        LMA       Number(5)
---------  ------  ----------------  -----------  --------------  ---------------  -----------  ------------  ----------
<S>        <C>     <C>               <C>          <C>             <C>              <C>          <C>           <C>
 
WUTV        39(6)  Buffalo, NY         1,577,000      633,000                5          2/5             6/90       29
                   Toronto, Ontario    5,912,000    2,174,000               12
WZTV/       33     Nashville, TN       1,918,000      783,000                5          3/8             6/88       17
WUXP                                                                                    2/4             2/96       30
WXLV/       46     Greensboro/         1,376,000      568,000                6          2/8            12/86       45
WUPN               Winston Salem/                                                       1/3             7/96       48
                   High Point, NC
WRGT        53     Dayton, OH          1,277,000      503,000                4          2/6             2/88       45
WVAH        56     Charleston/         1,232,000      483,000                4          2/6             2/88       11
                   Huntington, WV
WRLH        59     Richmond, VA        1,144,000      461,000                4          3/8             9/88       35
WUHF        74     Rochester, NY         923,000      367,000                4          3/9             3/89       31
WMSN        84     Madison, WI           785,000      313,000                4         3/12             7/96       47
WTAT       109     Charleston, SC        601,000      224,000                5          2/7            11/87       24
WFXV/      166     Utica, NY             242,000       96,000                3          2/5             7/96       33
WPNY                                                                                    1/2             7/96       11
</TABLE>
  Source -- The November 1997 Nielsen Station Index (other than information with
respect to Toronto).

                                       9
<PAGE>
 
  (1) DMA is defined by A.C. Nielsen Co. ("Nielsen") as a station's "designated
market area".

  (2) Each of the Stations broadcasts over-the-air and is carried on cable
systems operating within its market. Approximately 68%, in the aggregate, of the
television households within the Stations' markets are served by cable.

  (3) Total number of commercial broadcast television stations, including the
Stations, designated by Nielsen as "local" to the DMA delivering at least 1% of
the 7:00 a.m. to 1:00 a.m., Sunday through Saturday audiences. As used
throughout this Form 10-K report, references to the number of independent
stations in a DMA exclude public television stations and other stations that are
not reportable stations.

  (4) Represents average share in the market from 7:00 a.m. to 1:00 a.m., daily,
Sunday through Saturday as estimated by Nielsen for the most recent rating
period ended November 1996. The ratings and shares shown are statistical
estimates.

  (5) Each of the Stations, other than WVAH and WPNY, broadcast on the UHF band
and consequently have not been assigned channel numbers above 2 through 13,
which are reserved for VHF transmission. WVAH and WPNY broadcast on the VHF
band, and consequently their channel position (both 11) is within the 2 through
13 VHF band.

  (6) If the combined markets of Buffalo and Toronto were considered a single
market, they would constitute approximately the sixth largest television market
in the U.S.

DESCRIPTION OF THE STATIONS

  The following is a description of the history and characteristics of each of
the Stations.

WUTV (BUFFALO, NEW YORK/TORONTO, ONTARIO)

  The Company acquired WUTV, a UHF station, in June 1990. WUTV is the dominant
independent television station in the Buffalo market and is the only U.S.
independent television Fox affiliate station to broadcast in the Toronto market.
WUTV is carried on Toronto area cable systems as part of the basic cable service
provided to the Toronto market. WUTV enjoys a "grandfathered" status in Canada
due to the fact that the Station's commencement of operations in 1970 pre-dated
formal cable regulation in Canada. WUTV capitalizes on its unique ability to
offer Fox and independent U.S. programming in Toronto by selling advertising
time to Canadian advertisers while obtaining syndicated programming based on
prices appropriate for the Buffalo market. WUTV competes effectively against the
Buffalo network affiliates, which also are carried in Toronto via cable, due to
its ability to offer a greater variety of syndicated U.S. programming other than
that provided by the three major networks. The major three network affiliates'
programming has limited appeal in Toronto since a large number of the networks'
programs are syndicated to Canadian broadcasters.  The Company began replacing
WUTV's transmitter, tower and antenna in 1996 to increase its power and
broadcast area.  This project is expected to be completed by mid-1998.

WZTV (NASHVILLE, TENNESSEE)

  The Company acquired WZTV, a UHF station, in June 1988.  The Company believes
that WZTV has obtained a strong position in the market which has further been
solidified with the

                                       10
<PAGE>
 
metering of the Nashville market by Nielsen in July of 1997. WZTV operates
production facilities which it utilizes to produce commercials and originate
community oriented programming. WZTV also leases the production facilities to
third parties. In addition, WZTV launched a 9:00 p.m. newscast in July of 1997
which is produced by the ABC affiliate in Nashville.

WUXP (NASHVILLE, TENNESSEE)

  The Company began programming WUXP under the WUXP LMA in February 1996.  With
the Company's emphasis on local sales and the continued reductions in operating
costs, including marketing, programming and overhead, resulting from economies
of scale and with the positive impact of metering, WUXP has strengthened the
Company's position within the market while providing improved operating results.

WXLV (GREENSBORO/WINSTON-SALEM/HIGH POINT, NORTH CAROLINA)

  The Company acquired WXLV, a UHF station, in December 1986. On March 23, 1995,
in anticipation of the termination by Fox of its affiliation with WXLV as a
result of the acquisition by a Fox-related company of a material ownership
interest in a television station in the Greensboro/Winston-Salem/High Point,
North Carolina market, the Company entered into the ABC Affiliation Agreement.
WXLV's affiliation change from Fox to ABC became effective as of September 3,
1995.  Under the ABC Affiliation Agreement, WXLV has the right to broadcast all
ABC programming.  As a result of the change in network affiliation, WXLV has
access to approximately seven additional hours of prime-time and twenty-five
additional hours of non-prime time network programming per week as compared to
its prior arrangement with Fox.  The ABC Affiliation Agreement provides for a
term of ten years and the Company receives network compensation of approximately
$350,000 per year for each year of such term.

  Historically, WXLV operated at a competitive disadvantage because of sub-
standard transmission facilities.  In order to address this issue, in September
1991, the Company entered into a LMA with Guilford Telecasters, Inc.
("Guilford"), owner of WGGT (the "Original WGGT LMA"), the only independent
television station in the market.  Pursuant to the Original WGGT LMA, WXLV
simulcast substantially all of its programming over WGGT, thereby increasing
WXLV's audience reach.  During 1994, WXLV replaced its old transmitter and
antenna.  These new transmission facilities resulted in improved signal quality
and audience reach.  As a result, the Original WGGT LMA became obsolete.

  On June 30, 1995, the Company and Guilford entered into a revised LMA (the
"Second WGGT LMA"), which is an amendment to the Original WGGT LMA.  Pursuant to
the Second WGGT LMA, the Company paid Guilford $6.0 million in exchange for
certain broadcast time on WGGT through September 30, 2001 and the Company's
obligation to pay Guilford 25% of WXLV's cash flow was terminated.  Under the
Second WGGT LMA, the Company had the right to have WGGT rebroadcast the signal
of WXLV or to broadcast other programming designated by the Company, subject to
certain rights of Guilford.

  As part of the Second WGGT LMA, the Company also paid Guilford $1.0 million
and Guilford granted to a third party an option to purchase certain assets of
WGGT for an additional $1.0 million (the "WGGT Option").  Such third party
granted the right to the Company to require such third party to assign the WGGT
Option to the Company or another third party designated by the Company and such
option was assigned and exercised in March 1996.  In conjunction with the
exercise of the WGGT Option by a third party, WGGT changed its call letters to
WUPN, and the

                                       11
<PAGE>
 
Second WGGT LMA was assigned to such third party (hereafter, the "WUPN LMA").
The Company began providing a separate program feed to WUPN in September 1996
using WXLV's excess programming as a result of its affiliation switch to ABC
from Fox. Such programming will satisfy WUPN's needs for up to three years at
very little incremental cost.

  WXLV is active in community involvement through such events as the Dixie Class
Fair in Winston-Salem and the Fridays at Five in Greensboro.  Additionally, WXLV
is the media sponsor of the Juvenile Diabetes Foundation, as well as the
flagship station for the United Cerebral Palsy Telethon.

WRGT (DAYTON, OHIO)

  The Company acquired WRGT, a UHF station, in February 1988.  WRGT is the only
independent television station in the Dayton, Ohio market. The Station's
promotion and production departments have earned 17 regional Emmy awards, as
well as a Gold and Silver Medal from The International Film and Television
Festival of New York.

WVAH (CHARLESTON/HUNTINGTON, WEST VIRGINIA)

  The Company acquired WVAH, a VHF station, in February 1988.  WVAH is the only
independent television station in the Charleston/Huntington market, and WVAH is
the only Fox affiliate located in West Virginia. WVAH has its own production
department doing business as an independent production company.

WRLH (RICHMOND, VIRGINIA)

  The Company acquired WRLH, a UHF station, in September 1988. WRLH is the
dominant independent television station in the Richmond, Virginia market.  WRLH
added local news to its programming in 1994, making it, WTAT, WZTV and WUHF the
four Fox Stations of the Company which provide news programming.  Pursuant to a
multi-year agreement effective September 1994, WWBT-TV, the NBC affiliate in
Richmond, provides WRLH with a fully produced half hour seven day-a-week
newscast for broadcast from 10:00 p.m. to 10:30 p.m.  In exchange, WRLH pays
WWBT-TV $8,333 per month plus a percentage of the net cash flow resulting from
the newscast.

WUHF (ROCHESTER, NEW YORK)

  The Company acquired WUHF, a UHF station, in March 1989.  WUHF is the only
independent television station in the Rochester, New York market. In serving its
clients, WUHF's production unit features a state-of-the-art facility that
specializes in long form corporate videos, plus documentaries that have aired
nationally on PBS. WUHF's locally produces a children's program, Doctor's Rock's
Dinosaur Adventure.  In addition, WUHF launched a self-produced 10:00 p.m. seven
day-a-week newscast in December 1997.

WTAT (CHARLESTON, SOUTH CAROLINA)

  The Company acquired WTAT, a UHF station, in November 1987. WTAT is the
dominant independent television station in the Charleston, South Carolina
market.  WTAT provides news programming pursuant to an agreement (which has been
extended through December 1999) under which WCSC-TV, the CBS affiliate in
Charleston, provides WTAT with a fully-produced

                                       12
<PAGE>
 
half-hour newscast for broadcast weekdays from 10:00 p.m. to 10:30 p.m. In
exchange, WTAT pays WCSC-TV $8,333 per month plus a percentage of the net cash
flow resulting from the newscast.

WMSN (MADISON, WISCONSIN)

  The Company acquired WMSN, a UHF station, in July 1996.  WMSN is the only
independent station in the Madison market, a market which is consistently rated
one of the best places in America in which to live.  Madison maintains a very
low unemployment rate and an average per capita income significantly higher than
the U.S. average.

WFXV AND WPNY (UTICA, NEW YORK)

  The Company acquired WFXV, a Fox affiliate, and WPNY, a low power UPN
affiliate, in July 1996. Although a relatively small market, given the overall
size of the Company, the station benefits greatly from the Company's group
buying power in programming and other related costs.

RATINGS

  The price which television stations can charge for advertising spots is
determined in part by a station's overall ratings and share in a given market,
as well as a station's rating and share among a particular demographic group
which an advertiser may be targeting in specific time periods.  There are
approximately 211 generally-recognized television DMA's in the U.S. that are
ranked in size according to various factors based upon actual or potential
audience.  Each market is defined as an exclusive geographic area consisting of
all counties in which the in-market commercial stations receive the greatest
percentage of total viewing hours.  Currently, Nielsen periodically publishes
data on estimated audiences. The estimates are expressed in terms of the
percentage of the total potential audience in the market viewing a station (a
station's "rating") and of the station's percentage of the total potential
audience actually watching television during the time-period measured (a
station's "share").

  Nielsen uses one of two methods to measure a station's actual viewership,  In
large DMA's, ratings are determined by a combination of meters connected
directly to selected household television sets and periodic surveys of the
television viewers through a manual diary system.  Nashville began metering in
July 1997 and the Greensboro/Winston-Salem/High Point market will be metered in
April 1998.  In smaller DMA's, only periodic surveys during preset ratings
periods ("sweep months") are used.

COMPETITION

  Competition in the television industry takes place on several levels:
competition for audience, competition for programming (including news) and
competition for advertisers. Additional factors that are material to a
television station's competitive position include signal coverage and assigned
frequency. The broadcasting industry is continually faced with technological
change and innovation, the possible rise in popularity of competing
entertainment and communications media, and governmental restrictions or actions
of federal regulatory bodies, including the FCC and the Federal Trade Commission
("FTC"), any of which could have a material effect on the Company's operations.

                                       13
<PAGE>
 
     Audience.  Stations compete for audience on the basis of program
popularity, which has a direct effect on advertising rates. A portion of the
Company's daily programming is supplied by Fox.  Likewise, a portion of the
Company's daily programming at its ABC Station is supplied by ABC.  In those
time periods, the Fox Stations are totally dependent upon the performance of the
Fox programs in attracting viewers and the ABC Station is totally dependent upon
the performance of the ABC programs in attracting viewers.  Four of the nine Fox
Stations have a secondary affiliation agreement with UPN and the two stations
programmed under LMA's, WUPN and WUXP, in addition to WPNY, are primary
affiliates of UPN. Non-network time periods are programmed by the Stations with
syndicated programs purchased for cash, cash and barter, or barter only. The
Stations also air sports, talk shows, public affairs and other entertainment
programming.

  The development of methods of transmission of video programming other than
over-the-air television broadcasting, and in particular the growth of cable
television, has significantly altered competition for audience in the television
industry. These other transmission methods can increase competition for a
broadcasting station by bringing into its market distant broadcasting signals
not otherwise available off the air to the station's audience and also by
serving as a distribution system for non-broadcast programming distributed by
the cable system. As the technology of satellite program delivery to cable
systems advanced in the late 1970's, development of programming for cable
television accelerated dramatically, resulting in the emergence of multiple,
national-scale program alternatives and the rapid expansion of cable television
and higher subscriber growth rates.

  Other sources of competition include direct broadcast satellite, home
entertainment systems (including video cassette recorder and playback systems,
videodiscs and television game devices), multichannel and multipoint
distribution systems (a.k.a. wireless cable), satellite master antenna
television systems, and low power television stations. Television stations also
face competition for market share and advertising revenues from radio stations,
newspapers, periodicals and other entertainment media. Additional competition
may be provided if the telephone companies begin to offer video programming,
either through multi-channel video services such as cable TV or as part of so-
called "open video system" (OVS) services.

  Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now under development
for use with current cable television delivery systems or direct broadcast
satellites are expected to reduce the bandwidth required for television signal
transmission allowing the delivery of potentially more channels of programming.
These compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting,
and have the potential to provide vastly expanded programming to highly targeted
audiences. Reduction in the cost of creating additional channel capacity could
lower entry barriers for new channels and encourage the development of
increasingly specialized "niche" programming for highly targeted audiences. This
ability to provide additional channels of programming and to reach very defined
audiences may alter the competitive dynamics for advertising expenditures. The
Company is unable to predict the effect that technological changes will have on
the broadcast television industry or the future results of the Company's
operations.

     Programming.  Competition for programming involves negotiating with
national program distributors or syndicators which sell first-run and rerun
packages of programming. The Stations compete against other broadcast stations
in their market for the exclusive right to broadcast off-network reruns (such as
Seinfeld and Home Improvement) and first-run product (such as Ricki

                                       14
<PAGE>
 
Lake). Cable systems generally do not compete with local stations for
programming, although various national cable networks have acquired programs
that would have otherwise been offered in syndication to local television
stations.

  Time Warner, Inc. and Viacom, Inc., each of which has launched new television
networks (WB and UPN, respectively), also own or control a major production
studio.  Outside production companies are still the primary source of
programming for the traditional three networks and Fox. It is uncertain in the
future as to how much studio produced programming, which is generally licensed
by the studios and production companies to the four networks under short-term (1
year) agreements, will be moved to the UPN and WB networks. The Company has
entered into secondary and primary affiliation agreements with UPN.

     Advertising.  The Stations compete for local advertising revenues with
other television stations in their respective markets, as well as with other
advertising media, such as newspapers, radio, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail and local cable
systems.  Competition for advertising dollars in the broadcasting industry
occurs primarily in individual markets.  Generally, a television station in a
market does not compete with stations in other market areas for local revenue.

REGULATION OF TELEVISION BROADCASTING

     Overview. The ownership, operation, programming, purchase and sale of
television stations in the U.S. are subject to the jurisdiction of the FCC,
which acts under authority granted by the Communications Act of 1934, as
recently amended (the "Communications Act").  Pursuant to the Communications
Act, the FCC, among other things, determines stations' frequencies, locations
and power; issues, revokes, modifies and renews station licenses; approves the
transfer or assignment of such licenses; imposes fees; regulates certain terms
of network affiliation agreements; regulates the equipment used by stations;
adopts rules and regulations governing the operation and ownership of broadcast
stations and implements the Communications Act's provisions, including the
implementation of rulemaking proceedings for the recently enacted
telecommunications legislation; and imposes penalties for violations of the
Communications Act or FCC regulations.  As discussed below, the Company and the
Stations may from time to time be subject to investigative and enforcement
proceedings initiated by the FCC concerning their broadcast operations, and FCC
proceedings generally affecting the broadcast industry. The Company is not aware
of any investigative or enforcement proceedings against any of its Stations
except as disclosed below and believes that no such matters exist which would
have a material effect on the licenses of the Stations operated by the Company.

  The following is a brief summary of certain provisions of the Communications
Act and of specific FCC regulations and policies. Reference should be made to
the Communications Act, the FCC's rules and the public notices and rulings of
the FCC for further information concerning the nature and extent of FCC
regulation of broadcast stations.

     License Renewal.  Until recently, television broadcasting licenses were
granted for maximum terms of five years. The Telecommunications Act of 1996
(hereinafter the "1996 Act") gave the FCC authorization to extend TV stations'
license terms to eight years.  In 1997, the FCC changed its rules so as to
extend license terms to eight years.  Broadcast station licenses are subject to
renewal upon application to the FCC. During certain periods when renewal
applications are pending, petitions to deny the license renewal application can
be filed by interested parties, including members of the public.  Such petitions
may raise various issues before the FCC.  The

                                       15
<PAGE>
 
FCC is required to hold evidentiary, trial-type hearings on renewal applications
if the FCC is unable to determine that renewal of a license would serve the
public interest, convenience and necessity; or if a petition to deny renewal of
such license is filed and the petition raises a "substantial and material
question of fact" as to whether the grant of the renewal application would be
prima facie inconsistent with the public interest, convenience and necessity. In
the vast majority of cases, broadcast station licenses are renewed by the FCC
even when petitions to deny have been filed against the license renewal
application.

  The expiration dates for the FCC licenses of the Stations are as follows:
WXLV: December 1, 2004; WUTV: June 1, 1999; WUHF: June 1, 1999; WRLH: October 1,
2004; WVAH: October 1, 2004; WUPN-TV:  October 1, 2004; WTAT: December 1, 2004;
WZTV and WUXP: August 1, 2005;  WRGT: October 1, 2005; WFXV: June 1, 1999; WMSN:
December 1, 2005; W31BP, WPNY-LP, and W53AM:  June 1, 1998; and W34BX:  October
1, 2004.  Licenses for Stations whose renewal applications are pending are
continued by statute until the FCC takes action on such applications.
 
     FCC Ownership Regulation. FCC rules generally prohibit any single person or
entity from owning, controlling or having an interest deemed "attributable"
under such rules in (i) two television stations that provide service to
specified overlapping areas; (ii) both a radio station and a television station
that provide service to specified overlapping areas (although the FCC permits
waivers of this restriction in the 25 largest television markets if there are a
sufficient number of broadcast stations owned by other entities, in situations
involving failed or distressed stations, or in other circumstances where the FCC
determines on a case-by-case basis that waiver is appropriate (pursuant to the
requirements of the 1996 Act, the FCC has proposed to expand the application of
this waiver policy to the top 50 markets); (iii) a commonly owned group of
television stations that reach more than 35% of the national audience, as
determined by market rankings of the percentage of national television
households contained in each market, crediting UHF stations with only 50% of
their markets' television households (this limit can be increased to 40% of the
national audience if more than a 50% interest in the additional stations causing
ownership to exceed 35% is held by members of certain minority groups); (iv) a
television station and a daily newspaper published in a community encompassed
within that station's predicted Grade A service contour (as defined by the FCC);
and (v) a television station and a cable television system if the cable
television system is located within the television station's predicted Grade B
service contour (as defined by the FCC).

  Interests generally deemed "attributable" for purposes of the FCC's ownership
restrictions include, in the case of corporations holding broadcast licenses,
the interests of officers, directors and those who, directly or indirectly, have
the right to vote 5% or more of the corporation's voting stock (or 10% or more
of such stock in the case of insurance companies, certain regulated investment
companies and bank trust departments that are holding stock for investment
purposes only); and, in the case of partnerships, general partners, and certain
limited partners not "insulated" from "material involvement" in the media-
related activities of the partnership under FCC policies.  The FCC presently
treats limited liability companies similar to limited partnerships in
determining whether a member of such a company has an attributable interest.

  The FCC has initiated rulemaking proceedings to consider proposals to
eliminate or modify its television ownership restrictions, including proposals
to permit the ownership in some circumstances of two television stations with
overlapping service areas.  The FCC has initiated another rulemaking to consider
modification of its definitions of interests which are considered
"attributable," including possible treatment of non-voting stock and debt
instruments as attributable

                                       16
<PAGE>
 
interests. The Company is unable to predict the ultimate outcome of possible
changes in these FCC rules and the impact such changes might have on its
broadcasting operations.

     LMAs. The FCC has held that programming a television station under an LMA
does not constitute an interest attributable in such station under the
Communications Act or the FCC's rules (including its multiple ownership rules)
as long as the licensee of the station that is being substantially programmed by
another entity maintains ultimate responsibility for, and control over, the
operations of its broadcast station and otherwise ensures compliance with
applicable FCC rules and policies. In accordance with policies of the FCC, the
owner-licensee of each station that is programmed under an LMA retains the right
to preempt programming supplied by the LMA programmer. Typically, in order to
comply with FCC policy, LMAs also provide that the owner-licensee may terminate
the LMA under certain circumstances. The FCC is presently considering what rules
it should apply to LMAs as part of its television ownership and attribution
rulemaking proceedings described above. Any rules hereafter adopted by the FCC
for LMAs could require the Company to restructure or discontinue the WUXP and
WUPN LMAs and could adversely affect the Company's ability to enter into LMAs in
other markets in which it owns or has an attributable interest in a television
station.

  In connection with entering into an LMA, the LMA programmer may make a loan to
the owner-licensee or be granted an option to purchase the station's license and
other broadcasting assets.  As an interim policy to govern the processing of
television station sales applications which involve LMAs, the FCC issued a
public notice on June 1, 1995.  The public notice sets forth certain guidelines
concerning arrangements pursuant to which an entity programming a television
station pursuant to an LMA also supplies financing to and/or holds an option to
purchase the station.  The FCC stated that it would not approve a sale of a TV
station where the station being sold will be under an LMA with another TV
station in the same market and the LMA programmer has both made a loan for part
of the purchase price and has an option to acquire the station; and that any
television acquisitions involving LMAs would be subject to future action of the
FCC in its pending rulemaking dealing with the FCC's ownership attribution
rules. The FCC also is considering specific rules to govern television LMAs in a
separate rulemaking dealing with the FCC's television ownership rules.

     Alien Ownership Restrictions. The Communications Act prohibits the issuance
of broadcast licenses to, or the holding of a broadcast license by, non-U.S.
citizens or their representatives or by a foreign government or a representative
thereof, or by any corporation organized under the law of a foreign country
(collectively, "Aliens"), and to any corporation of which more than 20% of the
capital stock is owned of record or voted by Aliens.  (Such 20% limit is
increased to 25% if the Aliens hold their interest through a U.S. corporation.)
As the result of these provisions, the licenses granted to the subsidiaries of
the Company by the FCC could be rescinded if, among other restrictions imposed
by the FCC, more than 25% of Holding's stock is owned or voted by Aliens.

     Regulatory Fees. Pursuant to the Omnibus Budget Reconciliation Act of 1993,
the FCC collects annual "regulatory fees."  These fees vary with the size of a
television station's market and whether it is a VHF or UHF station.  The Company
does not believe that the obligation to pay such fees will have a material
adverse effect on the Stations.

     Children's Television. In October 1990, Congress enacted the Children's
Television Act of 1990 ("1990 Children's TV Act"), which directed the FCC to
adopt rules limiting the amount of commercial matter that television stations
may air during children's programming.  The 1990

                                       17
<PAGE>
 
Children's TV Act also directed the FCC to consider, in its review of television
station license renewal applications, the extent to which licensees have
complied with such commercial limits and have served "the educational and
informational needs of children through the licensee's overall programming,
including programming specifically designed to serve such needs." Subsequently,
the FCC enacted rules which limit the amount of commercial matter which may be
aired during children's programming (10.5 minutes per hour on weekends and 12
minutes per hour on weekdays); such rules became effective on January 1, 1992.
The FCC also clarified its long-standing policy that a program associated with a
product in which commercials for that product are aired would cause the entire
program to be counted as commercial time (a "program length commercial").

  Since February 1, 1992, the FCC has reviewed television station license
renewal applications for compliance with the FCC's children's television rules
and policies promulgated pursuant to the 1990 Children's TV Act.  In 1997 the
FCC granted the Company's request and canceled a proposed forfeiture (proposed
forfeiture) against WTAT in connection with the FCC's review of the WTAT license
renewal application.  Although the Company seeks to comply with the FCC's
children's television rules and policies, there can be no assurance that the FCC
will not take action with regard to children's programming when the FCC reviews
the Company's pending or future renewal of license applications for the
Stations.

  In August 1996 the FCC modified its policies,  specifying new requirements for
the broadcast of childrens' television.  Under the new policy television
stations demonstrating the broadcast of three hours of regularly scheduled
educational "core" programming each week, where the programs are at least 30
minutes in length and broadcast between 7:00 AM and 10:00 PM, are presumed to
have met the FCC's requirements.  "Core" programming is defined of which has a
"significant purpose" of serving "educational and informational needs of
children".  If less than three hours is aired, a station would still satisfy
childrens' TV renewal requirements if it "demonstrates a level of commitment to
educating and informing children that is at least equivalent to airing three
hours per week of core programming".  It may do this through the provision of
other services to children such as regularly schedules non-weekly programs,
public service announcements, specials and short segment programming.  If a
station fails to meet these children's programming requirements the FCC may
impose sanctions which, depending on the severity of the offense, include an
admonition, reporting requirements, forfeitures, short-term license renewals
and, in extreme cases, designation for hearing of the renewal application to
determine whether a license renewal is warranted.

  The majority of the  television industry has adopted a ratings system
patterned after the age-based rating system used by the movie industry,  which
also indicates whether the show earned the rating due to violence, sexual
content, or for other reasons.  The networks with which the Company's stations
are affiliated have adopted this system. Pursuant to the requirements of the
1996 Act the FCC, evaluating and has requested comment on the proposed system.

     Other FCC Regulations. The FCC regulates other aspects of broadcast station
operation, including maintenance of certain records concerning programming and
operations, political advertising, sponsorship identification, advertisement of
contests and lotteries, obscene and indecent broadcasts, equal employment
opportunity and technical matters.

     The 1992 Cable Act. Certain provisions of the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") have a direct
effect on television broadcasting,

                                       18
<PAGE>
 
including signal carriage, retransmission consent and equal employment
opportunity provisions. The FCC has adopted various rules and regulations to
implement the 1992 Cable Act.

  The signal carriage, or "must carry," provisions of the 1992 Cable Act
generally require cable system operators to carry the signals of local
commercial and non-commercial television stations and certain low power
television stations.  The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming providers from carrying broadcast stations without obtaining their
consent in certain circumstances.  Television stations, on a cable system-by-
cable system basis, must make a choice once every three years whether to proceed
under the must carry rules or whether to waive that right to mandatory, but
uncompensated, carriage and instead negotiate a grant of retransmission consent
permitting the cable system to carry the stations' signals, in most cases in
exchange for some form of consideration from the cable operator. The Fox
Stations have granted Fox the right to negotiate with most cable operators in
their respective markets for retransmission consent agreements.

  On April 8, 1993, a special three-judge panel of the U.S. District Court for
the District of Columbia upheld the constitutionality of the must carry
provisions of the 1992 Cable Act.  On June 27, 1994, the U.S. Supreme Court, in
a five to four decision, vacated such judgment and remanded the case to the
District Court for further proceedings.  Although the Supreme Court found the
must carry rules to be content-neutral and supported by legitimate governmental
interest under appropriate constitutional tests, it also found that genuine
issues of material fact still remained.  On remand, the District Court again
upheld the must carry provisions.  In 1997, in a five to four decision, the
Supreme Court upheld the must carry rules as constitutional.

  The 1992 Cable Act also codified the FCC's basic equal employment opportunity
("EEO") rule and the use of certain EEO reporting forms currently filed by
television broadcast stations.  In addition, pursuant to the 1992 Cable Act's
requirements, the FCC has adopted rules providing for a review of the EEO
performance of each television station at the mid-point in its license term (in
addition to review which occurs in conjunction with station license renewal
applications).  The FCC is currently considering proposed changes to its EEO
policies.

     Distribution of Video Services by Telephone Companies.  Recent actions by
the FCC, Congress and the courts all indicate the potential significant future
involvement by telephone companies in the provision of video services.  The
Company cannot predict either the timing or the extent of such involvement.  The
1996 Act allows telephone companies to provide video services within their
telephone service areas, by means of traditional cable TV systems, "wireless"
cable TV systems and "open video systems" ("OVS").  OVS is a new type of service
which combines features of traditional cable TV and common carrier services.
OVS is not subject to the same degree of federal, state and local regulation as
are traditional cable TV systems.  However, the FCC must certify a provider
before it may begin offering OVS service.

  Establishment of and Transition to ATV Services.  In 1997, the FCC adopted
rules and procedures for the implementation of a new digital advance television
("ATV") service, including high definition television.  Implementation of ATV
service is expected to improve the technical quality of television and enable
broadcasters to provide other digital transmission services in addition to
television service.  Whereas the current analog NTSC service allows each station
to provide only one channel of analog television service, digital ATV
potentially allows each station to provide four to five channels of standard
definition programming (similar to the current quality of NTSC service) or one
channel of high definition programming, plus ancillary services.  Ancillary
services may include but are not limited to subscription

                                       19
<PAGE>
 
television, distribution of computer software, data transmission, teletext,
interactive services and audio signals.

  The FCC's rules and procedures are intended to provide for a transition of the
television broadcast industry from NTSC service to ATV service.  Initial
eligibility for ATV channels is limited to authorized full power television
licensees and permittees.  Low power television and television translator
stations are not initially eligible to receive ATV channels.  During the
transition period television licensees will operate using both their NTSC and
new ATV channels.  At the end of the transition period television stations will
cease operating on and return one of those channels to the FCC, and thereafter
provide only an ATV service on their remaining channel.

  The FCC's rules require that stations complete construction of their ATV
transmission system no later than a specified date which depends on the size of
the market in which a station is located and whether the station has a network
affiliation with ABC, CBS, Fox, or NBC.  Affiliates of those networks which are
located in the ten largest markets must complete ATV construction no later than
May 1, 1999.  Affiliates of those networks in markets 11-30 must complete ATV
construction no later than November 1, 1999.   All other commercial stations
must complete construction no later than May 1, 2002.  Because all of the
Company's stations are located in markets smaller than the 30th market, May 1,
2002, is the ATV construction deadline applicable to all of the Company's
stations.  All of the Company's stations must file with the FCC no later than
November 1, 1999, a construction permit application for the new ATV transmission
system that each station proposes to build.  After a station completes
construction of its ATV facility it will then begin broadcasting an ATV service
in addition to its existing NTSC service.

  The FCC has assigned to each television station a specific channel, operating
power and antenna height which the station is to use to provide ATV service
during the transition period, and which are intended to replicate, to the extent
possible, each station's current NTSC service. Based on the FCC's calculation's,
the ATV  facilities that the FCC specified for the Company's stations' will
allow all of the stations to replicate 98% to 100% of their NTSC service, except
for WRGT, Dayton, which will replicate 95% of its NTSC service.  The Company
believes, however, that the operating power level that the FCC assigned to each
of the Company's stations for ATV service is an important consideration beyond
the FCC's predicated replications of NTSC service that potentially affects the
ability of consumers to receive ATV broadcasts using standards indoor television
antennas.  The Company believes that a low operating power will have an adverse
affect on the reception of a station's ATV broadcast.  Except for WTAT-TV,
Charleston, the FCC assigned to the Company's stations an operating power which
the Company believes may be too low to assure full reception of the ATV signal
by standard indoor television antennas throughout each station's market.  The
FCC recently adopted rules that may allow the Company to increase significantly
the operating power for the Company's stations if such a power increase is
consistent with certain technical parameters the FCC also adopted.  The Company
has not completed an engineering analysis of the FCC's new rules to determine
how they will affect the Company's stations and its ability to increase the
stations' operating power.

  The implementation of ATV service will require each television station to
incur substantial costs to construct a second transmission system to broadcast
on the ATV channel, and then to provide both their existing NTSC broadcasts and
new ATV broadcasts during the transition period.  The construction costs for
each station will depend on numerous variables, including the cost of ATV
equipment at the time of construction, the type of equipment required, whether
the station must acquire a new transmitter site or construct a new antenna tower
to accommodate the ATV transmission facility, and whether the station will
originate ATV programming or only pass through ATV programming received from
other sources (including network broadcasts and syndicated programming).  THE
COMPANY CANNOT PREDICT THE COSTS IT WILL INCUR TO CONSTRUCT AND OPERATE NEW ATV
TRANSMISSION FACILITIES FOR ITS STATION.

                                       20
<PAGE>
 
  The FCC has limited the number of channels it will use for ATV service
compared to the channels which are now used for NTSC service.  Thus, only
Channels 2 through 51 will be used for permanent ATV service (the "Core ATV
Channels") whereas NTSC services is provided on Channels 2 through 69.  Because
there are fewer Core ATV Channels available and because new ATV channels must
co-exist  with current  NTSC station operations and minimize interference caused
to existing NTSC service during the transition period, the FCC initially
assigned to many stations for use during the transition period new ATV channels
that are outside the Core ATV Channel.  When the transition period ends,
stations will operate only on a Core ATV Channel.  Stations that provide ATV
service on a channel that is outside the Core ATV Channels during the transition
will need to change their ATV service to a Core ATV Channel at the end of the
transition, which will require such stations to incur additional ATV transition
costs. All of the Company's stations (excluding its low power and television
translator station) were assigned new ATV channels that are within the Core ATV
Channels.

  All television stations that provide ATV service are required to provide a
minimum service that consists of a free over-the-air digital television program
service of a quality at least comparable to the present NTSC service and which
is provided during the same hours each day that a station provides NTSC service.
Beyond  this minimum requirement, stations have the discretion to determine how
to program their new ATV service (for example, whether to provide one or more
channels of standard definition programming or a high definition program
service, plus other possible ancillary services).  However, the FCC has
established  a requirement that by April 2003, all stations must simulcast on
their ATV channel 50% of the programming carried on their NTSC channel (i.e.,
broadcast the same programming at the same time).  This increases to a 75%
simulcast requirement by April 2004, and a 100% requirement by April 2005.  By
December 31, 2006, all stations must terminate their NTSC broadcasts and provide
only ATV service, subject to an FCC authorized extension if certain conditions
exists in a station's market.  If these conditions exist (which were
established in the Balanced Budget Act of 1997 and generally relate to the
degree to which the transition to ATV has taken place in a given market), then
the FCC may extend the transition period for any station in that market that
requests such an extension, thereby delaying the date when the station must
terminate its NTSC operation.  The Company cannot predict how the transition to
ATV will progress in any of the markets in which the Company has a station, or
whether any of the Company's stations would require or request an extension of
the transition  period.

  Under the FCC rules, low power television and television translator stations
are considered secondary services and cannot cause any interference to the
operation of a full power television station, including its new ATV service.
Because low power  television and television translator stations are not
initially eligible for ATV channels, and because of their secondary status, it
is expected that many low power television and television translator stations
will have to cease operating when full power stations begin to provide ATV
service.  Although the FCC allows low power television and television translator
stations that are subject  to potential termination to relocate to a new
channel, the allocation of the new ATV channels, will make it more difficult to
locate a channel to which a low power television or television translator
stations could relocate.  After the transition period when each television
station has returned to the FCC one of its channels, more channels will then be
available for the relocation of dislocated low power television and television
translator stations.  The Company does not presently know whether its low power
television or translator stations will be subject to possible termination and
whether, if so dislocated, an alternate channel can be found on which they may
operate, particularly during the transition period.

  The FCC has pending or plans to initiate several rule making proceedings to
consider numerous issues related to the initiation of ATV service.  These issues
include the applicability to ATV broadcasts of cable systems' must carry
obligations to carry the signals of local broadcast stations, the public service
obligations that television licensees must meet in the context of providing ATV
broadcasts, the regulatory

                                       21
<PAGE>
 
fees that station licensees will pay if they use their ATV facility to provide
pay services in addition to traditional free over-the-air broadcasting, and the
impact of state and local zoning and other ordinances on the ability of stations
to rapidly construct new ATV facilities. The results of several of these
proceedings could have a significant impact on the implementation schedule and
consumer acceptance of the new ATV service.

  The Company cannot predict the specific effects that the new ATV service will
have on the Company's business.

     Proposed Changes.  Congress and the FCC have under consideration, and in
the future may enact, new laws, regulations and policies regarding a wide
variety of matters that could affect, directly or indirectly, the operation,
ownership, programming, competitive position, and profitability of the Stations,
result in loss of audience share and advertising revenues for the Stations, or
affect network-affiliate relationships or the Company's ability to acquire
additional broadcast stations or to finance such acquisitions. The Company
cannot predict whether or when any proposed changes will be adopted or what
other matters might be considered in the future or the effect of any such
changes or matters on the Company.

     Other Considerations. The foregoing summary does not purport to be a
complete discussion of all provisions of the Communications Act or the
regulations and policies of the FCC thereunder.  Additionally, other federal,
state and local laws, regulations and policies may affect the Company's
operations.  All such laws, regulations and policies may be changed from time to
time, and the Company cannot predict the nature of such changes or their impact
on its operations.  Also, various of the foregoing matters are now, or may
become, the subject of court litigation, and the Company cannot predict the
outcome of any such litigation or its impact on its broadcast business.

HOLDINGS
--------

  A-3 was formed to acquire all of the outstanding capital stock of Act III
pursuant to the Stock Purchase Agreement.  A-3 conducted no other activities
other than in connection with the negotiations, financing and consummation of
the Acquisition.

  Approximately $374.3 million in cash was required to purchase all of the
outstanding capital stock of Act III.  Funds obtained by A-3 and Holdings to
purchase the Act III stock, retire outstanding indebtedness of Act III and pay
fees and expenses associated with such transactions were provided from (i)
proceeds of approximately $115.0 million and $68.5 million from the issuance and
sale of Holdings preferred and common stock, respectively, (ii) proceeds of
$35.0 million from the sale in a public offering of 35,000 units consisting of
$1,000 principal amount of Holdings 13 1/4% senior accrual debentures due 2006
and 16 shares of Holdings class B-1 common stock, (iii) proceeds of $125.0
million from the sale in a public offering of A-3 10 1/4% senior subordinated
notes due 2005 (which notes are now obligations of SBC) and (iv) initial
borrowings by A-3 of $224.0 million under a bank credit agreement, with the
obligations under such bank credit agreement now being the obligations of SBC.
As of December 31, 1995, only the Holdings 35,000 units and the A-3 senior
subordinated notes due 2005 were outstanding.

                                       22
<PAGE>
 
EMPLOYEES

  As of December 31, 1997, the Company employed approximately 541 people.  The
Company is not a party to any collective bargaining agreements.  The Company
considers its employee relationships to be very good.

ITEM 2.       DESCRIPTION OF PROPERTIES

  The Company's headquarters are located at 18 Newbury Street, Boston,
Massachusetts 02116. The Company reimburses ABRY Partners, Inc., the management
company for all investments of ABRY, $1,789 per month, representing the
Company's allocable share of rent paid by ABRY under its lease, which expires
March 31, 2001. The lease covers approximately 4,112 square feet of office
space.

  The types of properties required to support each of the Owned Stations include
offices, studios, transmitter sites and antenna sites. A Station's studios are
generally housed with its offices in downtown or business districts. The
transmitter sites and antenna sites are generally located so as to provide
maximum market coverage. The following table contains certain information
describing the general character of the Company's properties:
 
      STATION,                      OWNED        ACREAGE       EXPIRATION
     METROPOLITAN                     OR       APPROXIMATE         OF
     AREA AND USE                   LEASED        SIZE           LEASE
     ------------                   ------     -----------     ----------
 
     WUTV - Buffalo, NY/
          Toronto, Ontario
          Office - Studio           Owned     15,000 Sq. Ft      N/A
          Tower/Transmitter Site    Owned     44.5 Acres         N/A
 
     WZTV - Nashville, TN
          Office - Studio           Owned     22,500 Sq. Ft.     N/A
          Tower/Transmitter Site    Leased    1,750 Sq.Ft.(a)    01/11/03
 
     WXLV - Greensboro/
          Winston Salem/
          High Point, NC
          Office - Studio           Owned     10,000 Sq. Ft.     N/A
          Office - Studio           Leased    5,650 Sq. Ft.      10/31/03
          Tower/Transmitter Site    Leased    9.4 Acres          10/31/05
 
     WRGT - Dayton, OH
          Office - Studio           Owned     12,000 Sq. Ft.     N/A
          Tower/Transmitter Site    Owned     15 Acres           N/A
 
     WVAH - Charleston/
          Huntington, WV
          Office - Studio           Owned     10,500 Sq. Ft.     N/A
          Tower/Transmitter Site    Owned     18.2 Acres         N/A

                                       23
<PAGE>
 
     WRLH - Richmond, VA
          Office - Studio           Leased    13,798 Sq. Ft.     03/01/00
          Tower/Transmitter Site    Owned     25 Acres           N/A
 
     WUHF - Rochester, NY
          Office - Studio           Leased    11,300 Sq. Ft.     05/31/99
          Tower/Transmitter Site    Leased    950 Sq. Ft.        12/31/29
 
     WTAT - Charleston, SC
          Office - Studio           Leased    10,521 Sq. Ft.     06/30/00
          Tower/Transmitter Site    Leased    1,200 Sq. Ft.(a)   05/31/00
 
     WMSN - Madison, WI
         Office - Studio            Leased    12,000 Sq. Ft.     12/31/00
         Tower/Transmitter Site     Leased    1,600 Sq. Ft.(a)   10/14/05
 
     WFXV - Rome, NY
         Office - Studio            Owned     3,500 Sq. Ft.      N/A
         Tower/Transmitter Site     Leased    5 Acres              9/1/02
         Tower/Transmitter Site     Leased    7 Acres             8/31/14
         Repeater Site              Leased    5 Acres             4/30/97

  (a) Represents square feet for its transmitter building.  Station also leases
space on a tower for its antenna.

ITEM 3. LEGAL PROCEEDINGS

  The Company is not a party to any lawsuit or proceeding which, in the opinion
of management, is likely to have a material adverse effect on the financial
position or results of operations of the respective entity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  The Company did not submit any matters to a vote of security holders during
the quarter ended December 31, 1997.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON EQUITY

  The Company does not have a class of equity securities registered pursuant to
the Securities Act of 1933, and consequently there is no established public
trading market for the Company or Holdings common stock.  As March 15, 1998,
Holdings owned 100% of the Company's common stock.  As of March 15, 1998, there
were 47 stockholders of Holding's Class B-1 Common Stock, two stockholders of
Holding's Class B-2 Common Stock and 15 stockholders of Holding's Class C Common
Stock.  Holdings has never declared any dividends on any class of its common
stock.  Additionally, certain of Holding's debt instruments restrict payment of
dividends on its common stock.

                                       24
<PAGE>
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE COMPANY
-----------
                              (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                    Sullivan         Sullivan    
                                                                                  Broadcasting       Broadcast   
                                       Predecessor   Predecessor   Predecessor    Company, Inc.   Holdings, Inc. 
                                                                                                                 
                                           1993          1994          1995         1996 (6)         1996 (6)    
INCOME STATEMENT DATA:                 ------------  ------------  ------------  ---------------  ---------------
                                                                                                                 
<S>                                    <C>           <C>           <C>           <C>              <C>            
Net revenue (1)                          $  74,929     $  83,828      $ 92,125         $107,714         $107,714 
Trade and  barter revenues                   9,035         7,942         7,876           14,808           14,808 
                                         ---------     ---------      --------         --------         -------- 
Total net revenue (1)                       83,964        91,770       100,001          122,522          122,522 
                                                                                                                 
Operating expenses                       $   9,211     $   8,518      $ 11,136         $ 15,005         $ 15,005 
Selling, general and administrative         21,928        23,243        23,447           23,402           23,921 
Depreciation and amortization (2)           37,738        33,494        29,813           74,724           74,724 
                                         ---------     ---------      --------         --------         -------- 
Operating income                            15,087        26,515        35,605            9,391            8,872 
Interest expense                            17,648        18,587        17,777           34,411           41,187 
Net income (loss) (3)                      (15,883)        4,364        22,343          (17,899)         (22,272)
                                                                                                                 
OTHER FINANCIAL DATA:                                                                                            
Broadcast Cash Flow (4)                  $  35,044     $  45,318      $ 53,985         $ 64,049         $ 64,049 
Amortization of programming rights          23,088        20,367        18,033           26,673           26,673 
Payments for programming rights             12,369        10,341         8,368            9,087            9,087 
Trade expense                                  363           320           304              928              928 
Corporate expense                            3,260         3,272         4,507            2,901            3,420 
Capital expenditures                         1,525         4,518         5,560            3,105            3,105 
                                                                                                                 
OTHER DATA:                                                                                                      
Number of stations (5)                           8             8             8               13               13 
                                                                                                                 
BALANCE SHEET DATA:                                                                                              
Total assets                             $ 132,903     $ 121,848      $134,826         $735,340         $737,544 
Total long-term debt                       182,207       176,355       138,898          377,602          407,743 
Other long-term liabilities                 11,209        10,535        12,992          107,097          109,458 
Senior redeemable preferred stock           21,532        23,868        26,386                0          111,483 
Stockholders' equity (deficit)            (102,453)     (108,491)      (88,513)         187,850           53,073 


<CAPTION>
                                           Sullivan        Sullivan
                                         Broadcasting     Broadcast
                                        Company, Inc.   Holdings, Inc.
                                      
                                             1997            1997
INCOME STATEMENT DATA:                  --------------  --------------
                                      
<S>                                     <C>             <C>
Net revenue (1)                              $120,124        $120,124
Trade and  barter revenues                     17,650          17,650
                                             --------        --------
Total net revenue (1)                         137,774         137,774
                                      
Operating expenses                           $ 17,301        $ 17,301
Selling, general and administrative            27,516          28,319
Depreciation and amortization (2)              72,417          72,417
                                             --------        --------
Operating income                               20,540          19,737
Interest expense                               35,057          40,711
Net income (loss) (3)                         (11,918)        (15,474)
                                      
OTHER FINANCIAL DATA:                 
Broadcast Cash Flow (4)                      $ 67,895        $ 67,895
Amortization of programming rights             30,197          30,197
Payments for programming rights                11,820          11,820
Trade expense                                     815             815
Corporate expense                               3,593           4,396
Capital expenditures                            4,439           4,439
                                      
OTHER DATA:                           
Number of stations (5)                             13              13
                                      
BALANCE SHEET DATA:                   
Total assets                                 $708,000        $710,316
Total long-term debt                          356,505         386,828
Other long-term liabilities                   110,386         115,236
Senior redeemable preferred stock                   0         133,185
Stockholders' equity (deficit)                175,932          15,855
</TABLE>

(1) Net "revenues"  and "Total net revenue" are shown net of agency
   communications.
(2) This amount includes amortization of programming rights reflected below in
    "Other Financial Data".
(3) Net loss for the year ended December 31, 1993 includes an extraordinary item
    of $12,619,000 resulting from a prepayment premium and other losses from
    early extinguishment of certain debt.
(4) "Broadcast Cash Flow" is defined as operating income plus (i) noncash
    expenses, including depreciation and amortization expenses and program
    amortization expense, plus (ii) corporate expenses, net less (iii) payments
    for programming rights and net barter revenues (expenses).  The Company has
    included Broadcast Cash Flow data because it understands such data is used
    by certain investors to measure a Company's ability to service debt.
    Broadcast Cash Flow does not purport to represent cash provided by operating
    activities as reflected in the Company's consolidated financial statements,
    is not a measure of financial performance under generally accepted
    accounting principles and should not be considered in isolation or as a
    substitute for measures of performance prepared in accordance with generally
    accepted accounting principles.

                                       25
<PAGE>
 
(5)  "Number of stations" represents stations either owned or programmed under a
     LMA arrangement.
(6)  Data for 1996 includes the results of the Company after giving effect to
     the Acquisition and other acquisitions made during 1996.
 
             (DOLLARS IN THOUSANDS)
 
                                          A-3      HOLDINGS
 
                                          1995       1995
                                          ----       ----
INCOME STATEMENT DATA:
Net revenues                           $      -    $      -
Selling, general and administrative       1,116       1,601
Operating income (loss)                  (1,116)     (1,601)
Interest expense                            169         258
Net income (loss)                        (1,053)     (1,524)
 
BALANCE SHEET DATA:
Total assets                           $134,981    $173,964
Total long-term debt                    125,000     154,407
Stockholders equity                       4,148      11,048
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

   The following analyses of the financial condition and results of operations
of the Company, A-3 and Holdings should be read in conjunction with the
respective entities Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-K report.

THE COMPANY
-----------

   The Company's revenues are derived principally from local and national
advertisers. Additional revenues are derived from network compensation from ABC,
commercial production and rental of broadcast towers.  Substantially all of the
Company's revenue growth in the last three years has been due to increases in
advertising unit rates paid by its advertisers, which have been mostly
attributable to improvements in ratings among key demographics, strong
advertiser demand as well as the WUXP LMA and other acquisitions made in 1996.
The Company has been able to improve its ratings among key demographics due to
the availability of high quality programming, including programming provided by
Fox, programming provided by FCN, NFL football and first run programming.  The
development of sales marketing programs, implemented to enhance the Stations'
image, has also contributed to the growth in revenues. The Stations conduct
local "Kids Expos" and live remote broadcasts, publish promotional advertising
print supplements and participate in joint marketing events with local
businesses and radio stations.

   The Company's operating revenues are generally highest in the fourth quarter
of each year. This seasonality is primarily attributable to increased
expenditures by advertisers in anticipation of holiday retail spending and an
increase in viewership during the Fall/Winter season. Accordingly, accounts
receivable balances as of the end of each of the first three calendar quarterly
periods are generally substantially less than the balances as of the end of the
year.  Each of the Stations

                                       26
<PAGE>
 
generate positive Broadcast Cash Flow. Generally, Stations in larger markets
contribute higher Broadcast Cash Flow.

   The Company's principal costs of operations are employee salaries and
commissions, programming, production, promotion and other expenses (such as
maintenance, supplies, insurance, rent and utilities).

   On January 4, 1996, A-3 acquired substantially all of the outstanding stock
of Act III for approximately $517 million plus certain amounts defined in the
underlying purchase and sale agreement.  See Note 3 of "Notes to Consolidated
Financial Statements."

A-3
---

   A-3 and its sole stockholder, Holdings, were formed in 1995 to acquire the
outstanding capital stock of Act III.  The operations of A-3 during 1995 were
principally related to the raising of funds through the issuance in a public
offering of $125 million of A-3 10 1/4% senior subordinated notes due 2005
(which notes are now obligations of SBC).

HOLDINGS
--------

   Holdings, and its 100% owned subsidiary A-3, were formed in 1995 to acquire
the outstanding capital stock of Act III.  The operations of Holdings during
1995 were principally related to the raising of funds through the issuance in a
public offering of 35,000 units, each unit consisting of $1,000 principal amount
of Holdings 13 1/4% senior accrual debentures due 2006 and 16 shares of Holdings
Class B-1 Common Stock.

                                       27
<PAGE>
 
RESULTS OF OPERATIONS

The Company
-----------

   YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

   Set forth below are selected consolidated financial data for the years ended
December 31, 1997 and December 31, 1996 and the percentage changes between the
periods.

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                   -------------------------------------------------------------
                                               1996                          1997                        Percentage Change
                                   -----------------------------   -----------------------------  ----------------------------------

                                     Sullivan       Sullivan         Sullivan       Sullivan         Sullivan            Sullivan
                                    Broadcasting    Broadcast      Broadcasting     Broadcast       Broadcasting        Broadcast
                                   Company, Inc.  Holdings, Inc.   Company, Inc.  Holdings, Inc.    Company, Inc.     Holdings, Inc.

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

                                                           (in thousands)
<S>                                <C>            <C>              <C>            <C>             <C>                 <C>
Net revenues (excluding trade 
 and barter)                            $107,714        $107,714        $120,124        $120,124        11.5%               11.5 %
Trade and barter revenues                 14,808          14,808          17,650          17,650        19.2                19.2
Total net revenues                       122,522         122,522         137,774         137,774        12.4                12.4
Operating expenses                        15,005          15,005          17,301          17,301        15.3                15.3
Selling, general                                                                                                     
 and administrative expenses              23,402          23,921          27,516          28,319        17.6                18.4
Depreciation and amortization             74,724          74,724          72,417          72,417        (3.1)               (3.1)
Operating income                           9,391           8,872          20,540          19,737       118.7               122.5
Interest expense                          34,411          41,187          35,057          40,711         1.9                (1.2)
Net loss                                  17,899          22,272          11,918          15,474       (33.4)              (30.5)
Payments for programming rights            9,087           9,087          11,820          11,820        30.1                30.1
Broadcast Cash Flow                       64,049          64,049          67,895          67,895         6.0                 6.0
</TABLE>

    Net revenues are net of commissions and exclude trade and barter revenues
and primarily include local and national spot advertising sales.  Net revenues
increased to $120,124,000 in 1997 from $107,714,000 in 1996, an increase of $
12,410,000, or 11.5%.  Approximately $4,044,000 of this increase was
attributable to the WMSN and WFXV station acquisitions made during mid-1996.
Additionally, net revenues increased due to higher advertising rates in 1997
when compared with 1996.  During 1997, advertising spot rates were positively
impacted by the improving economy, resulting in greater advertising spending,
along with higher key demographic ratings from additional Fox programming and
other syndicated and first run programming.  Of the advertising revenues
reported for 1997, 59.6% were from local advertising sales and 40.4% were from
national advertising sales.

    Local revenues include gross revenues before commissions from local or
regional advertisers or their representative agencies. Local and regional areas
encompass the station's designated market area and its outlying areas. Local
revenues increased to $83,862,000 in 1997 from $72,073,000 in 1996, an increase
of $11,789,000, or 16.4%.  The increase was due to station acquisitions made
during mid-1996, along with increased ratings and stronger advertising demand
resulting from the Company's emphasis on expanding local sales.

    National revenues include gross revenues before commissions from national
advertisers or their representative agencies. National advertisers are
advertisers outside of the station's local market or region. National revenues
increased to $56,912,000 in 1997 from $55,795,000 in 1996, an increase of
$1,117,000, or  2.0%.  As with local revenues, national revenues increased as a
result of  stations acquisitions made during mid-1996, as well as increased
ratings and higher

                                       28
<PAGE>
 
advertising rates in 1997 when compared with 1996, offset somewhat by the
Company successfully increasing local sales in 1997 over 1996.

    Trade and barter revenues increased to $17,650,000 in 1997 from $14,808,000
in 1996, an increase of $2,842,000, or 19.2%.  This change was primarily due to
higher advertising spot rates in 1997 compared to 1996 along with Station
acquisitions made in mid-1996 which resulted in an increase in the revenue
recognized therefrom.

    Operating expenses include engineering, promotion, production, programming
operations and trade expenses. Operating expenses increased to $17,301,000 in
1997 from $15,005,000 in 1996, an increase of $2,296,000, or 15.3%.  The
increase was primarily the result of operating the WMSN and WFXV stations for a
full twelve months in 1997 compared to only six months in 1996.

    Selling, general and administrative expenses include sales, salaries,
commissions, insurance, supplies and general management salaries.  Selling,
general and administrative expenses increased to $27,516,000 and $28,319,000 in
1997 from $23,402,000 and $23,921,000 in 1996, increases of $4,114,000, and
$4,398,000 or 17.6% and 18.4% for Sullivan Broadcasting Company, Inc. and
Sullivan Broadcast Holdings, Inc., respectively.  These increases were the
result of additional costs associated with the WMSN and WFXV station
acquisitions in mid-1996 along with higher compensation levels in 1997 over
1996.

    Depreciation and amortization includes depreciation of property and
equipment, amortization of programming rights and amortization of intangibles.
Depreciation and amortization decreased to $72,417,000 in 1997 from $74,724,000
in 1996, a decrease of $2,307,000, or 3.1%, due to the retirement of certain
fixed and intangible assets, offset somewhat by increased amortization of
programming rights along with additional amortization of intangible assets and
depreciation  of fixed assets associated with the acquisition of WMSN and WFXV
in mid-1996.

    Operating income increased to $20,540,000 and $19,737,000 in 1997 from
$9,391,000 and $8,872,00 in 1996, increases of $11,149,000 and $10,865,000 or
118.7% and 122.5% for Sullivan Broadcasting Company, Inc. and Sullivan Broadcast
Holdings, Inc., respectively, due to the reasons discussed above.

    Interest expense includes interest charged on all outstanding debt and the
amortization of debt issuance costs and debt discount over the life of the
underlying debt.  Interest expense increased to $35,057,000 and decreased to
$40,711,000 in 1997 from $34,411,000 and $41,187,000 in 1996, an increase of
$646,000 and a decrease of $476,000 or 1.9% and 1.2% for Sullivan Broadcasting
Company, Inc. and Sullivan Broadcast Holdings, Inc., respectively.  The increase
in Sullivan Broadcasting Company, Inc. was the result of interest costs incurred
on the additional borrowings utilized to fund the WMSN and WFXV acquisitions,
further increased by slightly higher amortization of debt issuance costs while
the decrease in Sullivan Broadcast Holdings, Inc. interest expense was
attributable to lower amortization of debt issue costs and debt discount offset
somewhat by the compounding of unpaid interest and those increases attributable
to the Sullivan Broadcasting Company, Inc. debt.

    The income tax benefit decreased to $2,591,000 and $5,488,000 in 1997 from
$7,252,000 and $10,174,000 in 1996, decreases of $4,661,000 and $4,686,000 or
64.3% and 46.1% for Sullivan Broadcasting Company, Inc. and Sullivan Broadcast
Holdings, Inc., respectively. This decrease is due to an increase in current
income tax expense coupled with a decrease in the deferred income tax benefit.
These fluctuations relate to improving operating results as well as timing
differences between book and tax for items such as depreciation and
amortization.


 

                                       29
<PAGE>
 
    Net loss decreased to $11,918,000 and $15,474,000 in 1997 from $17,899,000
and $22,272,000 in 1996, decreases of $5,981,000 and $6,798,000 or 33.4% and
30.5% for Sullivan Broadcasting Company, Inc. and Sullivan Broadcast Holdings,
Inc., respectively, due to the reasons discussed above.

    Payments for programming rights increased to $11,820,000 in 1997 from
$9,087,000 in 1996, an increase of $2,733,000, or 30.1%.  This increase is a
result of increased programming demands relating to the WMSN and WFXV stations
acquired in mid-1996.

    Broadcast Cash Flow increased to $67,895,000 in 1997 from $64,049,000 in
1996, an increase of $3,846,000, or 6.0%. This increase is a result of the
aforementioned increased in revenue with a smaller proportional increase in
operating, selling, and general and administrative expenses in the aggregate.
The Company believes that Broadcast Cash Flow, which is operating income
exclusive of amortization, depreciation, barter revenue and expense less the
amount of any cash film payments made during the period, is important in
measuring the Company's financial results and its ability to pay principal and
interest on its debt because broadcasting companies traditionally have large
amounts of non-cash expense attributable to amortization of programming rights
and other intangibles.  Broadcast Cash Flow does not purport to represent cash
provided by operating activities as reflected in the Company's consolidated
financial statements, is not a measure of financial performance under generally
accepted accounting principles, and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with generally
accepted accounting principles.

   YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

    Set forth below are selected consolidated financial data for the years ended
December 31, 1996 and December 31, 1995 and the percentage changes between the
periods.
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                    -------------------------------------------------------------
                                            1995 (Predecessor)                 1996                      Percentage Change
                                    -----------------------------  ------------------------------  ------------------------------- 
                                      Sullivan        Sullivan        Sullivan        Sullivan        Sullivan        Sullivan
                                    Broadcasting     Broadcast      Broadcasting     Broadcast      Broadcasting      Broadcast
                                    Company, Inc.  Holdings, Inc.  Company, Inc.   Holding, Inc.   Company, Inc.   Holdings, Inc.
                                    -------------  --------------  --------------  --------------  --------------  ---------------
                                                          (in thousands)
<S>                                 <C>            <C>             <C>             <C>             <C>             <C>
Net revenues (excluding trade
 and barter)                             $ 92,125        $ 92,125       $107,714        $107,714          16.9  %         16.9   %
Trade and barter revenues                   7,876           7,876         14,808          14,808            88.0             88.0
Total net revenues                        100,001         100,001        122,522         122,522            22.5             22.5
Operating expenses                         11,136          11,136         15,005          15,005            34.7             34.7
Selling, general
 and administrative expenses               23,447          23,447         23,402          23,921            (0.2)             2.0
Depreciation and amortization              29,813          29,813         74,724          74,724           150.6            150.6
Operating income                           35,605          35,605          9,391           8,872           (73.6)           (75.1)
Interest expense                           17,777          17,777         34,411          41,187            93.6            131.7
Net income  (loss)                         22,343          22,343        (17,899)        (22,272)         (180.1)          (199.7)
Payments for programming rights             8,368           8,368          9,087           9,087             8.6              8.6
Broadcast Cash Flow                        53,985          53,985         64,049          64,049            18.6             18.6
</TABLE>

    Net revenues are net of commissions and exclude trade and barter revenues
and primarily include local and national spot advertising sales.  Net revenues
increased to $107,714,000 in 1996 from $92,125,000 in 1995, an increase of
$15,589,000, or 16.9%.  Furthermore, net revenues increased at all of the
Stations in 1996 from 1995.  Approximately $10,800,000 of this increase was
attributable to the addition of the WUXP LMA and Station acquisitions made
during 1996.  Additionally, net revenues

                                       30
<PAGE>
 
increased due to reduced national sales representative commission rates which
commenced concurrent with the Acquisition along with higher advertising rates in
1996 when compared with 1995. During 1996, advertising spot rates were
positively impacted by the improving economy, resulting in greater advertising
spending, along with higher key demographic ratings from additional Fox
programming and other syndicated and first run programming. Of the advertising
revenues reported for 1996, 56.3% were from local advertising sales and 43.7%
were from national advertising sales.

    Local revenues include gross revenues before commissions from local or
regional advertisers or their representative agencies. Local and regional areas
encompass the station's designated market area and its outlying areas. Local
revenues increased to $72,073,000 in 1996 from $59,036,000 in 1995, an increase
of $13,037,000, or 22.1%.  Of this increase, approximately $6,700,000 was
attributable to the addition of the WUXP LMA and Stations acquired in 1996.
Furthermore, the increase is due to increased ratings as well as strong
advertising demand.

    National revenues include gross revenues before commissions from national
advertisers or their representative agencies. National advertisers are
advertisers outside of the station's local market or region.  National/Canadian
revenues increased to $55,795,000 in 1996 from $50,413,000 in 1995, an increase
of $5,382,000, or 10.7%.  Approximately $4,630,000 of this increase was related
to the WUXP LMA along with Stations acquired during 1996.  Additionally, as with
local revenues, national revenues increased as a result of higher ratings as
well as stronger advertising demand in 1996 when compared with 1995.

    Trade and barter revenues increased to $14,808,000 in 1996 from $7,876,000
in 1995, an increase of $6,932,000, or 88.0%.  This change was primarily due to
the increase in the value of barter programming rights recorded in the purchase
accounting for the Acquisition as well as other acquisitions made in 1996 which
resulted in an increase in the revenue recognized therefrom.

    Operating expenses include engineering, promotion, production, programming
operations and trade expenses. Operating expenses increased to $15,005,000 in
1996 from $11,136,000 in 1995, an increase of $3,869,000, or 34.7%.  The
increase was primarily due to the WXLV affiliation switch from Fox Broadcasting
Company to the American Broadcasting Company, Inc. in September 1995, as the
Company is now producing local news at WXLV, which increased operating expenses
by $1,785,000 in 1996.  Additionally, operating expenses were further increased
by approximately $1,323,000 due to the addition of the WUXP LMA as well as
Station acquisitions made during 1996.

    Selling, general and administrative expenses include sales, salaries,
commissions, insurance, supplies and general management salaries.  Selling,
general and administrative expenses decreased to $23,402,000 and increased to
$23,921,000 in 1996 from $23,447,000 in 1995, a decrease of $45,000 and an
increase of $474,000, or 0.2% and 2.0% for Sullivan Broadcasting Company, Inc.
and Sullivan Broadcast Holdings, Inc., respectively.  These changes are the
result of higher salary costs due to an overall headcount increase, offset
somewhat by reduced corporate overhead.

    Depreciation and amortization includes depreciation of property and
equipment, amortization of programming rights and amortization of intangibles.
Depreciation and amortization increased to $74,724,000 in 1996 from $29,813,000
in 1995, an increase of $44,911,000, or 150.6%, due to the increased value of
all fixed assets, programming rights and intangible assets recorded in the
purchase accounting for the Acquisition, and other acquisitions made in 1996.

    Operating income decreased to $9,391,000 and $8,872,000 in 1996 from
$35,605,000 in 1995, decreases of $26,214,000 and $26,733,000 or 73.6% and 75.1%
for Sullivan Broadcasting Company, Inc. and Sullivan Broadcast Holdings, Inc.,
respectively, due to the reasons discussed above.

                                       31
<PAGE>
 
    Interest expense increased to $34,411,000  and $41,187,000 from $17,777,000,
increases of $16,634,000 and $23,410,000 or 93.6% and 131.7% for Sullivan
Broadcasting Company, Inc. and Sullivan Broadcast Holdings, Inc. respectively.
These increases were the result of interest costs incurred on the debt utilized
to fund the Acquisition and additional borrowings to fund other acquisitions
made during the period.

    Sullivan Broadcasting Company, Inc. and Sullivan Broadcast Holdings, Inc.
had net losses of $17,899,00 and $22,272,000, respectively, compared to net
income of $22,343,000 in 1995, decreases of $40,242,000 and $44,615,000 due to
the reasons discussed above.

    Payments for programming rights increased to $9,087,000 in 1996 from
$8,368,000 in 1995, an increase of $719,000, or 8.6%.  This increase was a
result of increased programming demands relating to the WUXP LMA, an independent
station, and other Station acquisitions made during 1996.

    Broadcast Cash Flow increased to $64,049,000 in 1996 from $53,985,000 in
1995, an increase of $10,064,000, or 18.6%. This increase was a result of the
aforementioned increased in revenue with a smaller proportional increase in
operating, selling, and general and administrative expenses in the aggregate.
The Company believes that Broadcast Cash Flow, which is operating income
exclusive of amortization, depreciation, barter revenue and expense less the
amount of any cash film payments made during the period, is important in
measuring the Company's financial results and its ability to pay principal and
interest on its debt because broadcasting companies traditionally have large
amounts of non-cash expense attributable to amortization of programming rights
and other intangibles.  Broadcast Cash Flow does not purport to represent cash
provided by operating activities as reflected in the Company's consolidated
financial statements, is not a measure of financial performance under generally
accepted accounting principles, and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with generally
accepted accounting principles.


YEAR ENDED DECEMBER 31, 1995

Set forth below is selected  consolidated financial data for the year ended
December 31, 1995.
 
                                                 (DOLLARS IN THOUSANDS)
 
                                                   A-3         HOLDINGS
                                                               
                                                  1995           1995
                                                  ----           ----
Total net revenues                              $      -       $     -
Selling, general and administrative expenses       1,116         1,601
Operating income (loss)                           (1,116)       (1,601)
Net income (loss)                                 (1,053)       (1,524)

  Selling, general and administrative expenses include salaries and payments
required under an agreement executed with an executive's former employer related
to the executive's termination.

                                       32
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

THE COMPANY
-----------

  The Company's primary source of liquidity is cash provided by operations. Cash
provided by operations was $21,342,000 and $21,361,000 during 1997 and
$27,170,000 and $16,663,000  in 1996 for Sullivan Broadcasting Company, Inc. and
Sullivan Broadcast Holdings, Inc., respectively.  Cash provided by operations
was $21,820,000 during 1995.  The changes in cashflow from operations for these
periods was attributable primarily to improvements in the Company's operating
results, offset somewhat by the timing of interest payments.

  Such cash provided by operations is after payments for programming rights,
which amounted to $11,820,000, $9,087,000, and $8,368,000 respectively, for the
years ended 1997, 1996 and 1995. The Company prepaid certain obligations for
programming rights in connection with the Acquisition in 1996.  After giving
effect to such prepayments, the Company has cash program payment commitments
(including contracts not yet recordable as assets) of $46,253,000 of which
$14,798,000 are payable in 1998, $11,437,000 in 1999, $9,351,000 in 2000,
$5,868,000 in 2001, $3,632,000 in 2002 and $1,167,000 thereafter.

  The Company's primary capital requirements have been for capital expenditures.
Capital expenditures totaled $4,439,000, $3,105,000, and $5,560,000 for 1997,
1996 and 1995, respectively.  Expenditures for 1997, 1996 and 1995 reflect work
associated with the replacement of WUTV's transmitter, tower and antenna.  The
Company anticipates a lower level of capital expenditures in 1998 compared to
1997, which expenditures the Company anticipates will maintain the Company's
operations as well as allow for the completion of the replacement of the
transmitter system at WUTV.

  The Company's primary financing activities have been related to borrowings
under the existing debt facility to fund the station acquisitions made during
1996.  At December 31, 1997, the Company had $6,000,000 of revolver borrowings
outstanding under a $30,000,000 revolving credit facility.

A-3
---

A-3's only source of liquidity as of December 31, 1995 was from the proceeds of
capital stock purchases and funds raised through the issuance, in a public 
offering, of $125,000,000 of senior subordinated notes due 2006.

HOLDINGS
--------

  Holdings' only source of liquidity as of December 31, 1995 was from the
proceeds of capital stock purchases and funds raised through the issuance in a
public offering of 35,000 units, each unit consisting of $1,000 principal amount
of Holdings 13 1/4% senior accrual debentures due 2006 and 16 shares of Holdings
Class B-1 Common Stock.

FORWARD-LOOKING STATEMENTS

  This documents contains forward-looking statements.  In addition, when used in
this document, the words "intends to", "believes", "anticipates", "expects" and
similar expressions are intended to identify forward-looking statements.  Such
statements are subject to a number of risks and uncertainties.  Actual results
in the future could differ materially and adversely from those described in the
forward-looking statements as a result of various important factors, including
the impact of changes in national and regional economies, successful integration
of acquired television station, pricing fluctuations in local and national
advertising and volatility in programming costs. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.

                                       33
<PAGE>
 
RISK OF LOSS OF TAX BENEFITS

  At December 31, 1997, there were  net operating loss carryforwards for federal
income tax purposes, available to reduce future taxable income of approximately
$99,863,000 and $109,857,000 for Sullivan Broadcasting Company, Inc. and
Sullivan Broadcast Holdings, Inc., respectively.  Additionally, there were
charitable contributions carryforwards of approximately $10,000,000 for federal
income tax purposes, available to reduce future taxable income for both Sullivan
Broadcasting Company, Inc. and Sullivan Broadcast Holdings, Inc. To the extent
not used, federal net operating loss carryforwards expire in varying amounts
beginning in 2003. In addition, there were net operating loss carryforwards of
approximately $31,590,000 and $38,604,000 for Sullivan Broadcasting Company,
Inc. and Sullivan Broadcast Holdings, Inc., respectively, regarding state and
local income tax purposes in various jurisdictions.

A corporation that undergoes a "change of ownership" pursuant to Section 382 of
the Internal Revenue Code is subject to limitations on the amount of its net
operating loss carryforwards which may be used in the future.  An ownership
change occurred on January 4, 1996.  The annual limitation on the use of the net
operating loss is $10,050,000.  The Company estimates the limitation on the net
operating loss will not have a material adverse impact on the Company's
consolidated financial position or results of operations.  No assurance can be
given that an ownership change will not occur as a result of other transactions
entered into by the Company, or by certain other parties over which the Company
has no control.  If a "change in ownership" for income tax purposes occurs, the
Company's ability to use "pre-change losses" could be postponed or reduced,
possibly resulting in accelerated or additional tax payments which, with respect
to tax periods beyond 1997, could have a material adverse impact on the
Company's consolidated financial position or results of operations.

INFLATION

  For the three years ended December 31, 1997, inflation and changing prices
have not had a significant impact on the Company's results of operations and
financial condition.

SEASONALITY

  The Company's operating revenues are generally highest in the fourth quarter
of each year. This seasonality is primarily attributable to increased
expenditures by advertisers in anticipation of holiday retail spending and on
increases in viewership during the Fall/Winter season.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The consolidated financial statements (together with report of independent
accountants) of Act III and the Company and its subsidiaries and financial
statement schedules are included on pages F-1 through F-58 of this report on
Form 10-K.

                                       34
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

  Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

    The following table sets forth certain information with respect to the
Directors and Executive Officers of SBC and Holdings as of March 15, 1998. All
directors will hold office until the next annual meeting of the stockholders and
until their successors are duly elected and qualified or until their earlier
death, resignation or removal.  All officers will hold office until their
successors are duly elected or until their death, resignation or removal.
 
     Name                   Age  Position
     ----                   ---  --------
     Peni Garber             35  Director
     Peggy Koenig            41  Director
     Tim R. Palmer           40  Director
     J. Daniel Sullivan      46  Director, President and Chief Executive Officer
     Royce Yudkoff           42  Director
     Patrick Bratton         32  Vice President and Chief Financial Officer
     David Pulido            43  Executive Vice President-Programming and
                                  Legal Affairs and Secretary

The following sets forth certain biographical information with respect to the
individuals identified above.

    Peni Garber joined ABRY I (the predecessor fund to ABRY) in 1990.  She is a
principal and is responsible for investment analysis, working with the portfolio
companies of ABRY on an ongoing basis and arranging the disposition of ABRY's
investments.  Prior to joining ABRY I, Ms. Garber served as Senior Accountant in
the Audit Division of Price Waterhouse LLP, an international accounting firm,
from 1985 to 1990.

    Peggy Koenig joined ABRY in 1995.  She is a partner and is responsible for
initiating investment opportunities and arranging debt and equity financing.
From 1992 until joining ABRY, Ms. Koenig was President of Koenig Management
Group, Inc., a financial management company which provided advisory services to
broadcast related companies, including ABRY I.  From 1988 to 1992, Ms. Koenig
was Vice President, partner and member of the Board of Directors of Sillerman
Communications Management Corporation, a merchant bank, which makes investments
principally in the radio industry.

    Tim R. Palmer is a Managing Director of Harvard Private Capital Group, Inc.
("Harvard Private Capital"), which manages the direct investment portfolio of
the Harvard University endowment fund and is a wholly owned subsidiary of the
President and Fellows of Harvard College.  Prior to joining Harvard Private
Capital in 1990, Mr. Palmer was Manager, Business Development for The Field
Corporation, a Chicago-based investment management firm specializing in direct
investments in the communications industry, and an attorney with Sidley & Austin
in Chicago.  Mr. Palmer serves on the board of directors of NHP Incorporated,
PriCellular Corporation and several private companies.

    J. Daniel Sullivan is President and Chief Executive Officer of Holdings and
the Company.  From 1988 to September 1995 (when he signed the Sullivan
Employment Agreement (as defined)), Mr. Sullivan was the President and Chief
Executive Officer of Clear Channel, a wholly owned subsidiary of Clear Channel
Communications, Inc., which owned and/or programmed fourteen television stations
as of June

                                       35
<PAGE>
 
30, 1995. Mr. Sullivan has been an executive in the television broadcasting
business for 22 years. Mr. Sullivan serves on the Holdings Board of Directors
pursuant to the Sullivan Employment Agreement.

    Royce Yudkoff co-founded ABRY I in 1989 with Andrew Banks.  Mr. Yudkoff has
managing partner responsibilities for ABRY and had similar responsibilities for
ABRY I.  Prior to the formation of ABRY I, Mr. Yudkoff was affiliated with Bain
& Company ("Bain"), an international consulting firm.  He was a partner at Bain
from 1985 until the time he co-founded ABRY I.  While at Bain, Mr. Yudkoff had
significant responsibility for Bain's media practice.

    Patrick Bratton is Vice President and Chief Financial Officer of Holdings
and the Company.  From October 1993 until November 1995 (when he signed the
Bratton Employment Agreement (as defined)), Mr. Bratton was the controller of
Honeywell DMC Services, Inc., an energy conservation services company.
Previously, Mr. Bratton was a manager with Price Waterhouse LLP, an
international accounting firm, which he joined in August 1988.

    David Pulido is Executive Vice President--Programming and Legal Affairs and
Secretary of Holdings and the Company.  Mr. Pulido joined ABRY I in 1990 and was
a partner prior to joining SBC, with responsibility for evaluating investment
opportunities and overseeing on-going programming, legal and regulatory matters
related to ABRY's investments.  Prior to joining ABRY I, Mr. Pulido spent eight
years in the television business at MCA, Paramount Pictures and Columbia
Pictures, most recently as Director of Legal and Business Affairs for MCA
Television from 1986 to 1990.


ITEM 11. EXECUTIVE COMPENSATION

ACT III
-------

    Compensation of Directors.  Those directors who are not also officers or
employees of the Company receive reimbursement for expenses in attending each
meeting of the Board of Directors and for each committee meeting attended.

    Compensation of Executive Officers.  The following table summarizes the
compensation paid to the Chief Executive Officer and the Company's most highly
compensated officers as to whom the total annual salary and bonus exceeded
$100,000 in 1995, for services rendered to the Company.  These officers are no
longer employed by the Company effective as of the Acquisition.

SUMMARY COMPENSATION TABLE
 
                                                  ANNUAL COMPENSATION
Name                  PRINCIPAL POSITION          YEAR     SALARY      BONUS
----                  ------------------          ----     ------      -----

Hal Gaba              Chief Executive Officer     1995    $200,000    $ 50,000

Richard M. Ballinger  President, Chief Operating  1995    $306,000    $300,000
                      Officer

John F. DeLorenzo     Executive Vice President,   1995    $201,000    $160,000
                      Chief Financial Officer

                                       36
<PAGE>
 
   Compensation for Executive Officers was determined by the Compensation
Committee of the Board of Directors of the Company. Executive Officer
compensation was principally in the form of annual salary and cash bonuses paid
on a quarterly basis. In making compensation determinations, the Compensation
Committee considered several criteria, including the Company's performance and
growth, industry standards for similarly situated companies and the experience
and qualitative performance of such Executive Officers.

   Specifically, the Company's financial performance for the fiscal year and
quarters were analyzed and compared against budgeted performance goals for such
periods. However, commencing June 1, 1993, the annual salaries of Mr. Ballinger
and Mr. DeLorenzo were set by their respective employment agreements at a
minimum base of $250,000 and $175,000, respectively, plus bonuses.

   Quarterly bonuses for the Company's Executive Officers were set exclusively
on comparison of the Company's quarterly financial performance to budgeted
goals. The extent to which such quarterly goals were surpassed or not achieved
affected the bonuses paid to the Executive Officers. In the past, the Company's
performance had approximated budgeted goals, resulting in regular quarterly
bonuses for Executive Officers.  Typically, bonuses were established at the
beginning of each fiscal year by the Chief Executive Officer.

   Long-term compensation of Executive Officers and certain other Company
employees were in the form of options to purchase Class B Common Stock (as
defined) under the Company's 1989 Management Stock Option Plan, as amended.
Awards of such stock options were determined by the Stock Option Plan Committee
of the Board of Directors.  These option awards were generally not considered or
intended to be part of the Executive Officers' annual compensation, but rather
to provide long-term incentive and motivation through equity ownership in the
Company.

   No options were granted by the Company in 1995 to the Executive Officers
named in the Summary Compensation Table fiscal year-end option values for the
Executive Officers named in the Summary Compensation Table.  All outstanding
options were exercised by such individuals in 1996.
<TABLE>
<CAPTION>
 
 
FISCAL YEAR-END OPTION VALUES - 1995
                                    NUMBER OF SHARES
                                  UNDERLYING UNEXERCISED                 VALUE OF UNEXERCISED
                                   OPTIONS AT YEAR-END                   OPTIONS AT YEAR-END(1)
                            ----------------------------------        -----------------------------
NAME                        EXERCISABLE          UNEXERCISABLE        EXERCISABLE     UNEXERCISABLE
<S>                         <C>                  <C>                  <C>             <C>
Hal Gaba                        5.00                13.00                $ 14,250        $28,500
Richard M. Ballinger           74.00                15.50                 814,400         73,850
John F. DeLorenzo              22.83                13.67                 242,159         87,066
</TABLE>
(1) Based upon the value of $11,850 per Class B Share.

                                       37
<PAGE>
 
The Company, A-3 and Holdings
-----------------------------

    Compensation of Directors.  Those Directors who are not also officers or
employees of the Company receive reimbursement for expenses in attending each
meeting of the Board of Directors and for each committee meeting attended.

   Compensation of Executive Officers.  The following table summarizes the
compensation paid to the Chief Executive Officer and the Company's most highly
compensated officers as to whom the total annual salary and bonus exceeded
$100,000 in 1996 and 1997, for services rendered to the Company.
 
SUMMARY COMPENSATION TABLE

                                                  ANNUAL COMPENSATION
NAME                  PRINCIPAL POSITION           YEAR      SALARY      BONUS
----                  ------------------          -----------------------------
 
J. Daniel Sullivan    Chief Executive Officer      1997     $375,000   $150,000
                                                   1996     $411,305   $150,000
                                                   1995     $ 94,231         --
 
David Pulido          Executive Vice President,    1997     $185,000   $ 55,000
                      Programming and Legal        1996     $173,343   $ 72,250
                      Affairs
 
Patrick Bratton       Vice President and           1997     $ 90,000   $ 25,000
                      Chief Financial Officer      1996     $ 75,085   $ 37,300
 

Compensation for Executive Officers is determined based upon the respective
officer's employment agreement.  Increases to the contractual salaries and
annual non-contractual discretionary bonuses are determined by the Board of
Directors based upon the Company's overall performance against financial targets
and the individual's performance during the past year.

EMPLOYMENT AGREEMENTS OF HOLDINGS AND SBC

SULLIVAN EMPLOYMENT AGREEMENT

    SBC, Holdings and Mr. Sullivan are parties to an Executive Employment
Agreement, dated as of September 13, 1995 ( the "Sullivan Employment
Agreement"), under which, Mr. Sullivan will serve as President and Chief
Executive Officer of Holdings and as a director and member of the executive
committee, if any, of the Board of Directors of Holdings and SBC.  Additionally,
under the Sullivan Employment Agreement, Holdings will cause Mr. Sullivan to be
elected President and Chief Executive Officer of any of its wholly-owned direct
or indirect subsidiaries which is the holder of any FCC license to operate
television, radio or other broadcast properties (including SBC).  The Sullivan
Employment Agreement is for an initial term through September 13, 2000 (with
automatic successive one-year renewals thereafter unless either party gives 180
days prior notice of its intent to terminate), subject to earlier termination as
described below.  The Sullivan Employment Agreement provides for an annual base
salary of $350,000, an annual guaranteed bonus of $150,000 (the "Guaranteed
Bonus") and an additional bonus each year as determined by the Holdings Board of
Directors in its sole discretion based upon Holdings' overall performance and
the satisfaction of the personal goals of Mr. Sullivan as established by the
Holdings Board of Directors.  Mr. Sullivan has purchased at the Closing, 200,000
shares of Class B-2 Common Stock for $10.00 per share and 347,512 shares of
Class C Common Stock for $0.5720665 per share, for an aggregate purchase price
of $2,198,800.

                                       38
<PAGE>
 
    The Sullivan Employment Agreement will terminate under the following
circumstances:  (i) Mr. Sullivan's death, (ii) the illness, physical or mental
disability or other incapacity of Mr. Sullivan resulting in an inability to
perform his duties under the Sullivan Employment Agreement for six consecutive
months and (iii) a Sale of Holdings (as defined in the Sullivan Employment
Agreement).  In addition, (i) Holdings may terminate the Sullivan Employment
Agreement for any reason on or after September 13, 1996 upon thirty days notice
and subject to the obligation to make termination payments described below and
(ii) Mr. Sullivan may terminate the Sullivan Employment Agreement at any time
for Good Reason (as defined in the Sullivan Employment Agreement), and for any
reason on or after September 13, 1996 upon thirty days notice, provided that in
the latter case Holdings will have the right, exercisable at any time within
ninety days after the date of termination, to repurchase 69,502 shares of the
Holdings Class C Common Stock at $0.5720665 per share (which is Mr. Sullivan's
original purchase price per share).  Holdings may also require Mr. Sullivan to
retire upon attaining age 65.

    Under the Sullivan Employment Agreement, in the event Mr. Sullivan's
employment with Holdings is terminated other than by reason of Mr. Sullivan's
death or following a Sale of Holdings, then Holdings will have the right,
exercisable at any time within 90 days after the date of termination of
employment, to repurchase for cash that number of Mr. Sullivan's shares of
Holdings Class C Common Stock for $0.5720665 (which is Mr. Sullivan's original
purchase price per share) as follows:

                                                          Shares Which May be
                                                              Repurchased
                                                              -----------

     Termination on or after 9/13/97 but before 9/13/98..        208,507
     Termination on or after 9/13/98 but before 9/13/99..        139,005
     Termination on or after 9/13/99 but before 9/13/00..         69,502
     Termination on or after 9/13/00.....................              0

    Under the Sullivan Employment Agreement, in the event Mr. Sullivan's
employment is terminated under certain limited circumstances, then Holdings will
be required to purchase all of the shares of Holdings Class C Common Stock held
by Mr. Sullivan for a purchase price stated within the agreement.

    Under the Sullivan Employment Agreement, if Mr. Sullivan's employment is
terminated by reason of Mr. Sullivan's death, following a Sale of Holdings or by
Mr. Sullivan without Good Reason, Holdings will pay to Mr. Sullivan (or his
estate, as the case may be) any accrued and unpaid base salary as of the date of
termination and the Guaranteed Bonus, prorated through the date of termination.
Under the Sullivan Employment Agreement, if Mr. Sullivan's employment is
terminated by reason of Mr. Sullivan's disability, then Mr. Sullivan will
continue to receive his base salary and the Guaranteed Bonus, less any amounts
paid to Mr. Sullivan pursuant to disability insurance, for 12 months after the
date of termination, and if Mr. Sullivan's employment is voluntarily terminated
by Holdings for any reason or by Mr. Sullivan for Good Reason, Mr. Sullivan will
continue to receive his base salary and the Guaranteed Bonus for one year after
the date of termination.  A "Sale of Holdings" will occur when Holdings
consolidates with or merges with and into any other entity, effects a share
exchange, sells all or substantially all of its assets or enters into a
comparable capital transaction pursuant to which Holdings is not the continuing
or surviving corporation or a sale of a majority of the outstanding voting power
of Holdings equity securities to a third party occurs such that the beneficial
owners of Holdings have substantially changed and, in such transaction, the
stockholders of Holdings receive at least 50% of the value of their Holdings
Common Stock held immediately prior to such consolidation, merger, share
exchange, asset sale, stock sale or comparable transaction of Holdings.  For
purposes of the Sullivan Employment Agreement, termination of Mr. Sullivan's
employment following a transaction described in the definition of a "Sale of
Holdings" in which the stockholders of Holdings do not receive at least 50% of
such value will be considered to be a voluntary termination by Holdings.

                                       39
<PAGE>
 
BRATTON EMPLOYMENT AGREEMENT

    SBC, Holdings and Mr. Bratton are parties to an Executive Employment
Agreement, dated as of November 10, 1995 ( the "Bratton Employment Agreement"),
under which Mr. Bratton will serve as Chief Financial Officer of each of
Holdings and the SBC.  Under the Bratton Employment Agreement, Mr. Bratton's
employment was for an initial term through December 31, 1996 (the "Initial
Term") and, after the Initial Term, will continue on a month-by-month basis.
The Bratton Employment Agreement provides for an annual base salary of $100,000
and a guaranteed bonus of $25,000.  Mr. Bratton purchased, at the Closing, 6,000
shares of Holdings Class C Common Stock and an additional 10,000 shares of
Holdings Class C Common Stock in December 1996, each at $0.5720665 per share
(for an aggregate purchase price of $9,153).

    SBC's employment of Mr. Bratton under the Bratton Employment Agreement will
terminate under the following circumstances:  (i) Mr. Bratton's death, (ii) the
illness, physical or mental disability or other incapacity of Mr. Bratton
resulting in an inability to perform his duties under the Bratton Employment
Agreement for three consecutive months, subject to certain notice requirements,
and (iii) if, after the Initial Term, Holdings consolidates or merges with and
into any other entity, effects a share exchange, sells all or substantially all
of its assets or enters into a comparable capital transaction pursuant to which
Holdings is not the continuing or surviving corporation or a sale of a majority
of the outstanding voting power to a third party such that the beneficial owners
of Holdings have substantially changed.  In addition, (I) SBC may terminate Mr.
Bratton's employment for any reason or for Company's Good Reason (as defined in
the Bratton Employment Agreement) and (ii) Mr. Bratton may terminate his
employment at any time with or without Executive Good Reason (as defined in the
Bratton Employment Agreement).  SBC may also require Mr. Bratton to retire upon
attaining age 65.

    Under the Bratton Employment Agreement, in the event Mr. Bratton's
employment with SBC is terminated other than following a Sale of Holdings, then
Holdings will have the right, exercisable at any time within 90 days after the
date of termination of employment, to repurchase for cash, from Mr. Bratton or
his estate, executors and/or personal representatives, as the case may be, that
number of Mr. Bratton's shares of Holdings Class C Common Stock for $0.5720665
(which is Mr. Bratton's original purchase price per share) as follows:

                                                               SHARES WHICH
                                                                  MAY BE
                                                                REPURCHASED
                                                                -----------
     Termination on or after 11/20/97 but before 11/20/98..        9,600
     Termination on or after 11/20/98 but before 11/20/99..        6,400
     Termination on or after 11/20/99 but before 11/20/00..        3,200
     Termination on or after 11/20/00......................            0

    Under the Bratton Employment Agreement, if Mr. Bratton's employment is
terminated by reason of Mr. Bratton's death, following a Sale of Holdings, by
Holdings with Good Reason, or by Mr. Bratton without Good Reason, then SBC will
pay to Mr. Bratton (or his estate, as the case may be) any accrued and unpaid
base salary as of the date of termination.  If Mr. Bratton's employment is
terminated by reason of Mr. Bratton's disability, then Mr. Bratton will continue
to receive his base salary, less any amounts paid to Mr. Bratton pursuant to
disability insurance, for three months after the date of termination, and if Mr.
Bratton's employment is voluntarily terminated by SBC without Good Reason or by
Mr. Bratton for Good Reason, Mr. Bratton will continue to receive his base
salary for the remainder of the initial term for such reason after the Initial
Term.  For purposes of the Bratton Employment Agreement, termination of Mr.
Bratton's employment following a transaction described in the definition of a
"Sale of Holdings" in

                                       40
<PAGE>
 
which the stockholders of Holdings do not receive at least 50% of such value
will be considered to be voluntary termination by the Company.

PULIDO EMPLOYMENT AGREEMENT

    SBC and Mr. Pulido have executed an Executive Employment Agreement (the
"Pulido Employment Agreement") under which Mr. Pulido serves as Executive Vice
President--Programming and Legal Affairs and Secretary of each of Holdings and
SBC.

    Mr. Pulido purchased, at the Closing, 10,000 shares of Holdings Class B-1
Common Stock for $10.00 per share (for an aggregate purchase price of $100,000)
and 61,500 shares of Holdings Class C Common Stock for $0.5720665 per share (for
an aggregate purchase price of $35,182)  In addition, Mr. Pulido acquired 20,000
shares of Holdings Class C Common Stock in December 1996, each at $0.5720665 per
share (for an aggregate purchase price of $11,441).

    The Pulido Employment Agreement has an initial term and will terminate under
comparable circumstances to those set forth in the Sullivan Employment
Agreement.  The Pulido Employment Agreement provides for an annual base salary
of $185,000 and a guaranteed bonus of $55,000.  The Pulido Agreement is also
expected to contain provisions comparable to the Sullivan Employment Agreement
giving Holdings the right to repurchase shares of Holdings Class B-1 Common
Stock and Holdings' Class C Common Stock held by Mr. Pulido and requiring
payments to Mr. Pulido under certain circumstances upon employment termination.

ITEM 12.                SECURITY OWNERSHIP OF CERTAIN
                       BENEFICIAL OWNERS AND MANAGEMENT

HOLDINGS
--------

Ownership

     The following table sets forth certain information regarding the beneficial
ownership of Holdings Common Stock as of March 15, 1998 by (i) holders having
beneficial ownership of more than five percent of Holdings Common Stock by vote,
(ii) each director of Holdings, (iii) the executive officers of Holdings, and
(iv) all such directors and executive officers as a group.  The general managers
of the Stations own as a group 45,000 shares of Class B-1 Common Stock and
573,860 shares of Class C Common Stock.

                                       41
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                         HOLDINGS COMMON STOCK
                                                 ---------------------------------------
                                                    TYPE OF      NUMBER OF    PERCENT
NAME OF BENEFICIAL OWNER                         SHARES OWNED      SHARES    OF CLASS(a)
------------------------                         ------------      ------    ----------- 
<S>                                              <C>             <C>         <C> 
ABRY Broadcase Partners II, L.P. (b)..........    Class B-2      5,958,211      79.8%
  18 Newbury Street
  Boston, MA 02116

Patrick Bratton (c)(d)........................    Class C           16,000         *

Peni Garber (c)...............................    Class B-1            500         *

Peggy Koenig (c)..............................    Class B-1          1,688         *

David Pulido (c)(d)...........................    Class B-1         10,000       1.1
                                                  Class C           81,500      

Tim R. Palmer (f).............................    Class B-1        941,598       1.3
  Harvard Private Capital
  600 Atlantic Avenue, 26th Floor
  Boston, MA 02210

J. Daniel Sullivan (g)........................    Class B-2        200,000       7.3
  4431 Dyke Bennet Road                           Class C          347,512
  Franklin, TN 37064

Royce Yudkoff (c)(h)..........................    Class B-1          9,205      79.8
                                                  Class B-2      5,958,211

Directors and executive officers as a group...    Class B-1        962,991      89.6
                                                  Class B-2      6,158,211
                                                  Class C          415,012
</TABLE> 
------------------------
(a)  For such purpose, all shares of Holdings Common Stock are treated as a
     single class. Percentages are based on the percentage of total voting power
     and are rounded to the nearest one-tenth of one percent.  An asterisk
     indicates less than 1.0%.
(b)  ABRY Holdings, Inc., the general partner of ABRY Capital, which is the
     general partner of ABRY, is wholly owned by Mr. Yudkoff.
(c)  The business address of Mr. Bratton, Ms. Garber, Ms. Koenig, Mr. Pulido and
     Mr. Yudkoff is 18 Newbury Street, Boston, MA 02116.
(d)  Mr. Bratton's shares are subject to the Bratton Employment Agreement.  See
     "Management--Bratton Employment Agreement."
(e)  Mr. Pulido's shares are subject to the Pulido Employment Agreement.  See
     "Management--Pulido Employment Agreement."
(f)  Represents shares that Harvard Private Capital has the right to acquire
     under Holdings Warrants and other shares purchased by Harvard Private
     Capital.  Mr. Palmer has neither sole investment power not sole voting
     power over such shares, and disclaims beneficial ownership thereof.

                                       42
<PAGE>
 
(g)  Mr. Sullivan's shares are subject to the Sullivan Employment Agreement.
     See "Management--Sullivan Employment Agreement."
(h)  Mr. Yudkoff may be deemed to be the beneficial owner of the Holdings Common
     Stock held by ABRY.  See Note (b) above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In connection with the Acquisition, the Company and Holdings paid ABRY a
fee of $500,000.  The Company, Holdings and ABRY Partners, Inc. are parties to
an agreement pursuant to which ABRY Partners provides management, financial and
other corporate advisory services to SBC and Holdings.  Under such agreement,
ABRY Partners, Inc. will receive an annual fee of $250,000 (adjusted upward
annually for increases, if any, in the consumer price index) plus reimbursement
of expenses.  ABRY has determined that such annual fee is an appropriate level
of compensation for the management services expected to be provided.  In
connection with the Closing, SBC and Holdings reimbursed ABRY for expenditures
incurred in connection with SBC and Holdings and paid on their behalf by ABRY of
approximately $1.5 million.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

SULLIVAN BROADCASTING COMPANY, INC. (FORMERLY ACT III BROADCASTING, INC.)
-------------------------------------------------------------------------
                                                                      Page
(a) (1)  Financial Statements

Sullivan Broadcasting Co., Inc. and Subsidiaries (formerly Act III Broadcasting,
Inc. as Successor by Merger with A-3 Acquisitions, Inc.)

Report of Independent Public Accountants for the Year Ended
December 31, 1995                                                     F-1

Consolidated Statement of Operations for the Year Ended
December 31, 1995                                                     F-2
                                                            
Consolidated Statement of Changes in Shareholders'          
Equity for the Year Ended December 31, 1995                           F-3
                                                            
Consolidated Statement of Cash Flows for the Year Ended     
December 31, 1995                                                     F-4
                                                            
Notes to Consolidated Financial Statements                            F-5

Sullivan Broadcasting Company, Inc. (formerly
Act III Broadcasting, Inc. as Successor 
by Merger with A-3 Acquisitions, Inc.)

Report of Independent Accountants for the Period from Inception
(June 2, 1995) through December 31, 1995 and
the Years Ended December 31, 1996 and 1997                            F-18
                                              
Consolidated Balance Sheet at December 31, 1996 and 1997              F-19

                                       43
<PAGE>
 
Consolidated Statement of Operations for the period from Inception
(June 2, 1995) through December 31, 1995 and the Years Ended
December 31, 1996 and 1997                                            F-21
                                                                                
Consolidated Statement of Changes in Shareholders' Equity for
the Period from Inception (June 2, 1995) through December 31, 1995
and the Years Ended December 31, 1996 and 1997                        F-22

Consolidated Statement of Cash flows for the Period from Inception
(June 2, 1995) through December 31, 1995 and the Years Ended
December 31, 1996 and 1997                                            F-23

Note to Consolidated Financial Statements                             F-24

(a) (2) Financial Statements

Schedule II - Valuation and Qualifying Accounts                       F-37

SULLIVAN BROADCAST HOLDINGS, INC.
---------------------------------

                                                                      Page
(a) (1)  Financial Statements

Report of Independent Accountants for the Period from Inception
(June 2, 1995) through December 31, 1995 and the Years Ended
December 31, 1996 and 1997                                            F-38

Consolidated Balance Sheet at December 31, 1996 and 1997              F-39

Consolidated Statement of Operations for the period from Inception
(June 2, 1995) through December 31, 1995 and the Years Ended
December 31, 1996 and 1997                                            F-41

Consolidated Statement of Changes in Shareholders' Equity
for the Period from Inception (June 2, 1995) through
December 31, 1995 and the Years Ended December 31, 1996 and 1997      F-42

Consolidated Statement of Cash flows for the Period from Inception
(June 2, 1995) through December 31, 1995 and the Years Ended
December 31, 1996 and 1997                                            F-43

Note to Consolidated Financial Statements                             F-44

(a) (2) Financial Statements

Schedule II - Valuation and Qualifying Accounts                       F-58

                                       44
<PAGE>
 
<TABLE> 
<CAPTION> 
 
Exhibit
Number                                        DESCRIPTION OF EXHIBIT
------                                        ----------------------
<C>    <S>                                                       
10.1   Fourth Supplemental Indenture dated as of January 7, 1997 between Sullivan
       Broadcasting Company, Inc. (as successor to A-3 ) and State Street Bank
       and Trust Company, as trustee (the "Trustee") relating to the Notes.*

10.2   Seventh Supplemental Indenture dated as of January 7, 1997 between Sullivan
       Broadcasting Company, Inc. (as successor to A-3 ) and State Street Bank
       and Trust Company, as trustee (the "Trustee") relating to the Notes.*

10.3   Fourth Amendment to Credit Agreement and Limited Wavier and Consent dated
       as of June 26, 1997 by and among Sullivan Broadcasting Company, Inc. as successor
       to A-3 Acquisitions, Inc., NationsBank of Texas, N.A. and certain other lenders.*

10.4   Fifth Amendment to Credit Agreement dated as of December 31, 1997 by
       and among Sullivan Broadcasting Company, Inc. as successor to
       A-3 Acquisitions, Inc., NationsBank of Texas, N.A. and certain other
       lenders.

10.5   Sixth Amendment to Credit Agreement and Limited Consent dated as of January 30,
       1998 by and among Sullivan Broadcasting Company, Inc. as successor to
       A-3 Acquisitions, Inc., NationsBank of Texas, N.A. and certain other
       lenders.

10.6   Agreement and Plan of Merger among Sullivan Broadcast Holdings, Inc., Sinclair
       Broadcast Group, Inc. and ABRY Partners, Inc. effective as of February 23, 1998.

10.7   Agreement and Plan of Merger among Sullivan Broadcasting Company II, Inc., Sinclair             
       Broadcast Group, Inc. and ABRY Partners, Inc. effective as of February 23, 1998. 

10.8   Agreement and Plan of Merger among Sullivan Broadcasting Company III, Inc.,
       Glencairn, LTD., and ABRY Partners, Inc. effective as of February 23, 1998.
 
10.9   Indemnity Agreement among Sullivan Broadcast Holdings, Inc., Sullivan Broadcasting
       Company II, Inc., Sullivan Broadcasting Company III, Inc., Sinclair Broadcast
       Group, Inc., Glencairn, Ltd. and ABRY Partner, Inc. effective February 23, 1998.

12.1   Computation of ratio of earnings to fixed charges.

21.1   Subsidiaries of Sullivan Broadcast Holdings, Inc.
</TABLE> 
*    Incorporated herein by reference from the Company's 10-Q for the
     quarterly period ended   June 30, 1997.

(b)  No reports on Form 8-K were filed during the quarter ending December 31,
     1997.

                                       45
<PAGE>
 
                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                      SULLIVAN BROADCASTING COMPANY, INC.
                       SULLIVAN BROADCAST HOLDINGS, INC.
 




    By: 
       --------------------------------------
        J. Daniel Sullivan
        President and Chief Executive Officer


    Date:
         ------------------------------------


   Pursuant to the requirements of the Securities and Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and the dates indicated.
<TABLE> 
<S>                      <C>         <C> 

---------------------    ---------   President,  Chief Executive Officer and Director
 J. Daniel Sullivan      Date        (Principal Executive Officer)

---------------------    ---------   Chief Financial Officer (Principal Financial
 Patrick Bratton         Date        Officer and Principal Accounting Officer)

---------------------    ---------   Director
 Peggy Koenig            Date

---------------------    ---------   Director
 Peni Garber             Date
</TABLE> 

                                       46
<PAGE>
 
                       Report of Independent Accountants



To the Board of Directors and Shareholders
of Sullivan Broadcasting Company, Inc.
(formerly Act III Broadcasting, Inc. as successor by
merger with A-3 Acquisition, Inc.)

In our opinion, the accompanying consolidated statements of operations, of cash
flows and of changes in shareholders' deficit present fairly, in all material
respects, the results of operations and of cash flows of Sullivan Broadcasting
Company, Inc. and its subsidiaries (the "Company") for the year ended December
31, 1995, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.


Price Waterhouse LLP
Boston, Massachusetts

March 25, 1996

                                      F-1
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Statement of Operations
(dollars in thousands)
--------------------------------------------------------------------------------

                                               Year ended
                                              December 31,
                                                  1995

Revenues                                      $    112,039
  Less - commissions                                19,914
                                              ------------

Net revenues                                        92,125
Barter revenues                                      7,876
                                              ------------ 

 Total net revenues                                100,001
                                              ------------

 
Expenses:
 Operating expenses                                 11,136
 Selling, general and administrative                23,447
 Amortization of programming rights                 18,033
 Depreciation and amortization                      11,780
                                              ------------ 

                                                    64,396
                                              ------------ 
 
   Operating income                                 35,605
 
Interest expense, including amortization of
  debt discount and deferred loan costs             17,777
Other expenses                                         247
                                              ------------ 

Income before income tax benefit                    17,581
Income tax benefit                                  (4,762)
                                              ------------

   Net income                                 $     22,343
                                              ============

  The accompanying notes are an integral part of these financial statements.

                                      F-2

<PAGE>
 
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Deficit
(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                     Class A            Class C     Additional                                    Total       
                                  Common Stock       Common Stock     Paid-in    Accumulated     Deferred     Shareholders'   
                                Shares   Amount    Shares   Amount    Capital      Deficit     Compensation      Deficit      
<S>                             <C>      <C>       <C>      <C>     <C>          <C>           <C>            <C>            
                                                                                                                              
Balance at December 31, 1994    893.720    $ 9     666.879    $ 7     $ 6,285    $(114,639)       $ (153)       $ (108,491)   
                                                                                                                              
Accretion of discount and                                                                                                     
  dividends on 8% Cumulative                                                                                                  
  Redeemable Preferred Stock       -        -         -        -       (2,518)         -             -              (2,518)   
Amortization of deferred                                                                                                      
  compensation                     -        -         -        -         -             -             153               153    
Net income                         -        -         -        -         -           22,343          -              22,343    
                                -------    ---     -------    ---     -------    ----------       ------        ----------    
Balance at December 31, 1995    893.720    $ 9     666.879    $ 7     $ 3,767    $  (92,296)      $  -          $  (88,513)    
                                =======    ===     =======    ===     =======    ==========       ======        ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                     F-3 
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Statement of Operations
(dollars in thousands)
--------------------------------------------------------------------------------

                                                              Year ended
                                                             December 31,
                                                                 1995
 
Cash flows from operating activities:                        
 Net income                                                  $     22,343
 Adjustments to reconcile net income to net cash provided
   by operating activities:
   Adjustment to goodwill relating to realization of
     net operating loss                                               484
   Depreciation of property and equipment                           3,147
   Amortization of intangibles                                      8,633
   Amortization of programming rights, excluding barter            10,728
   Payments for programming rights                                 (8,368)
   Prepayment of WGGT time brokerage fees                          (6,000)
   Amortization of debt issuance costs and discount                   851
   Loss on sale or retirement of fixed assets                          24
   Increase in interest payable                                        95
   Amortization of deferred compensation                              153
 Changes in assets and liabilities:
   Increase in accounts receivable                                 (3,121)
   Increase in prepaid expenses and other assets                     (515)
   Increase in deferred tax assets                                 (7,326)
   Increase in taxes payable                                        1,105
   Decrease in accounts payable and other accrued
     liabilities                                                     (413)
                                                             ------------

    Net cash provided by operating activities                      21,820
                                                             ------------

 
Cash flows from investing activities:
  Payment for WGGT option                                          (1,000)
  Purchase of fixed assets                                         (5,560)
                                                             ------------
 
    Net cash used for investing activities                         (6,560)
                                                             ------------


Cash flows from financing activities:
 Payment of principal amounts                                     (14,971)
                                                             ------------

    Net cash used for financing activities                        (14,971)
                                                             ------------

    Net increase in cash and cash equivalents                         289
    Cash and cash equivalents, beginning of year                    3,295
                                                             ------------

    Cash and cash equivalents, end of year                   $      3,584
                                                             ============

  The accompanying notes are an integral part of these financial statements.

                                      F-4

<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1.   Basis of Presentation and Summary of Significant Accounting Policies

     On January 4, 1996, all of the outstanding capital stock of Act III
     Broadcasting (the "Company") was purchased by and the Company was merged
     with and into A-3 Acquisition, Inc. The Company then changed its name to
     Sullivan Broadcasting Company, Inc. (Note 11).

     The Company was incorporated in Delaware in 1986 and at December 31, 1995
     owned, operated and/or programmed, through its subsidiaries, seven Fox
     Broadcasting Company ("Fox") affiliated stations, one television station
     affiliated with the American Broadcasting Companies, Inc. ("ABC"), and two
     independent television stations that the Company programs under time
     brokerage agreements throughout the Northeast, Southeast, and Mid-Atlantic
     states. Television broadcasting is subject to the jurisdiction of the
     Federal Communications Commission ("FCC") under the Communications Act of
     1934, as amended (the "Communications Act"). The Communications Act
     prohibits the operation of television broadcasting stations except under a
     license issued by the FCC and empowers the FCC, among other things, to
     issue, revoke and modify broadcasting licenses, determine the location of
     the stations, regulate the equipment used by the stations, adopt
     regulations to carry out the provisions of the Communications Act and
     impose penalties for violation of such regulations.

     Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
     and its subsidiaries. Significant intercompany accounts and transactions
     have been eliminated in consolidation.

     As of December 31, 1995, Act III Communications Holdings, L.P.
     ("Holdings") directly owned approximately 15%, 100% and 6% of the
     Company's 8% Cumulative Redeemable Preferred Stock ("Senior Preferred
     Stock"), Class A Common Stock and Class C Common Stock, respectively.

     Revenue Recognition

     Advertising revenues are recognized in the period during which the time
     spots are aired. Revenues from other sources are recognized in the period
     when the services are provided.

     Trade and Barter Transactions

     The Company trades certain advertising time for various goods and services.
     These transactions are recorded at the estimated fair value of the goods or
     services received. The related revenue is recognized when commercials are
     broadcast. Goods or services received are recorded as assets or expenses
     when received or used, respectively.

     The Company barters advertising time for certain program material. These
     transactions are recorded at management's estimate of the value of the
     advertising time exchanged, which approximates the fair value of the
     program material received.

                                      F-5
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     Programming Rights and Contracts Payable

     Programming rights, primarily in the form of syndicated programs and
     feature film packages, represent amounts paid or payable to program
     suppliers for the limited right to broadcast the suppliers' programming and
     are recorded when available for use. Programming rights are stated at the
     lower of unamortized cost or net realizable value. Amortization is computed
     using the straight-line method based on the license period or based on
     usage, whichever yields the greater accumulated amortization for each
     program.

     Property and Equipment
     Property and equipment is stated on the basis of cost or estimated fair
     value at the date of acquisition. Expenditures for renewals and
     improvements that significantly add to productive capacity or extend the
     useful life of an asset are capitalized. Expenditures for maintenance and
     repairs are charged to income when incurred. Depreciation is computed on
     the straight-line basis over the estimated useful lives of the assets which
     range from 3 to 37 years.

     Intangible Assets
     Intangible assets represent the estimated fair value of both identifiable
     assets and goodwill resulting from acquisitions. Identifiable intangibles
     include FCC broadcast licenses, non-competition agreements, favorable
     leases, accelerated market growth assets and underdeveloped market
     competition assets and are being amortized on a straight-line basis over
     periods ranging from 5 to 15 years. Goodwill is being amortized over 40
     years using the straight-line method. The Company evaluates the
     recoverability of its intangible assets whenever adverse events or changes
     in business climate indicate that the expected undiscounted future cash
     flows from the related intangible assets may be less than previously
     anticipated. If the net book value of the related intangible asset exceeds
     the undiscounted future cash flows of the intangible asset, the carrying
     value would be reduced to the present value of its expected future cash
     flows and an impairment loss would be recognized. The Company did not
     recognize any impairment loss for the year ended December 31, 1995.

     Deferred Loan Costs
     Deferred loan costs represent costs incurred in obtaining long-term
     financing. These costs are expensed as interest over the lives of the
     related loan using the effective interest method.

     Accounting for Income Taxes
     The Company accounts for income taxes under the liability method of
     accounting as set forth in Statement of Financial Accounting Standards No.
     109 "Accounting for Income Taxes". Under the method prescribed by this
     statement, deferred income taxes are recognized at enacted tax rates to
     reflect the future effects of income tax carryforwards and temporary
     differences arising between the tax basis of assets and liabilities and
     their financial reporting amounts at each period end.

                                      F-6
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     Use of Estimates
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     use assumptions that affect the reported amounts of assets and liabilities
     and the disclosure for contingent assets and liabilities at the date of the
     financial statements as well as the reported amounts of revenues and
     expenses during the reporting period. Actual results may vary from
     estimates used.

     Supplementary Statement of Operations Information
     Included in operating expenses for the year ended December 31, 1995 were
     advertising costs of $1,694,000 and music license fees of $548,000.
     

2.   Time Brokerage Agreement

     On September 30, 1991, the Company entered into a time brokerage agreement
     with Guilford Telectasters, Inc. ("Guilford") for WGGT, an independent
     television station in Greensboro, North Carolina.  The purchase price was
     $2,000,000, plus the assumption of $821,000 in film liabilities.  Under the
     terms of the agreement, Guilford sells certain broadcast time of WGGT to
     the Company for the purpose of retransmitting the signal of WXLV, the
     Company's television station in Winston-Salem, North Carolina.  In addition
     to the purchase price, the Company will remit quarterly payments, not to be
     lower than $50,000, to Guilford based on a specified calculation.  The term
     of the contract is five years with a five-year extension that may be
     exercised by Guilford.

     On June 30, 1995, the Company and Guilford amended the time brokerage
     agreement.  Under the terms of the amended agreement, the Company paid
     Guilford $6,000,000 in exchange for the right to broadcast the signal of
     WXLV on WGGT through September 30, 2001.  This payment released the Company
     from the quarterly payments originally required under the agreement.  This
     amount is being amortized on a straight line basis, over the term of the
     agreement.

     In conjunction with the amendment, the Company also paid Guilford
     $1,000,000 and Guilford granted to a third party an option to purchase
     certain assets of WGGT of an exercise price of $1,000,000.  The third party
     granted the Company the right to require such third party to assign this
     option to the Company or another third party.

                                      F-7
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

3.   Long-Term Debt

     Long-term debt consisted of the following:
                                                            December 31,
                                                                1995
 
     Senior Debt:

     Bank Credit Agreement, $60,000,000 revolving
      credit, commitment reducing year by year, due
      December 31, 2000                                     $  24,000,000

     Series A Senior Notes, interest at 11.34%
      payable semi-annually, principal payable in
      semi-annual installments commencing
      June 30, 1993                                            15,260,000
      Less:  unamortized discount                                (109,000)
                                                            -------------

                                                               15,151,000
                                                            -------------

     Series B Senior Notes, interest at 12.03%
      payable semi-annually, principal payable in
      semi-annual installments commencing
      June 30, 1993                                             2,723,000

     Series C Senior Notes, interest at 12.60%
      payable semi-annually, principal due on
      December 31, 1996                                        13,432,000
      Less:  unamortized discount                                 (61,000)
                                                            -------------

                                                               13,371,000
                                                            -------------

     Series D Senior Notes, interest at 13.31%
      payable semi-annually, principal due on
      December 31, 1996                                         4,368,000

     Senior Acquisition Notes, interest at 12.92%
      payable semi-annually, principal payable
      in semi-annual installments commencing
      June 30, 1993                                             3,363,000
                                                            -------------

                                                               62,976,000

      Less:  current maturities                               (24,078,000)
                                                            -------------

                                                            $  38,898,000
                                                            =============

                                      F-8
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

                                                December 31,
                                                    1995    
     Subordinated Debt:                                     
                                                            
     Senior Subordinated Notes, interest                    
     at 9.625% payable semi-annually,                     
     principal due December 15, 2003            $100,000,000
                                                ============ 

 
     On December 22, 1993, the Company refinanced a substantial portion of its
     outstanding debt. The Company secured a revolving credit facility (the
     "Bank Credit Agreement") originally in the amount of $50 million, currently
     at $57.6 million, to mature on December 31, 2000, and issued $100 million
     of 9-5/8% Senior Subordinated Notes due December 2003 ("Notes"). With the
     proceeds from these transactions, the Company repaid $35,000,000 of its
     Floating Rate Senior Notes, $36,867,000 Series A Senior Notes, $10,054,000
     Series B Senior Notes, $8,689,000 Senior Acquisition Notes, $7,568,000
     Series A Subordinated Notes and $9,632,000 of its Series B Subordinated
     Notes. In connection with the issuance of the Notes and Bank Credit
     Agreement, the Company amended its existing loan agreement (the "Amended
     Existing Agreement") which extended the maturity of a portion of the
     Company's existing senior and subordinated debt from its then current
     maturity of December 31, 1996 to December 31, 1997. Of the $40,615,000 of
     remaining notes under the Amended Existing Agreement, $15 million is due
     December 31, 1997. All the notes under the Amended Existing Agreement rank
     pari passu with the debt issued under the Bank Credit Agreement. Concurrent
     with the refinancing, the Company redeemed 17.2 shares of 8% Cumulative
     Redeemable Preferred Stock ("Senior Preferred Stock") at a price of
     $22,865,000 (see Note 5) and 606,478 shares of Class C Common Stock at a
     price of $16,557,000 (see Note 6).

     The interest rate under the Bank Credit Agreement will be based, at the
     Company's option, on the lender's (I) ABR; (ii) Eurodollar or (iii) CD
     rates (each as defined therein), each plus an applicable margin which is
     based on the Company's ratio of Total Funded Debt to Operating Cash Flow
     (as defined therein). Interest rates will be adjusted monthly, with the
     applicable margins varying between .5% to 1.5% for the ABR rate, 1.5% to
     2.5% for the Eurodollar rate, and 1.625% to 2.625% for the CD rate. The
     Company is required to pay to the lender an annual commitment and an annual
     agency fee. The interest rate at December 31, 1995 was 7.25%.

     Borrowings under the Bank Credit Agreement are subject to a maximum
     available amount (the "Maximum Amount"), currently $57.6 million, and may
     be repaid and reborrowed at any time. The Maximum Amount is being reduced
     in varying quarterly amounts beginning June 30, 1995 through December 31,
     2000. Principal amounts outstanding on such dates must be repaid to reduce
     total outstanding principal to at least the Maximum Amount. Generally, the
     Company may prepay a greater amount of borrowed funds than is required
     without premium or penalty, except for certain breakage costs associated
     with prepayment of CD and Eurodollar loans.

                                      F-9
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     The Series A Senior Notes require principal payments of $260,000 on each
     June 30 and December 31 through June 30, 1996, with the remaining
     $15,000,000 due on December 31, 1997. In consideration for extending this
     maturity to 1997 the Company will be required to pay a 3% premium or
     $450,000 upon maturity. The Company has recorded the liability for this
     premium. The Series B Senior Notes require principal payments of $359,000
     on each June 30 and December 31 through June 30, 1996 with the remaining
     $2,364,000 due December 31, 1996. The Series C Senior Notes and Series D
     Senior Notes are due in full on December 31, 1996. A principal payment on
     Senior Acquisition Notes totaling $214,000 is due on June 30, 1996 with the
     remaining $3,147,000 due on December 31, 1996. Interest is payable in semi-
     annual installments on June 30 and December 31.

     The Notes mature on December 15, 2003. Interest on the Notes accrues at the
     rate of 9-5/8% per annum and will be payable semiannually in arrears on
     June 15, and December 15. Although the Notes are general unsecured
     obligations of the Company and are subordinate to all indebtedness, the
     Notes are guaranteed jointly and severally by each of the Company's
     subsidiaries.

     As of December 31, 1995, scheduled maturities, including discounts, are
     summarized as follows:

           1996                                     $  24,145,000 
           1997                                        15,000,000 
           1998                                                 - 
           1999                                         9,000,000 
           2000                                        15,000,000 
           Thereafter                                 100,000,000  
                                                    -------------
                                                     
                                                    $ 163,145,000
                                                    =============

     The Notes, Bank Credit Agreement and Amended Existing Agreement of the
     Company contain covenants which, among other restrictions, require the
     maintenance of certain financial ratios and cash flow, restrict asset
     purchases and the encumbrance of existing assets, require lender approval
     for proposed acquisitions, and limit the incurrence of additional
     indebtedness and the payment of dividends.

     The Company has estimated the fair value of long-term debt at December 31,
     1995 to approximate the carrying value. The fair value was estimated by
     discounting the future cash flows of loans with similar terms and remaining
     maturities at the Company's current borrowing rate.

                                     F-10
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

4.   Income Taxes

     The Company accounts for income taxes in accordance with Financial
     Accounting Standards Statement No. 109, "Accounting for Income Taxes" ("FAS
     109"), which mandates the liability method for computing deferred income
     taxes. The provision for income taxes charged to continuing operations was
     as follows:

                                                 Year ended               
                                                December 31,             
                                                    1995                 
                                                                         
     Current tax expense:                                                
        Federal                                 $    373,000                   
        State                                      1,265,000                    
                                                ------------
                                                                         
                                                   1,638,000          
                                                ------------
      Deferred tax expense (benefit):                                    
        Federal                                   (7,000,000)
        State                                        116,000                   
                                                ------------
                                                                         
                                                  (6,884,000)        
                                                ------------

      Benefit of acquired loss carryforward 
        used to reduce goodwill                      484,000                   
                                                ------------
                                                                         
        Total benefit                           $ (4,762,000)
                                                ============


     Reconciling amounts, stated below as a percentage of pretax income, between
     the statutory federal income tax rate and the Company's effective tax rate
     are as follows:

                                                   Year ended
                                                  December 31,
                                                      1995   
                                                             
     U.S. federal statutory rate                       35.0% 
      State and local taxes, net                        5.1% 
      Amortization of goodwill                          1.3% 
      Realized benefit for net operating losses       (27.1)% 
      Other                                             0.3% 
      Change in valuation allowance                   (41.7)%  
                                                  ------------  

      Effective tax rate                              (27.1)%
                                                  ============

                                     F-11
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     The components of the net deferred tax asset are as follows:

                                                December 31,
                                                    1995
 
     Property and equipment                     $  (744,000)
     Programming rights                           3,498,000
     Bad debts                                      443,000   
     Intangible assets                              745,000   
     Music license fees                              12,000   
     Net operating loss carryforwards            25,373,000   
     Other                                         (944,000)   
                                                -----------

                                                 28,383,000

     Less - valuation allowance                 (21,057,000)
                                                -----------

     Net deferred tax asset                     $ 7,326,000
                                                ===========

     At December 31, 1995, the Company had net operating loss carryforwards of
     approximately $60,303,000 for federal income tax purposes, available to
     reduce future taxable income. To the extent not used, federal net operating
     loss carryforwards expire in varying amounts beginning in 2002. In
     addition, the Company had net operating loss carryforwards of approximately
     $44,147,000 for state and local income tax purposes in various
     jurisdictions. Under FAS 109, the Company has recorded valuation allowances
     against the realization of the federal and state and local tax benefits
     resulting from net operating losses in the amounts of $16,647,000 at
     December 31, 1995. In 1995, the valuation allowance decreased by
     $11,438,000, of this $7,326,000 was a result of the determination by
     management that it is more likely than not that certain deferred tax assets
     will be utilized in future periods. The remaining valuation allowances are
     based on management's estimates and analysis, which include the impact of
     tax laws which may limit the Company's ability to utilize such loss
     carryforwards.

     A corporation that undergoes a "change of ownership" pursuant to Section
     382 of the Internal Revenue Code is subject to limitations on the amount of
     its net operating loss carryforwards which may be used in the future. An
     ownership change occurred on January 4, 1996. The Company estimates the
     limitation on the net operating loss will not have a material adverse
     impact on the Company's consolidated financial position or results of
     operation. No assurance can be given that an ownership change will not
     occur as a result of other transactions entered into by the Company, or by
     certain other parties over which the Company has no control. If a "change
     in ownership" for income tax purposes occurs, the Company's ability to use
     "pre-change losses" could be postponed or reduced, possibly resulting in
     accelerated or additional tax payments which, with respect to tax periods
     beyond 1995, could have a material adverse impact on the Company's
     consolidated financial position or results of operations.

                                     F-12
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     In addition, net operating loss carryforwards acquired through the
     acquisition of a corporation are also subject to limitations on the amount
     which may be used in the future. If the acquired net operating loss
     carryforwards are utilized, the tax benefit will result in an adjustment to
     the purchase price allocations of the acquired corporation. As a result of
     the acquisition of Act III Broadcasting of Dayton, Inc. (formerly Meridian
     Communications Corporation) and Act III Broadcasting of West Virginia, Inc.
     (formerly West Virginia Telecasting, Inc.) by the Company, federal tax net
     operating loss carryforwards were acquired. During 1995, the Company
     utilized approximately $1.4 million of the acquired net operating loss
     carryforwards with a resulting reduction of approximately $.5 million to
     goodwill.


5.   8% Cumulative Redeemable Preferred Stock ("Senior Preferred Stock")

     Dividends accrue on the outstanding shares of the Senior Preferred Stock at
     a rate of 8% per annum of the dividend base. The dividend base is the
     number of shares outstanding times $1,000,000 per share plus accrued
     dividends and is adjusted on December 31, of each year for dividends
     accrued during the year. The accrued dividends converted to shares of
     Senior Preferred Stock on December 31, 1995, at $1,000,000 per share. All
     dividends earned subsequent to that date shall be paid, in cash, on each
     December 31. With the exception of stock dividends on securities that are
     subordinate to the Senior Preferred Stock, dividends may not be paid on the
     Class A Common Stock or Class C Common Stock until all accrued dividends
     relating to the Senior Preferred Stock are paid and there is no outstanding
     mandatory redemption obligation. Accretion to record the value of the
     Senior Preferred Stock at its redemption value on its scheduled redemption
     date is calculated using the effective interest method. Such amounts have
     been charged to additional paid-in capital in the accompanying financial
     statements. Holders of the Senior Preferred Stock are entitled to elect one
     director if any dividends payable are in arrears and unpaid for two
     consecutive periods or the Company fails to discharge its mandatory
     redemption obligation and have no voting rights except under certain
     specified circumstances.

     The Company has estimated the fair value of the Senior Preferred Stock at
     December 31, 1995 to approximate the carrying value based on the recently
     negotiated redemption values.

     In connection with the issuance of the Notes and the Bank Credit Agreement,
     the Company redeemed 17.2 shares of Senior Preferred Stock at a price of
     $1,000,000 per share plus accrued dividends totaling $22,865,000. The
     mandatory redemption on the remaining 16.627 shares of Senior Preferred
     Stock has been extended from December 31, 1996 to December 31, 2004.
     Beginning January 1, 1994, the dividend on the Senior Preferred Stock
     increased to 9% from 8%. On January 1, 1997, the dividend rate will
     increase to 11% per annum. Dividends are payable in cash or in-kind at the
     Company's option. The Senior Preferred Stock will be redeemable, in whole
     or in part, at anytime without premium. If the Senior Preferred Stock is
     outstanding after December 31, 1996, the holders are entitled to a one-time
     2% dividend payable at redemption. Beginning January 1, 2000, the Company
     will issue to the holders of Senior Preferred Stock, warrants to purchase
     Class C Common Stock every three months.

                                     F-13
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     Each holder will receive thirty-six and one-half warrants for each share of
     Senior Preferred Stock owned. Each warrant will entitle the holder to
     purchase one share of Class C Common Stock at a price of $27,397 per share.
     A warrant may be exercised with cash or by tendering to the Company Senior
     Preferred Stock. The warrants expire at the end of each three month period.


6.   Shareholders' Deficit

     Class C Common Stock is convertible into Class A Common Stock on a one-to-
     one ratio upon the occurrence of certain events. Any necessary approval of
     the FCC must be obtained prior to all stock conversions.

     Holders of the Class A Common Stock are entitled to one vote per share on
     all matters submitted to shareholder vote. Holders of Class C Common Stock
     have no voting rights except under certain specified circumstances.

     In the event of liquidation, dissolution or winding-up of the affairs of
     the Company, the holders of Class A Common Stock and Class C Common Stock
     are entitled to share ratably, based on the number of shares held by each
     holder, in the remaining assets of the Company.

     Holdings has pledged all of its Class A Common Stock of the Company (the
     "Holdings Pledge") to secure a promissory note (the "Holdings Note") in the
     amount of $12 million held by Mediafin USA Incorporated, a Delaware
     corporation ("Mediafin") and a wholly owned subsidiary of Tractebel S.A., a
     Belgian company. Any foreclosure by Mediafin on the Company's stock,
     however, would require prior approval of the FCC. Current FCC rules
     restrict foreign ownership of broadcast companies and Mediafin is owned by
     a foreign entity. The Holdings Note is assignable in whole or in part,
     however, the Holdings Pledge of the Company's Class A Common Stock to
     Mediafin is not assignable without Holdings' consent.

     On November 30, 1989, the Company implemented a stock option plan (the
     "Plan") whereby 250 shares of the authorized but unissued shares of Class B
     Common Stock have been reserved for issuance upon the exercise of
     nonqualified stock options to be granted to certain key personnel. These
     options are exercisable for a period of up to ten years from the date of
     grant. The Class B Common Stock is convertible into Class A Common Stock at
     a ratio of one-to-one upon the occurrence of certain events.

                                     F-14
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     The following options were outstanding under the Plan at December 31, 1995:
 
                                                                        Per
                                                                       Share
                                                                     Exercise
                                                         Number        Price
                                                         ------        -----
                                                                   
         Options outstanding at December 31, 1994            250.0  
         Option granted during 1995                           33.0   $ 11,850
                                                      ------------  
                                                
         Options outstanding at December 31, 1995            283.0
                                                      ============

     No options were exercised during the year ended December 31, 1995. There is
     no compensation expense associated with the options granted in 1995 as the
     exercise price approximates the fair value at the date of the grant.


7.   Leases

     The Company has operating lease agreements for land, office space, office
     equipment and other property which expire on various dates through 2005.
     Rental expense was $691,000 during the year ended December 31, 1995.

     As of December 31, 1995, minimum required annual payments under
     noncancellable operating leases are as follows:
 

     1996                              $    650,000                   
     1997                                   620,000                  
     1998                                   594,000                  
     1999                                   595,000                  
     2000                                   510,000                  
     Thereafter                           2,518,000                   
                                       ------------ 
                                       $  5,487,000
                                       ============

                                     F-15
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

8.   Supplemental Disclosures of Cash Flow Information

     The Company paid interest of $16,862,000 during the year ended December 31,
     1995.

     During the year ended December 31, 1995 the programming rights increased
     $12,913,000, due to the assumption of programming liabilities.

     During the year ended December 31, 1995 the Company paid approximately
     $995,000 for income taxes.

9.   Commitments and Contingencies

     The Company has executed contracts for programming rights totaling
     approximately $18,961,000 at December 31, 1995, for which the broadcast
     period has not begun. Accordingly, the asset and related liability are not
     recorded at such dates.

     The Company currently and from time to time is involved in litigation
     incidental to the conduct of its business. In the opinion of management, no
     existing or contingent claims will have a material adverse effect on the
     Company's financial position or results of operations.

     The Company has entered into employment contracts with two of its executive
     officers in the minimum aggregate amount of $425,000 payable annually
     commencing June 1, 1993 and ending December 31, 1996.  In addition, the
     Company has quarterly bonus arrangements for its executive officers which
     are based on achieving budgeted performance goals.  Such budgeted
     performance goals have been met historically.
 
     The Company has no post-retirement or post-employment benefit plans.


10.  Related Party Transactions

     The Company has a management agreement with Holdings to reimburse certain
     salary and operating expenses incurred on behalf of the Company.  Operating
     expenses include reimbursements to Holdings for $6,100 per month
     representing an allocable share of rent paid by Holdings under its lease.
     During the year ended December 31, 1995, the Company paid $913,000 in
     management fees and other charges to Holdings.  Such amounts have been
     included in selling, general and administrative expenses in the Company's
     consolidated statements of operations.

                                     F-16
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     A former member of the Company's Board of Directors, who was a member from
     1990 through October 1993, also serves as Chairman and President of the
     Buffalo Sabres, a professional hockey team. Total programming rights fees
     payable to the Buffalo Sabres are $340,000 at December 31, 1995.


11.  Subsequent Event

     On January 4, 1996, A-3 Acquisition, Inc. ("A-3") acquired substantially
     all of the outstanding stock of the Company for approximately $517,000,000
     plus certain amounts defined in the purchase and sale agreement which are
     based on working capital and less the amounts necessary to repurchase or
     repay the existing indebtedness of the Company. The acquisition will be
     accounted for by the purchase method. Accordingly, the results of
     operations of the Company will be included with those of A-3 for periods
     subsequent to the date of acquisition.

     The unaudited pro forma combined condensed balance sheet of the Company and
     A-3 as of December 31, 1995 after giving effect to certain pro forma
     adjustments is as follows:
 
     Assets

     Current assets                       $  49,728,000
     Property and equipment, net             44,164,000
     Other assets and intangible assets     649,054,000
                                          -------------   

                                          $ 742,946,000
                                          =============

     Liabilities and Shareholders' Equity

     Current liabilities                  $  29,043,000
     Long-term debt                         488,395,000
     Shareholders' equity                   225,508,000
                                          ------------- 

                                          $ 742,946,000
                                          =============


     The unaudited pro forma combined results of operations of the Company and
     A-3 for the year ended December 31, 1995 after giving effect to certain pro
     forma adjustments are as follows:

     Net revenues                         $ 101,082,000
                                          =============

     Net loss                             $ (10,367,000)
                                          =============

                                     F-17
<PAGE>
 
                       Report of Independent Accountants



To the Board of Directors and Shareholder
of Sullivan Broadcasting Company, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholder's equity and of
cash flows present fairly, in all material respects, the financial position of
Sullivan Broadcasting Company, Inc. and its subsidiaries (the "Company") at
December 31, 1996 and 1997, and the results of their operations and their cash
flows for the period from inception (June 2, 1995) through December 31, 1995 and
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



Price Waterhouse LLP
Boston, Massachusetts


March 10, 1998

                                     F-18

<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                              December 31,
                                                                         1996             1997
<S>                                                                 <C>              <C> 
Assets
Current assets:
   Cash and cash equivalents                                        $       6,443    $       3,837
   Accounts receivable, net of allowance for doubtful
      accounts of $1,297 and $1,325                                        31,686           34,990
   Current portion of programming rights                                   23,360           22,850
   Current deferred tax asset                                               3,968            3,588
   Prepaid expenses and other current assets                                  733              941
                                                                    --------------   --------------

      Total current assets                                                 66,190           66,206

Property and equipment, net                                                44,454           39,723

Programming rights, net of current portion                                 21,319           23,432

Deferred financing costs, net of accumulated amortization
  of $793 and $1,655                                                       12,292           11,430

Intangible assets, net                                                    591,085          567,209
                                                                    --------------   --------------

      Total assets                                                  $     735,340    $     708,000
                                                                    --------------   --------------
</TABLE> 



  The accompanying notes are an integral part of these financial statements.

                                     F-19

<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Balance Sheet (cont'd)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                        December 31,
                                                                   1996             1997
<S>                                                            <C>              <C> 
Liabilities and Shareholder's Equity
Current liabilities:
   Current portion of senior debt                              $     18,583     $     23,562
   Interest payable                                                   4,362            3,882
   Accounts payable                                                   1,925            2,262
   Current portion of programming contracts payable                  24,281           24,944
   Current taxes payable                                              2,910              194
   Accrued expenses                                                   3,650            4,297
   Due to related parties                                             7,080            6,036
                                                               -------------    -------------

      Total current liabilities                                      62,791           65,177

Senior debt, net of current portion                                 195,917          171,820
Borrowings under revolving line of credit                            56,500           59,500
Subordinated debt                                                   125,185          125,185
Programming contracts payable, net of current portion                20,392           22,710
Deferred tax liability and other non-current liabilities             86,705           87,676
                                                               -------------    -------------

      Total liabilities                                             547,490          532,068
                                                               -------------    -------------

Commitments and contingencies (Note 11)                                   -                -

Shareholder's equity:
   Common stock, $.01 par value;
   800,000 shares authorized; 520,105 shares issued and
   outstanding                                                            5                5
   Additional paid-in capital                                       206,797          206,797
   Accumulated deficit                                              (18,952)         (30,870)
                                                               -------------    -------------

      Total shareholder's equity                                    187,850          175,932
                                                               -------------    -------------

      Total liabilities and shareholder's equity               $    735,340     $    708,000
                                                               -------------    -------------
</TABLE> 

  The accompanying notes are an integral part of these financial statements.

                                     F-20
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Statement of Operations
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                Period from
                                                                 inception
                                                               (June 2, 1995)
                                                                  through                Year ended
                                                                December 31,             December 31,
                                                                   1995            1996               1997

<S>                                                            <C>             <C>             <C> 
Revenues (excluding barter)                                    $        -      $   129,711     $      144,169
   Less: commissions                                                    -           21,997             24,045
                                                               -----------     ------------    ---------------

Net revenues (excluding barter)                                         -          107,714            120,124
Trade and barter revenues                                               -           14,808             17,650
                                                               -----------     ------------    ---------------

   Total net revenues                                                   -          122,522            137,774

Expenses:
   Operating expenses                                               1,116           15,005             17,301
   Selling, general and administrative                                  -           23,402             27,516
   Amortization of programming rights                                   -           26,673             30,197
   Depreciation and amortization                                        -           48,051             42,220
                                                               -----------     ------------    ---------------

                                                                    1,116          113,131            117,234
                                                               -----------     ------------    ---------------

      Operating (loss) income                                      (1,116)           9,391             20,540

Interest expense, net, including amortization of
  debt discount and deferred loan costs                               169           34,411             35,057
Other expenses (income)                                                 -              131                 (9)
                                                               -----------     ------------    ---------------

Loss before benefit for income taxes                               (1,285)         (25,151)           (14,508)

Income tax benefit                                                    232            7,252              2,590
                                                               -----------     ------------    ---------------

      Net loss                                                 $   (1,053)     $   (17,899)    $      (11,918)
                                                               ===========     ============    ===============
</TABLE> 



  The accompanying notes are an integral part of these financial statements.

                                     F-21
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholder's Equity
(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                       Additional                        Total
                                                Common Stock            Paid-in       Accumulated     Shareholder's
                                             Shares       Amount        Capital         Deficit          Equity
<S>                                          <C>        <C>           <C>             <C>           <C> 
Issuance of common stock                     520,105    $       5     $      5,196    $         -   $       5,201

Net loss                                           -            -                -         (1,053)         (1,053)
                                        -------------   ----------    -------------   ------------  --------------

Balance at December 31, 1995                 520,105            5            5,196         (1,053)          4,148

Additional investment by shareholder               -            -          201,601              -         201,601

Net loss                                           -            -                -        (17,899)        (17,899)
                                        -------------   ----------    -------------   ------------  --------------

Balance at December 31, 1996                 520,105            5          206,797        (18,952)        187,850

Net loss                                           -            -                -        (11,918)        (11,918)
                                        -------------   ----------    -------------   ------------  --------------

Balance at December 31, 1997                 520,105    $       5     $    206,797    $   (30,870)  $     175,932
                                        =============   ==========    =============   ============  ==============

</TABLE> 

  The accompanying notes are an integral part of these financial statements.

                                     F-22
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                        Period from
                                                                         inception
                                                                      (June 2, 1995)
                                                                          through                        Year ended
                                                                        December 31,                     December 31,
                                                                           1995              1996            1997
<S>                                                                    <C>               <C>             <C> 
Cash flows from operating activities:
   Net loss                                                      $          (1,053)    $    (17,899)   $    (11,918)
   Adjustments to reconcile net loss to net cash (used for) 
    provided by operating activities:
      Deferred income taxes                                                   (236)          (8,843)         (5,196)
      Depreciation of property and equipment                                     -            7,865           9,251
      Amortization of intangible assets                                          -           40,186          32,969
      Amortization of programming rights (excluding barter)                      -           12,911          13,198
      Payments for programming rights                                            -           (9,087)        (11,820)
      Amortization of deferred financing costs                                  21              793             862
   Changes in assets and liabilities:
      Increase in accounts receivable                                            -           (2,707)         (3,048)
      Increase in prepaid expenses and other assets                              -             (478)           (131)
      Increase (decrease) in amounts due to related party                      494            5,416          (1,044)
      Increase (decrease) in income taxes payable                                4              (85)         (1,392)
      Increase (decrease) in interest payable                                  356            4,006            (480)
      Increase in accounts payable                                               -              383             337
      Decrease in accrued expenses                                            (149)          (5,291)           (150)
      Decrease in non-current liabilities                                        -                -             (96)
                                                                 ------------------    -------------   -------------

        Net cash (used for) provided by operating activities                  (563)          27,170          21,342
                                                                 ------------------    -------------   -------------

Cash flows from investing activities:
   (Increase) decrease in restricted cash                                 (126,916)         126,916               -
   Acquisition of Act III Broadcasting, Inc., net of cash                                                         -
     acquired (Note 3)                                                           -         (550,045)            751
   Acquisition of WFXV and WPNY (Note 3)                                         -             (792)              -
   Acquisition of WMSN (Note 3)                                                  -          (26,584)              -
   Purchase of CTBC stock (Note 3)                                               -          (26,950)              -
   Payments for purchase options (Note 3)                                        -           (2,800)              -
   Acquisition of Cascom stock                                                   -                -          (4,142)
   Capital expenditures                                                          -           (3,105)         (4,439)
                                                                 ------------------    -------------   -------------

        Net cash used for investing activities                            (126,916)        (483,360)         (7,830)
                                                                 ------------------    -------------   -------------

Cash flows from financing activities:
   Proceeds from issuance of common stock                                    5,201                -               -
   Proceeds from senior subordinated debt                                  125,000                -               -
   Proceeds from long-term debt                                                  -          220,000               -
   Proceeds from borrowings under credit facilities                              -           56,500           3,000
   Proceeds from bridge loan                                                 1,300                -               -
   Proceeds from stockholder contribution                                        -          201,601               -
   Repayment of long-term debt                                                   -           (5,500)        (19,118)
   Payment of debt issuance costs                                           (4,022)          (5,572)              -
   Advance buydown of programming rights                                         -           (4,396)              -
                                                                 ------------------    -------------   -------------

        Net cash provided (used for) by financing activities               127,479          462,633         (16,118)
                                                                 ------------------    -------------   -------------

        Net increase (decrease) in cash and cash equivalents                     -            6,443          (2,606)
        Cash and cash equivalents, beginning of period                           -                -           6,443
                                                                 ------------------    -------------   -------------

        Cash and cash equivalents, end of period                 $               -     $      6,443    $      3,837
                                                                 ==================    =============   =============

</TABLE> 

  The accompanying notes are an integral part of these financial statements.

                                     F-23
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1.        Organization and Business Operations

          A-3 Acquisition Inc. ("A-3") was incorporated on June 2, 1995 in the
          State of Delaware for the sole purpose of acquiring 100% of the
          outstanding capital stock of Act III Broadcasting, Inc. ("Act III")
          under a purchase agreement dated June 19, 1995. The purchase of Act
          III was consummated on January 4, 1996 (the "Act III Acquisition"), at
          which time A-3 merged with and into Act III and changed its name to
          Sullivan Broadcasting Company, Inc. ("SBC" or the "Company") (Note 3).
          Sullivan Broadcast Holdings, Inc. ("Holdings") owns 100% of the
          Company's common stock.

          The Company currently owns, operates and programs, through its
          subsidiaries, nine Fox Broadcasting Company ("Fox") affiliated
          stations, one television station affiliated with the American
          Broadcasting Companies, Inc. ("ABC"), and one independent television
          station throughout the Northeast, Southeast, and the Mid-Atlantic
          states. Additionally, the Company programs two independent television
          stations under local marketing agreements ("LMA") in markets where the
          Company owns another television station (Note 4). Television
          broadcasting is subject to the jurisdiction of the Federal
          Communications Commission ("FCC") under the Communications Act of
          1934, as amended, (the "Communications Act"). The Communications Act
          prohibits the operation of television broadcasting stations except
          under a license issued by the FCC and empowers the FCC, among other
          things, to issue, revoke, and modify broadcasting licenses, determine
          the location of the stations, regulate the equipment used by the
          stations, adopt regulations to carry out the provision of the
          Communications Act, and impose penalties for violation of such
          regulations.


2.        Summary of Significant Accounting Policies

          Principles of Consolidation
          The consolidated financial statements include the accounts of the
          Company and its subsidiaries. Significant intercompany accounts and
          transactions have been eliminated in consolidation.

          Cash and Cash Equivalents
          The Company considers all highly liquid investments purchased with an
          original maturity of ninety days or less to be cash equivalents.

          Revenue Recognition
          Advertising revenues are recognized in the period during which the
          advertising spots are aired. Revenues from other sources are
          recognized in the period when the services are provided.

          Trade and Barter Transactions
          The Company trades certain advertising time for various goods and
          services. These transactions are recorded at the estimated fair value
          of the goods or services received. Revenues from trade transactions
          are recognized when advertisements are broadcast and services or
          merchandise received are charged to expense when received or used.

          The Company barters advertising time for certain program material.
          These transactions are recorded at management's estimate of the value
          of the advertising time exchanged, which approximates the fair value
          of the program material received.

                                     F-24
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         Concentration of Credit Risk
         Financial instruments which potentially expose the Company to a
         concentration of credit risk include cash, cash equivalents and
         accounts receivable. The Company maintains cash in excess of federally
         insured deposits at several financial institutions at December 31,
         1997. The Company does not believe that such deposits are subject to
         any unusual credit risk beyond the normal credit risk associated with
         operating its business. The Company maintains reserves for potential
         credit losses and such losses, in the aggregate, have not historically
         exceeded management's expectations.

         Programming Rights and Contracts Payable
         Programming rights, primarily in the form of syndicated programs and
         feature film packages, represent amounts paid or payable to program
         suppliers for the limited right to broadcast the suppliers' programming
         and are recorded when available for use. Programming rights are stated
         at the lower of unamortized cost or net realizable value. Amortization
         is computed using the straight-line method based on the license period
         or based on usage, whichever yields the greater accumulated
         amortization for each program. The current portion of programming
         rights represents those rights available for broadcast which will be
         amortized in the succeeding year.

         The Company has estimated the fair value of these programming contracts
         payable at approximately $49,480,000 as of December 31, 1997 based on
         future cash flows discounted at the Company's current borrowing rate.

         Property and Equipment
         Property and equipment is stated on the basis of cost or estimated fair
         value at the date of acquisition. Major renewals and betterments are
         capitalized and ordinary repairs and maintenance are charged to expense
         in the period incurred. Depreciation is computed on the straight-line
         basis over the estimated useful lives of the assets which range from
         three to thirty-nine years.

         Intangible Assets
         Intangible assets represent the estimated fair value of both
         identifiable intangible assets and goodwill resulting from
         acquisitions. Identifiable intangibles include FCC broadcast licenses,
         network affiliation agreements, non-competition agreements, and
         favorable leases and are being amortized on a straight-line basis over
         periods ranging from 5 to 15 years. Goodwill is the excess of the
         purchase price over the fair value of the net assets acquired,
         determined through an independent appraisal, and is amortized over 40
         years using the straight-line method. The Company evaluates the
         recoverability of its intangible assets whenever adverse events or
         changes in business climate indicate that the expected undiscounted
         future cash flows from the related intangible assets may be less than
         previously anticipated. If the net book value of the related intangible
         asset exceeds the undiscounted future cash flows of the intangible
         asset, the carrying value would be reduced to the present value of its
         expected future cash flows and an impairment loss would be recognized.
         The Company did not recognize any impairment loss during the years
         ended December 31, 1996 and 1997.

                                     F-25

<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         Deferred Financing Costs
         Deferred financing costs represent costs incurred in obtaining
         long-term financing. These costs are expensed as interest over the life
         of the related loan, using the effective interest method.

         Accounting for Income Taxes
         The Company accounts for income taxes under the liability method of
         accounting as set forth in Statement of Financial Accounting Standards
         No. 109 "Accounting for Income Taxes". Under the method prescribed by
         this statement, deferred income taxes are recognized at enacted tax
         rates to reflect the future effects of income tax carryforwards and
         temporary differences arising between the tax basis of assets and
         liabilities and their financial reporting amounts at each period end.

         Interest Rate Risk Management
         The Company enters into interest rate swap agreements with commercial
         banks to mitigate the risk of possible rising interest rates. These
         agreements are designated as hedges of interest rates, and the
         differential to be paid or received on interest rate swaps is accrued
         as an adjustment to interest expense as interest rates change. The
         Company is exposed to credit loss in the event of nonperformance by the
         other parties to the interest rate swap agreements; however, the
         Company does not anticipate nonperformance by the counterparties.

         Use of Estimates
         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and use assumptions that affect the reported amounts of assets and
         liabilities and the disclosure for contingent assets and liabilities at
         the date of the financial statements as well as the reported amounts of
         revenues and expenses during the reporting period. Actual results may
         vary from estimates used.


3.       Acquisitions

         In 1996 and 1997, the Company made the acquisitions set forth below,
         each of which has been accounted for as a purchase. The consolidated
         financial statements include the operating results of each business
         from the date of acquisition, except for the Act III Acquisition which
         includes the operating results of Act III from January 1, 1996 through
         January 4, 1996 due to the immateriality of the results in relation to
         the financial statements taken as a whole. Pro forma results of
         operations related to the other acquisitions made in 1996 and 1997 have
         not been presented as they are not considered material.

         The Act III Acquisition
         On January 4, 1996, the Company acquired all of the outstanding stock
         of Act III. The acquisition cost consisted of the following:

          Cash paid to Act III shareholders                     $   359,108,000
          Cash paid to retire debt                                  167,764,000
          Acquisition costs                                          23,173,000
                                                                ----------------

                                                                $   550,045,000
                                                                ----------------

                                     F-26
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         The excess of the purchase price over the fair value of the net assets
         acquired was $208,861,000. In 1997, the Company received $751,000 from
         the sellers due to the settlement of certain items for which funds were
         being held in escrow. This amount, net of expenses, was recorded as a
         reduction of goodwill during the year ended December 31, 1997.

         The Utica Acquisition
         On February 7, 1996, the Company executed an asset purchase agreement
         to acquire certain assets of Mohawk Valley Broadcasting, Inc.
         ("Mohawk") and Acme T.V. Corporation ("Acme"), the owners and operators
         of WFXV and WPNY in Utica, New York, for a total purchase price of
         $400,000. In addition, the Company paid $2,600,000 for the option to
         purchase the remaining assets of Mohawk and Acme pending FCC approval
         for $250,000 and simultaneously entered into a LMA with Mohawk and Acme
         (Note 4). On June 24, 1996, the FCC granted approval for the Company to
         purchase the remaining assets at which time the LMA with Mohawk and
         Acme was terminated and the remaining assets were purchased. The
         Company allocated the total cost of $3,250,000 plus fees and expenses
         of $142,000 to the net assets acquired. The excess of the purchase
         price over the fair value of the net assets acquired was $1,322,000.

         The Madison Acquisition
         On July 1, 1996, the Company acquired substantially all of the assets
         of Channel 47 Limited Partnership, owner and operator of a television
         station in Madison, Wisconsin (WMSN) for a total purchase price of
         $26,500,000 plus fees and expenses of $84,000. The excess of the
         purchase price over the fair value of the net assets acquired was
         $4,155,000.

         The Nashville Acquisition
         On February 22, 1996, the Company entered into a LMA with Central
         Tennessee Broadcasting Corporation ("CTBC"), owner and operator of
         WXMT, an independent television station in Nashville, Tennessee.
         Additionally, the Company paid $200,000 for the option to acquire the
         stock of CTBC based upon certain events defined in the underlying
         agreement for $13,710,000 in cash plus the repayment of $13,030,000 of
         CTBC's debt. On July 12, 1996, the Company exercised the option and
         purchased the stock of CTBC. The cost plus fees of $210,000 were
         allocated to the net assets acquired. The excess of the purchase price
         over the fair value of the net assets acquired was $17,505,000.

         The Cascom Acquisition
         On January 2, 1997, the Company acquired substantially all of the
         assets of Cascom International, Inc. and related film libraries for
         $4,038,000 plus fees and expenses of $104,000. The excess of the
         purchase price over the fair value of the assets acquired was
         $1,877,000.


4.       Local Marketing Agreements

         As part of the Act III Acquisition, the Company was assigned Act III's
         right, title and interest in a LMA with Guilford Telecasters, Inc.
         ("Guilford"), owner of WUPN (formerly WGGT), an independent television
         station in Greensboro, North Carolina (the "WUPN LMA"). Under the WUPN
         LMA, the Company sells and collects the advertising revenues of WUPN,
         programs WUPN, and reimburses Guilford for operating expenses. In
         connection with the Act III Acquisition, the Company also acquired Act
         III's right, title and interest in a prepayment made under the WUPN
         LMA, which released the Company from quarterly payments based on the
         cash flows of WUPN which were initially required under the WUPN LMA. In
         July 1996, Guilford sold the assets of WUPN to Mission Broadcasting II,
         Inc. ("Mission II") and assigned their right, title and interest in the
         WUPN LMA to Mission II under substantially similar terms.

                                     F-27
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         On July 12, 1996, the Company entered into an LMA with Mission
         Broadcasting I, Inc. ("Mission I"), owner of WUXP (formerly WXMT), an
         independent station in Nashville, Tennessee (the "WUXP LMA"). Under the
         terms of the WUXP LMA, the Company sells and collects the advertising
         revenues of WUXP and reimburses Mission I for operating expenses and
         debt service requirements.

         Net revenues of $7,121,000 and $11,989,000, respectively, and expenses
         of $2,818,000, and $3,397,000, respectively, related to the WUXP and
         WUPN LMAs have been included in the Company's consolidated statement of
         operations for the years ended December 31, 1996 and 1997. The Company
         has guaranteed an aggregate amount of debt of $3,850,000 related to
         WUXP and WUPN as of December 31, 1997.


5.       Property and Equipment

         Property and equipment consists of the following:

<TABLE> 
<CAPTION> 
                                                Estimated
                                               useful life                   December 31,
                                                 (years)              1996                 1997

          <S>                                     <C>            <C>                  <C> 
          Land                                      -            $     1,385,000      $     1,426,000
          Broadcasting equipment                   3-5                39,978,000           43,845,000
          Buildings and improvements              15-39                6,262,000            6,556,000
          Furniture and other equipment            5-7                 3,070,000            3,724,000
          Construction in progress                  -                  1,624,000            1,288,000
                                                                 ---------------      --------------- 

                                                                      52,319,000           56,839,000
          Less: accumulated depreciation
            and amortization                                           7,865,000           17,116,000
                                                                 ---------------      --------------- 

                                                                 $    44,454,000      $    39,723,000
                                                                 ===============      =============== 
</TABLE> 

                                     F-28
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

6.       Intangible Assets

         Intangible assets consist of the following:

<TABLE> 
<CAPTION> 
                                                       Amortization
                                                          Period                        December 31,
                                                         (years)                 1996                 1997

          <S>                                              <C>              <C>                  <C> 
          Commercial advertising contracts                  15              $  148,986,000       $  148,986,000
          Goodwill                                          40                 231,607,000          238,621,000
          Affiliation agreements                            10                  98,445,000           98,445,000
          FCC licenses                                      15                  81,297,000           81,297,000
          Canadian cable rights                             10                  59,000,000           59,000,000
          Other intangible assets                          5-15                 11,936,000           14,015,000
                                                                            --------------       -------------- 

                                                                               631,271,000          640,364,000

          Less: accumulated amortization                                        40,186,000           73,155,000
                                                                            --------------       --------------  

                                                                            $  591,085,000       $  567,209,000
                                                                            ==============       ============== 
</TABLE> 


7.      Long-Term Debt

        Long-term debt consists of the following:

<TABLE> 
<CAPTION> 
                                                                                        December 31,
                                                                                 1996                 1997
          Senior Debt:
             <S>                                                            <C>                  <C> 
             Revolving credit facility                                      $   30,000,000       $    6,000,000

             Acquisition credit facility                                        26,500,000           53,500,000

             Term loan                                                         214,500,000          195,382,000
                                                                            --------------       -------------- 

                                                                               271,000,000          254,882,000

             Less:  current portion                                             18,583,000           23,562,000
                                                                            --------------       -------------- 

                                                                            $  252,417,000       $  231,320,000
                                                                            ==============       ============== 
</TABLE> 

                                     F-29
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                        December 31,
                                                                                 1996                 1997

          Subordinated Debt:
             <S>                                                            <C>                 <C> 
             Senior subordinated notes, interest at 10.25%
               payable semi-annually, principal due         
               December 15, 2005                                            $  125,000,000       $  125,000,000

             Senior subordinated notes, interest at 9.625%
               payable semi-annually, principal due
               December 31, 2003                                                   185,000              185,000
                                                                            --------------       --------------

                                                                            $  125,185,000       $  125,185,000
                                                                            ==============       ==============
</TABLE> 

         On January 4, 1996, the Company entered into a Credit Agreement (the
         "Credit Agreement") to provide a $220,000,000 term loan to finance the
         Act III Acquisition. The Credit Agreement also provides a revolving
         credit facility and an acquisition credit facility allowing for
         borrowings of $30,000,000 and $75,000,000, respectively, through 2003.
         During 1997, the Company rolled $24,000,000 of borrowings under the
         revolving credit facility into the acquisition credit facility per the
         lenders permission as the borrowings were utilized to finance
         acquisitions. All borrowings under the Credit Agreement bear interest
         at the lender's base rate plus a percentage determined based upon the
         Company's most recent quarterly leverage ratio as defined in the Credit
         Agreement (8.49% at December 31, 1997). The interest is payable
         quarterly or at other increments if the Company has chosen a LIBOR
         interest rate for a period greater than 90 days. These borrowings are
         secured by substantially all of the Company's assets. The term loan is
         payable in varying quarterly installments beginning in December 1996
         through December 2003. The lender may require prepayments of the term
         loan based upon the meeting of certain cash flow criteria as defined in
         the Credit Agreement.

         The Credit Agreement requires the Company to enter into interest rate
         swap agreements for notional amounts of at least 50% of its total
         outstanding floating rate debt under the Credit Agreement. At 
         December 31, 1997, the Company had several interest rate swap
         agreements. These financial instruments, which are not held for trading
         purposes, expire from 1998 to 2001. The swap agreements set rates in
         the range of 5.14% to 5.61%. The notional amount related to these
         agreements was $200,000,000 at December 31, 1997. The Company has no
         intentions of terminating these instruments prior to their expiration
         dates unless it repays a portion of its bank debt in advance of
         scheduled payments. The Company estimates the fair value of these
         instruments at December 31, 1997 to be $1,576,000.

                                     F-30
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         On December 21, 1995, the Company issued and sold $125,000,000 of
         10.25% senior subordinated note (the "Notes") due December 15, 2005 in
         a public offering, the proceeds of which were used to finance the Act
         III Acquisition. The Notes are unsecured and are subordinated to all
         existing and future debt of the Company.

         Interest on the Notes is payable semiannually on June 15 and December
         15 of each year, commencing June 15, 1996. The Notes are subject to
         redemption on or after December 15, 2000 at the option of the Company
         at redemption prices specified in the debt agreement. In addition, on
         or prior to December 15, 1998, the Company may redeem additional
         principal amounts of the Notes with the proceeds from an initial public
         offering of equity at redemption prices specified in the agreement, so
         long as 67% of the original principal of the Notes is still
         outstanding.

         Concurrent with the Act III Acquisition, the Company made a tender
         offer for $100,000,000 9 5/8% senior subordinated notes (the "9 5/8
         Notes") originally issued by Act III. At December 31, 1997, $185,000 of
         the 9 5/8 Notes were still outstanding.

         The Credit Agreement and Notes contain covenants which, among other
         restrictions, require the Company to comply with certain financial
         ratios and provisions and limit the Company's ability to incur
         additional indebtedness and pay dividends. The Company was in
         compliance with all covenants as of December 31, 1997.

         The Company has estimated the fair value of long-term debt at December
         31, 1996 and 1997 to approximate the carrying value. The fair value was
         estimated by discounting the future cash flows of loans with similar
         terms and remaining maturities at the Company's current borrowing rate.

         As of December 31, 1997, scheduled maturities are summarized as
         follows:

          1998                                        $  23,562,000
          1999                                           31,513,000
          2000                                           42,017,000
          2001                                           42,963,000
          2002                                           42,963,000
          Thereafter                                    197,049,000
                                                      ------------- 

                                                      $ 380,067,000
                                                      =============  

                                     F-31
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

8.       Income Taxes

           The income tax benefit consists of the following:

<TABLE> 
<CAPTION> 
                                                 Period from
                                                  inception
                                               (June 2, 1995)
                                                   through                     Year ended
                                                December 31,                   December 31,
                                                    1995                 1996                 1997
          <S>                                <C>                   <C>                 <C> 
          Current tax expense:
          Federal                            $                  -   $               -   $          166,000
          State                                             4,000           1,591,000            2,440,000
                                             --------------------   -----------------   ------------------

                                                            4,000           1,591,000            2,606,000

          Deferred tax benefit:
          Federal                            $           (219,000)  $      (6,223,000)   $      (3,180,000)
          State                                           (17,000)         (2,620,000)          (2,016,000)
                                             --------------------   -----------------   ------------------

                                                         (236,000)         (8,843,000)          (5,196,000)
                                             --------------------   -----------------   ------------------

          Net income tax benefit             $           (232,000)  $      (7,252,000)  $       (2,590,000)
                                             ====================   =================   ==================
</TABLE> 

         Reconciling amounts, stated below as a percentage of pretax income,
         between the statutory federal income tax rate and the Company's
         effective tax rate are as follows:

<TABLE> 
<CAPTION> 
                                                       Period from
                                                        inception
                                                     (June 2, 1995)
                                                         through                     Year ended
                                                       December 31,                  December 31,
                                                           1995                 1996             1997
          <S>                                       <C>                   <C>               <C>    
          U.S. federal statutory rate                             35.00 %           35.00 %           35.00 %
          State and local taxes, net                               1.50              4.09             (2.90)
          Amortization of goodwill                                  -              (10.25)           (14.67)
          Change in valuation allowance                          (18.40)              -                 -
                                                    -------------------   ---------------   ---------------

          Effective tax rate                                      18.10 %           28.84 %           17.43 %
                                                    ===================   ===============   ===============
</TABLE> 

                                     F-32

<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subdidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


         The components of the net deferred tax liability at December 31, 1996
and 1997, are as follows:

<TABLE> 
<CAPTION> 

                                                                       December 31,
                                                                1996                1997
<S>                                                     <C>                 <C> 
          Property and equipment                        $     (9,699,000)    $     (7,624,000)
          Programming rights                                     770,000              239,000
          Bad debts                                            1,739,000            1,885,000
          Intangible assets                                 (131,965,000)        (119,855,000)
          Net operating loss carryforwards                    58,763,000           40,530,000
          Other assets                                         2,649,000            2,879,000
          Other                                               (4,861,000)          (2,095,000)
                                                        ----------------     ----------------

          Net deferred tax liability                    $    (82,604,000)    $    (84,041,000)
                                                        ================     ================
</TABLE> 

         At December 31, 1997, the Company had net operating loss and charitable
         contribution carryforwards of approximately $99,863,000 and
         $10,000,000, respectively, for federal income tax purposes, available
         to reduce future taxable income. To the extent not used, federal net
         operating loss carryforwards expire in varying amounts beginning in
         2003. In addition, the Company had net operating loss carryforwards of
         approximately $31,590,000 for state and local income tax purposes in
         various jurisdictions.

         A corporation that undergoes a "change of ownership" pursuant to
         Section 382 of the Internal Revenue Code is subject to limitations on
         the amount of its net operating loss carryforwards which may be used in
         the future. An ownership change occurred on January 4, 1996. The annual
         limitation on the use of the net operating loss is $10,050,000. The
         Company estimates the limitation on the net operating loss will not
         have a material adverse impact on the Company's consolidated financial
         position or results of operation. No assurance can be given that an
         ownership change will not occur as a result of other transactions
         entered into by the Company, or by certain other parties over which the
         Company has no control. If a "change in ownership" for income tax
         purposes occurs, the Company's ability to use "pre-change losses" could
         be postponed or reduced, possibly resulting in accelerated or
         additional tax payments which, with respect to tax periods beyond 1997,
         could have a material adverse impact on the Company's consolidated
         financial position or results of operations.

         In 1996, the tax benefit related to the repurchase of stock options of
         approximately $3,850,000 was recorded as a reduction of goodwill. In
         1997, an adjustment of approximately $4,487,000 was made to goodwill
         resulting from a change in management's estimate of the ultimate tax
         benefit of acquired assets, liabilities and carryforwards related to
         the Act III Acquisition.

                                     F-33
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

9.       Shareholder's Equity

         On August 31, 1995, Holdings made an initial investment in the Company
         of $100 to acquire 10 shares of the Company's common stock. On December
         21, 1995 concurrent with the issuances of the Notes (Note 7), Holdings
         made a second investment in the Company of $5,201,000 to acquire an
         additional 520,095 shares of the Company's common stock. Concurrent
         with the Act III Acquisition, Holdings made an additional investment in
         the Company of $201,601,000.


10.      Supplemental Disclosures of Cash Flow Information

         The Company paid interest of $33,828,000 and $34,666,000 during the
         years ended December 31, 1996 and 1997, respectively.

         During the years ended December 31, 1996 and 1997, the programming
         rights increased $44,679,000 and $31,850,000, respectively due to the
         assumption of programming liabilities.

         During the years ended December 31, 1996 and 1997, the Company paid
         approximately $1,749,000 and $3,400,000, respectively for income taxes.


11.      Commitments and Contingencies

         Leases
         The Company has operating lease agreements for land, office space,
         office equipment and other property which expire on various dates
         through 2005. Rental expense was $750,000 and $884,000 during
         the years ended December 31, 1996 and 1997, respectively. As of
         December 31, 1997, minimum required annual payments under
         noncancellable operating leases are as follows:

               1998                                        $        978,000
               1999                                                 968,000
               2000                                                 984,000
               2001                                                 836,000
               2002                                                 715,000
          Thereafter                                              1,230,000
                                                           -----------------

                                                           $      5,711,000
                                                           =================

                                     F-34 
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

         Programming Contracts
         Programming contracts acquired under license agreements are recorded as
         an asset and a corresponding liability at the inception of the license
         period. In addition to the programming contracts payable at December
         31, 1997, the Company has $17,575,000 of commitments to acquire
         programming rights for which the license period has not commenced and,
         accordingly, for which no asset or liability has been recorded. Future
         minimum payments arising from such commitments outstanding at December
         31, 1997, excluding $18,976,000 of barter commitments, are as follows:

               1998                                        $    14,798,000
               1999                                             11,437,000
               2000                                              9,351,000
               2001                                              5,868,000
               2002                                              3,632,000
               Thereafter                                        1,167,000
                                                           ----------------

                                                           $    46,253,000
                                                           ================


         Litigation
         The Company currently and from time to time is involved in litigation
         incidental to the conduct of its business. In the opinion of
         management, no existing or contingent claims will have a material
         adverse effect on the Company's financial position or results of
         operations.

         Employment Contracts
         The Company has entered into an employment contract with an executive
         officer of the Company providing for a minimum aggregate amount of
         $500,000 payable annually commencing September 13, 1995 for an initial
         term of eight years. Additionally, the Company has guaranteed annual
         bonus arrangements with two other executive officers which have
         historically been paid.


12.      Related Party Transactions

         Operating expenses include reimbursements to ABRY Partners, Inc.
         ("ABRY"), an entity related through common ownership, for the Company's
         allocable share of rent paid by ABRY for the Company. These expenses
         approximated $73,000 and $106,000 for the years ended December 31, 1996
         and 1997, respectively, and are included in selling, general and
         administrative expenses in the Company's consolidated statement of
         operations.

         The Company charges a management fee to Holdings. Management fees
         approximated $252,000 and $265,000 for the years ended December 31,
         1996 and 1997, respectively, and are included as a reduction in
         selling, general and administrative expenses in the Company's
         consolidated statement of operations.

                                     F-35
<PAGE>
 
Sullivan Broadcasting Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

13.      Subsequent Event

         On February 23, 1998, Holdings entered into a Plan of Merger (the
         "Merger"). Under the terms of the Merger, 100% of the issued and
         outstanding common stock of Holdings will be acquired by means of a
         merger. The Merger is subject to approval of the FCC and is expected to
         close prior to August 1998.

                                     F-36
<PAGE>
 
Sullivan Broadcasting Company, Inc.
Sullivan Broadcast Holdings, Inc.
Valuation and Qualifying Accounts                                  Schedule II
(in Thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                               Charged to
                                  Beginning    Costs and               Ending
                                  Balanace     Expenses    Deductions  Balance
                                  ---------    ----------  ----------  -------
<S>                               <C>          <C>         <C>         <C>

Year Ended December 31, 1995:(a)
 Allowance for Doubtful Accounts   1,482,000      404,000   (903,000)    983,000

Year Ended December 31, 1996:(a)
 Allowance for Doubtful Accounts     983,000      876,000   (562,000)  1,297,000

Year Ended December 31, 1997:(a)
 Allowance for Doubtful Accounts   1,297,000      892,000   (864,000)  1,325,000
</TABLE> 

                                     F-37

<PAGE>
 
                       Report of Independent Accountants


To the Board of Directors and Shareholders
of Sullivan Broadcast Holdings, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Sullivan Broadcast Holdings, Inc. and its subsidiaries (the "Company") at
December 31, 1996 and 1997, and the results of their operations and their cash
flows for the period from inception (June 2, 1995) through December 31, 1995 and
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


Price Waterhouse LLP
Boston, Massachusetts

March 10, 1998

                                     F-38

<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                     December 31,
                                                                                1996             1997
<S>                                                                        <C>              <C> 
Assets
Current assets:
   Cash and cash equivalents                                               $     6,469      $     3,840
   Accounts receivable, net of allowance for doubtful accounts
     of $1,297 and $1,325                                                       31,686           34,990
   Current portion of programming rights                                        23,360           22,850
   Current deferred tax asset                                                    4,535            4,310
   Prepaid expenses and other current assets                                       733              941
                                                                           ------------     ------------
      Total current assets                                                      66,783           66,931

Property and equipment, net                                                     44,454           39,723

Programming rights, net of current portion                                      21,319           23,432

Deferred financing costs, net of accumulated amortization of
  $1,238 and $2,120                                                             14,016           13,134

Intangible assets, net                                                         590,972          567,096
                                                                           ------------     ------------
      Total assets                                                         $   737,544      $   710,316
                                                                           ============     ============
</TABLE> 


  The accompanying notes are an integral part of these financial statements.

                                     F-39
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Consolidated Balance Sheet (continued)
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                              December 31,
                                                                                          1996             1997
<S>                                                                                 <C>              <C> 
Liabilities and Shareholders' Equity
Current liabilities:
   Current portion of senior debt                                                   $     18,583     $     23,562
   Interest payable                                                                        4,362            3,882
   Accounts payable                                                                        1,925            2,262
   Current portion of programming contracts payable                                       24,281           24,944
   Income taxes payable                                                                    2,865              195
   Accrued expenses                                                                        3,771            4,367
                                                                                    -------------    -------------
      Total current liabilities                                                           55,787           59,212

Senior debt, net of current portion                                                      195,917          171,820
Borrowings under revolving lines of credit                                                56,500           59,500
Subordinated debt                                                                        155,326          155,508
Interest payable                                                                           4,942           10,394
Programming contracts payable, net of current portion                                     20,392           22,710
Deferred tax liability and other non-current liabilities                                  84,124           82,132
                                                                                    -------------    -------------
      Total liabilities                                                                  572,988          561,276
                                                                                    -------------    -------------
15% Mandatorily redeemable cumulative preferred stock, 
  non-voting, $.001 par value; 1,500,000 shares authorized;
  1,150,000 shares issued and outstanding                                                111,483          133,185
                                                                                    -------------    -------------
Commitments and contingencies (Note 11)                                                        -                -

Shareholders' equity:
   Class B-1 common stock, $.001 par value; 5,000,000 shares authorized;
      1,204,077 and 1,201,577 shares issued
      and outstanding at December 31, 1996 and 1997, respectively                              1                1
   Class B-2 common stock; $.001 par value; 7,000,000
      shares authorized; 6,158,211 shares issued
      and outstanding at December 31, 1996 and 1997                                            6                6
   Class C common stock, $.001 par value; 2,000,000
      shares authorized; 896,229 and 853,854 shares issued and
      outstanding at December 31, 1996 and 1997, respectively                                  1                1
   Additional paid-in capital                                                             76,861           55,117
   Accumulated deficit                                                                   (23,796)         (39,270)
                                                                                    -------------    -------------
      Total shareholders' equity                                                          53,073           15,855
                                                                                    -------------    -------------
      Total liabilities and shareholders' equity                                    $    737,544     $    710,316
                                                                                    =============    =============
</TABLE> 

  The accompanying notes are an integral part of these financial statements.

                                     F-40
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Consolidated Statement of Operations
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                    Period from
                                                                     inception
                                                                   (June 2, 1995)
                                                                       through                  Year ended
                                                                     December 31,              December 31,
                                                                        1995              1996            1997
<S>                                                               <C>               <C>              <C> 
Revenues (excluding barter)                                       $             -   $      129,711   $      144,169
  Less:  commissions                                                            -           21,997           24,045
                                                                  ----------------  ---------------  ---------------
Net revenues (excluding barter)                                                 -          107,714          120,124
Trade and barter revenues                                                       -           14,808           17,650
                                                                  ----------------  ---------------  ---------------
   Total net revenues                                                           -          122,522          137,774
                                                                  ----------------  ---------------  ---------------
Expenses:
   Operating expenses                                                       1,601           15,005           17,301
   Selling, general and administrative                                          -           23,921           28,319
   Amortization of programming rights                                           -           26,673           30,197
   Depreciation and amortization                                                -           48,051           42,220
                                                                  ----------------  ---------------  ---------------
                                                                            1,601          113,650          118,037
                                                                  ----------------  ---------------  ---------------
          Operating (loss) income                                          (1,601)           8,872           19,737

Interest expense, net, including amortization of debt
   discount and deferred loan costs                                           258           41,187           40,711
Other expenses (income)                                                         -              131             (12)
                                                                  ----------------  ---------------  ---------------
Loss before income taxes                                                   (1,859)         (32,446)         (20,962)

Income tax benefit                                                            335           10,174            5,488
                                                                  ----------------  ---------------  ---------------
      Net loss                                                    $        (1,524)  $      (22,272)  $      (15,474)
                                                                  ================  ===============  ===============
</TABLE> 


  The accompanying notes are an integral part of these financial statements.

                                     F-41
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                   Class B-1                 Class B-2                   Class C         
                                                 common stock              common stock              common stock        
                                            Shares       Amount       Shares       Amount       Shares       Amount      
<S>                                         <C>          <C>          <C>          <C>          <C>          <C>         
Issuance of Class B-1 common stock          560,000      $   1              -      $   -             -       $   -       
                                                                                                                         
Issuance of Class B-2 common stock                -          -        697,243          1             -           -       
                                                                                                                         
Net loss                                          -          -              -          -             -           -       
                                         -----------     ------    -----------     ------   -----------      ------       
Balance at December 31, 1995                560,000          1        697,243          1             -           -       
                                                                                                                         
Issuance of Class B-1 common stock          651,577          -              -          -             -           -       
                                                                                                                         
Repurchase of Class B-1 common stock         (7,500)         -              -          -             -           -       
                                                                                                                         
Issuance of Class B-2 common stock                -          -      5,460,968          5             -           -       
                                                                                                                         
Issuance of Class C common stock                  -          -              -          -       990,979           1       
                                                                                                                         
Repurchase of Class C common stock                -          -              -          -       (94,750)          -       
                                                                                                                         
Issuance of common stock purchase                                                                                        
warrants                                          -          -              -          -             -           -       
                                                                                                                         
Accretion of preferred stock                      -          -              -          -             -           -       
                                                                                                                         
Net loss                                          -          -              -          -             -           -        
                                         -----------     ------    -----------     ------   -----------      ------        
Balance at December 31, 1996              1,204,077          1      6,158,211          6       896,229           1 

Repurchase of Class B-1 common stock         (2,500)         -              -          -             -           -   

Issuance of Class C common stock                  -          -              -          -         5,000           -   
                                                                                        
Repurchase of Class C common stock                -          -              -          -       (47,375)          -   
                                                                                        
Accretion of preferred stock                      -          -              -          -             -           -     
                                                                                                                     
Net loss                                          -          -              -          -             -           -    
                                         -----------     ------    -----------     ------   -----------      ------        
Balance at December 31, 1997              1,201,577      $   1      6,158,211      $   6       853,854       $   1   
                                         ===========     ======    ===========     ======   ===========      ====== 
<CAPTION> 

                                            Additional                        Total
                                             paid-in       Accumulated     shareholders'
                                             capital        deficit          equity
<S>                                        <C>             <C>          <C>  
Issuance of Class B-1 common stock         $    5,599      $       -    $      5,600

Issuance of Class B-2 common stock              6,971              -           6,972

Net loss                                            -         (1,524)         (1,524)
                                           -----------   ------------   ------------- 
Balance at December 31, 1995                   12,570         (1,524)         11,048

Issuance of Class B-1 common stock              6,515              -           6,515

Repurchase of Class B-1 common stock              (75)             -             (75)

Issuance of Class B-2 common stock             54,605              -          54,610

Issuance of Class C common stock                  566              -             567

Repurchase of Class C common stock                (54)             -            (54)

Issuance of common stock purchase       
warrants                                       24,063              -          24,063

Accretion of preferred stock                  (21,329)             -         (21,329)

Net loss                                            -        (22,272)        (22,272)
                                           -----------   ------------   ------------- 
Balance at December 31, 1996                   76,861        (23,796)         53,073

Repurchase of Class B-1 common stock              (25)             -             (25)

Issuance of Class C common stock                   10              -              10

Repurchase of Class C common stock                (27)             -             (27)

Accretion of preferred stock                  (21,702)             -         (21,702)

Net loss                                            -        (15,474)        (15,474)
                                           -----------   ------------   ------------- 
Balance at December 31, 1997               $   55,117    $   (39,270)   $     15,855
                                           ===========   ============   =============
</TABLE> 

   The accompanying notes are an integral part of these financial statements.
 
                                     F-42
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                              Period from                              
                                                                               inception                               
                                                                               (June 2,                                
                                                                                 1995)                                 
                                                                                through             Year ended   
                                                                              December 31,          December 31,  
                                                                                 1995           1996           1997     
<S>                                                                           <C>            <C>           <C>  
Cash flows from operating activities:                                                                                  
   Net loss                                                                  $     ( 1,524)  $   (22,272)  $   (15,474) 
   Adjustments to reconcile net loss to net cash (used for) provided by                                                
     operating activities:                                                                                             
      Deferred income taxes                                                           (349)      (11,767)       (8,332) 
      Depreciation of property and equipment                                             -         7,865         9,251 
      Amortization of intangible assets                                                  -        40,186        32,969 
      Amortization of programming rights (excluding barter)                              -        12,911        13,198 
      Payments for programming rights                                                    -        (9,087)      (11,820) 
      Amortization of deferred financing costs and debt discount                        38         2,765         1,064 
   Changes in assets and liabilities:                                                                                  
      Increase in accounts receivable                                                    -        (2,707)       (3,048) 
      Increase in prepaid expenses and other assets                                      -          (477)         (131) 
      Increase (decrease) in amounts due to related party                            1,547        (2,717)            - 
      Increase (decrease) in income taxes payable                                       14          (179)       (1,328) 
      Increase in interest payable                                                     485         8,819         4,972 
      Increase in deferred debt issuance costs                                      (6,647)            -             - 
      Increase in accounts payable                                                       -           383           337 
      Increase (decrease) in accrued expenses                                        5,163        (7,060)         (201) 
      Decrease in non-current liabilities                                                -             -           (96) 
                                                                             --------------  ------------  ------------
                                                                                                                       
        Net cash (used for) provided by operating activities                        (1,273)       16,663        21,361 
                                                                             --------------  ------------  ------------
                                                                                                                       
Cash flows from investing activities:                                                                                  
   (Increase) decrease in restricted cash                                         (162,599)      162,599             - 
   Acquisition of Act III Broadcasting, Inc., net of cash acquired                       -      (550,045)          751 
   Acquisition of WFXV and WPNY (Note 3)                                                 -          (792)            - 
   Acquisition of WMSN (Note 3)                                                          -       (26,584)            - 
   Purchase of CTBC stock (Note 3)                                                       -       (26,950)            - 
   Payments for purchase options                                                         -        (2,800)            - 
   Acquisition of Cascom stock (Note 3)                                                  -             -        (4,142) 
   Capital expenditures                                                                  -        (3,105)       (4,439) 
                                                                             --------------  ------------  ------------
                                                                                                                       
      Net cash used for investing activities                                      (162,599)     (447,677)       (7,830) 
                                                                             --------------  ------------  ------------
                                                                                                                       
Cash flows from financing activities:                                                                                  
   Proceeds from issuance of common stock                                            6,972        61,692            10 
   Proceeds from issuance of subordinated debt                                     125,000             -             - 
   Proceeds from issuance of long-term debt                                              -       220,000             - 
   Proceeds from borrowings under credit facilities                                      -        56,500         3,000 
   Proceeds from bridge loan                                                         1,300             -             - 
   Proceeds from issuance of preferred stock                                             -       115,000             - 
   Proceeds from issuance of senior accrual debentures                              35,000             -             - 
   Repayment of long-term debt                                                           -        (5,500)      (19,118) 
   Repurchase of common stock                                                            -          (129)          (52) 
   Debt and preferred stock issuance costs                                          (4,400)       (5,684)            - 
   Advance buydown of programming rights                                                 -        (4,396)            - 
                                                                             --------------  ------------  ------------
                                                                                                                       
      Net cash provided by (used for) financing activities                         163,872       437,483       (16,160) 
                                                                             --------------  ------------  ------------
                                                                                                                       
      Net increase (decrease) in cash and cash equivalents                               -         6,469        (2,629) 
                                                                                                                       
      Cash and cash equivalents, beginning of period                                     -             -         6,469 
                                                                             --------------  ------------  ------------
                                                                                                                       
      Cash and cash equivalents, end of period                               $           -   $     6,469   $     3,840 
                                                                             ==============  ============  ============
</TABLE> 


   The accompanying notes are an integral part of these financial statements.

                                     F-43 
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Statement of Cash Flows
--------------------------------------------------------------------------------

1.   Organization and Business Operations

     A-3 Holdings Inc. ("Holdings" or the "Company") was incorporated on June 2,
     1995 in the State of Delaware for the sole purpose of acquiring 100% of the
     outstanding capital stock of Act III Broadcasting, Inc. ("Act III"),
     through its wholly owned subsidiary A-3 Acquisition, Inc. ("A-3"), under a
     purchase agreement dated June 19, 1995. The purchase of Act III was
     consummated on January 4, 1996 (the "Act III Acquisition"), at which time
     A-3 merged with and into Act III and changed its name to Sullivan
     Broadcasting Company, Inc. ("SBC") (Note 3).

     The Company currently owns, operates and programs, through its
     subsidiaries, nine Fox Broadcasting Company ("Fox") affiliated television
     stations, one television station affiliated with the American Broadcasting
     Companies, Inc. ("ABC"), and one independent television station throughout
     the Northeast, Southeast, and the Mid-Atlantic states. The Company programs
     two independent television stations under local marketing agreements
     ("LMA") in markets where the Company owns another television station (Note
     4). Television broadcasting is subject to the jurisdiction of the Federal
     Communications Commission ("FCC") under the Communications Act of 1934, as
     amended (the "Communications Act"). The Communications Act prohibits the
     operation of television broadcasting stations except under a license issued
     by the FCC and empowers the FCC, among other things, to issue, revoke, and
     modify broadcasting licenses, determine the location of the stations,
     regulate the equipment used by the stations, adopt regulations to carry out
     the provision of the Communications Act, and impose penalties for violation
     of such regulations.


2.   Summary of Significant Accounting Policies

     Principles of Consolidation
     The consolidated financial statements include the accounts of the Company
     and its wholly owned subsidiaries. Significant intercompany accounts and
     transactions have been eliminated in consolidation.

     Cash and Cash Equivalents
     The Company considers all highly liquid investments purchased with an
     original maturity of ninety days or less to be cash equivalents.

     Revenue Recognition
     Advertising revenues are recognized in the period during which the
     advertising spots are aired. Revenues from other sources are recognized
     in the period when the services are provided.

     Trade and Barter Transactions
     The Company trades certain advertising time for various goods and services.
     These transactions are recorded at the estimated fair value of the goods or
     services received. Revenues from trade transactions are recognized when
     advertisements are broadcast and services or merchandise received are
     charged to expense when received or used.

     The Company barters advertising time for certain program material. These
     transactions are recorded at management's estimate of the value of the
     advertising time exchanged, which approximates the fair value of the
     program material received. 


                                     F-44
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     Concentration of Credit Risk 
     Financial instruments which potentially expose the Company to a
     concentration of credit risk include cash, cash equivalents and accounts
     receivable. The Company maintains cash in excess of federally insured
     deposits at several financial institutions at December 31, 1997. The
     Company does not believe that such deposits are subject to any unusual
     credit risk beyond the normal credit risk associated with operating its
     business. The Company maintains reserves for potential credit losses and
     such losses, in the aggregate, have not historically exceeded management's
     expectations.

     Programming Rights and Contracts Payable
     Programming rights, primarily in the form of syndicated programs and
     feature film packages, represent amounts paid or payable to program
     suppliers for the limited right to broadcast the suppliers' programming and
     are recorded when available for use. Programming rights are stated at the
     lower of unamortized cost or net realizable value. Amortization is computed
     using the straight-line method based on the license period or based on
     usage, whichever yields the greater accumulated amortization for each
     program. The current portion of programming rights represents those rights
     available for broadcast which will be amortized in the succeeding year.

     The Company has estimated the fair value of these programming contracts
     payable at approximately $49,480,000 as of December 31, 1997 based on
     future cash flows discounted at the Company's current borrowing rate.

     Property and Equipment
     Property and equipment is stated on the basis of cost or estimated fair
     value at the date of acquisition. Major renewals and betterments are
     capitalized and ordinary repairs and maintenance are charged to expense in
     the period incurred. Depreciation is computed on the straight-line basis
     over the estimated useful lives of the assets which range from three to
     thirty-nine years.

     Intangible Assets
     Intangible assets represent the estimated fair value of both identifiable
     intangible assets and goodwill resulting from acquisitions. Identifiable
     intangibles include FCC broadcast licenses, network affiliation agreements,
     non-competition agreements, and favorable leases and are being amortized on
     a straight-line basis over periods ranging from 5 to 15 years. Goodwill is
     the excess of the purchase price over the fair value of the net assets
     acquired, determined through an independent appraisal, and is amortized
     over 40 years using the straight-line method. The Company evaluates the
     recoverability of its intangible assets whenever adverse events or changes
     in business climate indicate that the expected undiscounted future cash
     flows from the related intangible assets may be less than previously
     anticipated. If the net book value of the related intangible asset exceeds
     the undiscounted future cash flows of the intangible asset, the carrying
     value would be reduced to the present value of its expected future cash
     flows and an impairment loss would be recognized. The Company did not
     recognize any impairment loss during the years ended December 31, 1996 and
     1997.

                                     F-45
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     Deferred Financing Costs
     Deferred financing costs represent costs incurred in obtaining long-term
     financing. These costs are expensed as interest over the lives of the
     related loans, using the effective interest method.

     Accounting for Income Taxes
     The Company accounts for income taxes under the liability method of
     accounting as set forth in Statement of Financial Accounting Standards
     No. 109 "Accounting for Income Taxes". Under the method prescribed by
     this statement, deferred income taxes are recognized at enacted tax rates
     to reflect the future effects of income tax carryforwards and temporary
     differences arising between the tax basis of assets and liabilities and
     their financial reporting amounts at each period end.

     Interest Rate Risk Management 
     The Company enters into interest rate swap agreements with commercial banks
     to mitigate the risk of possible rising interest rates. These agreements
     are designated as hedges of interest rates, and the differential to be paid
     or received on interest rate swaps is accrued as an adjustment to interest
     expense as interest rates change. The Company is exposed to credit loss in
     the event of nonperformance by the other parties to the interest rate swap
     agreements; however, the Company does not anticipate nonperformance by the
     counterparties.

     Use of Estimates
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     use assumptions that affect the reported amounts of assets and liabilities
     and the disclosure for contingent assets and liabilities at the date of the
     financial statements as well as the reported amounts of revenues and
     expenses during the reporting period. Actual results may vary from
     estimates used.


3.   Acquisitions

     In 1996 and 1997, the Company made the acquisitions set forth below, each
     of which has been accounted for as a purchase. The consolidated financial
     statements include the operating results of each business from the date of
     acquisition, except for the Act III Acquisition which includes the
     operating results of Act III from January 1, 1996 through January 4, 1996
     due to the immateriality of the results in relation to the financial
     statements taken as a whole. Pro forma results of operations of the other
     acquisitions made in 1996 and 1997 are not considered material.

                                     F-46
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     The Act III Acquisition
     On January 4, 1996, the Company acquired all of the outstanding stock of
     Act III. The acquisition cost consisted of the following:

      Cash paid to Act III shareholders              $  359,108,000
      Cash paid to retire debt                          167,764,000
      Acquisition costs                                  23,173,000
                                                     ---------------

                                                     $  550,045,000
                                                     ---------------

     The excess of the purchase price over the fair value of the net assets
     acquired was $208,861,000. In 1997, the Company received $751,000 from
     the sellers due to the settlement of certain items for which funds were
     being held in escrow. This amount, net of expenses, was recorded as a
     reduction of goodwill during the year ended December 31, 1997.

     The Utica Acquisition
     On February 7, 1996, the Company executed an asset purchase agreement to
     acquire certain assets of Mohawk Valley Broadcasting, Inc. ("Mohawk") and
     Acme T. V. Corporation ("Acme"), the owners and operators of WFXV and WPNY
     in Utica, New York, for a total purchase price of $400,000. In addition,
     the Company paid $2,600,000 for the option to purchase the remaining assets
     of Mohawk and Acme pending FCC approval for $250,000 and simultaneously
     entered into a LMA with Mohawk and Acme (Note 4). On June 24, 1996, the FCC
     granted approval for the Company to purchase the remaining assets at which
     time the LMA with Mohawk and Acme was terminated and the remaining assets
     were purchased. The Company allocated the total cost of $3,250,000 plus
     fees and expenses of $142,000 to the net assets acquired. The excess of the
     purchase price over the fair value of the net assets acquired was
     $1,322,000.

     The Madison Acquisition
     On July 1, 1996, the Company acquired substantially all of the assets of
     Channel 47 Limited Partnership, owner and operator of a television station
     in Madison, Wisconsin (WMSN) for a total purchase price of $26,500,000 plus
     fees and expenses of $84,000. The excess of the purchase price over the
     fair value of the net assets acquired was $4,155,000.

     The Nashville Acquisition 
     On February 22, 1996, the Company entered into a LMA with Central Tennessee
     Broadcasting Corporation ("CTBC"), owner and operator of WXMT, an
     independent television station in Nashville, Tennessee. Additionally, the
     Company paid $200,000 for the option to acquire the stock of CTBC based
     upon certain events defined in the underlying agreement for $13,710,000 in
     cash plus the repayment of $13,030,000 of CTBC's debt. On July 12, 1996,
     the Company exercised the option and purchased the stock of CTBC. The cost
     plus fees of $210,000 were allocated to the net assets acquired. The excess
     of the purchase price over the fair value of the net assets acquired was
     $17,505,000.

                                     F-47

<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     The Cascom Acquisition
     On January 2, 1997, the Company acquired substantially all of the assets
     of Cascom International, Inc. and related film libraries for $4,038,000
     plus fees and expenses of $104,000. The excess of the purchase price over
     the fair value of the net asset acquired was $1,877,000.


4.   Local Marketing Agreements

     As part of the Act III Acquisition, the Company was assigned Act III's
     right, title and interest in a LMA with Guilford Telecasters, Inc.
     ("Guilford"), owner of WUPN (formerly WGGT), an independent television
     station in Greensboro, North Carolina (the "WUPN LMA"). Under the WUPN LMA,
     the Company sells and collects the advertising revenues of WUPN, programs
     WUPN, and reimburses Guilford for operating expenses. In connection with
     the Act III Acquisition, the Company also acquired Act III's right, title
     and interest in a prepayment made under the WUPN LMA, which released the
     Company from the quarterly payments based on the cash flows of WUPN which
     were initially required under the WUPN LMA. In July 1996, Guilford sold the
     assets of WUPN to Mission Broadcasting II, Inc. ("Mission II") and assigned
     their right, title and interest in the WUPN LMA to Mission II under
     substantially similar terms.

     On July 12, 1996, the Company entered into an LMA with Mission Broadcasting
     I, Inc. ("Mission I"), owner of WUXP (formerly WXMT), an independent
     station in Nashville, Tennessee (the "WUXP LMA"). Under the terms of the
     WUXP LMA, the Company sells and collects the advertising revenues of WUXP
     and reimburses Mission I for operating expenses and debt service
     requirements.

     Net revenues of $7,121,000 and $11,989,000, respectively, and expenses of
     $2,818,000, and $3,397,000, respectively, related to the WUXP and WUPN LMAs
     have been included in the Company's consolidated statement of operations
     for the years ended December 31, 1996 and 1997. The Company has guaranteed
     an aggregate amount of debt of $3,850,000 related to WUXP and WUPN as of
     December 31, 1997.

                                     F-48
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

5.   Property and Equipment

     Property and equipment consists of the following:

<TABLE> 
<CAPTION> 
                                                    Estimated
                                                   useful life                December 31,
                                                    (years)             1996                1997    
<S>                                                 <C>           <C>                 <C> 
        Land                                          -           $    1,385,000      $    1,426,000
        Buildings and improvements                   15-39             6,262,000           6,556,000
        Broadcasting equipment                        3-5             39,978,000          43,845,000
        Furniture and other equipment                 5-7              3,070,000           3,724,000
        Construction in progress                      -                1,624,000           1,288,000
                                                                  ---------------     ---------------
                                                                                      
                                                                      52,319,000          56,839,000
          Less: accumulated depreciation                                              
            and amortization                                           7,865,000          17,116,000
                                                                  ---------------     ---------------
                                                                                      
                                                                  $   44,454,000      $   39,723,000
                                                                  ===============     ===============
</TABLE> 

6.   Intangible Assets

     Intangible assets consists of the following:

<TABLE> 
<CAPTION> 
                                                Amortization
                                                   period                     December 31,
                                                   (years)              1996                1997
        <S>                                     <C>               <C>                  <C> 
        Commercial advertising contracts             15           $  148,986,000       $  148,986,000
        Goodwill                                     40              231,494,000          238,508,000
        Affiliation agreements                       10               98,445,000           98,445,000
        FCC licenses                                 15               81,297,000           81,297,000
        Canadian cable rights                        10               59,000,000           59,000,000
        Other intangible assets                     5-15              11,936,000           14,015,000
                                                                  ---------------      ---------------

                                                                     631,158,000          640,251,000

          Less: accumulated amortization                              40,186,000           73,155,000
                                                                  ---------------      ---------------
                                                                  $  590,972,000       $  567,096,000
                                                                  ===============      ===============
</TABLE> 

                                     F-49
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

7.   Long-Term Debt

     Long term debt consists of the following:

<TABLE> 
<CAPTION> 
                                                                            December 31,            
                                                                     1996                 1997      
        <S>                                                    <C>                  <C>              
        Senior Debt:                                                                                
                                                                                                    
             Revolving credit facility                         $    30,000,000      $     6,000,000 
                                                                                                    
             Acquisition credit facility                            26,500,000           53,500,000 
                                                                                                    
             Term loan                                             214,500,000          195,382,000 
                                                               ----------------     ----------------
                                                                                                    
                                                                   271,000,000          254,882,000 
                                                                                                    
             Less:  current portion                                 18,583,000           23,562,000 
                                                               ----------------     ----------------
                                                                                                    
                                                               $   252,417,000      $   231,320,000 
                                                               ================     ================ 
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                            December 31, 
                                                                     1996                 1997
        <S>                                                    <C>                  <C>   
        Subordinated Debt:

          Senior accrual debentures, interest at 
            13.25% compounded semi-annually
            payable on June 15, 2001 and payable 
            semi-annual thereafter, principal due
            December 15, 2005                                  $    35,000,000      $    35,000,000

          Less:  unamortized discount                               (4,859,000)          (4,677,000)
                                                               ----------------     ----------------

                                                                    30,141,000           30,323,000
          Senior subordinated notes, interest at
            10.25% payable semi-annually,
            principal due December 15, 2005                        125,000,000          125,000,000

          Senior subordinated notes, interest at 9.625%
             payable semi-annually, principal due
             December 31, 2003                                         185,000              185,000
                                                               ----------------     ----------------

                                                               $   155,326,000      $   155,508,000
                                                               ================     ================
</TABLE> 

                                     F-50
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     On January 4, 1996, the Company entered into a Credit Agreement (the
     "Credit Agreement") to provide a $220,000,000 term loan to finance the Act
     III Acquisition. The Credit Agreement also provides for a revolving credit
     facility and an acquisition credit facility allowing for borrowings of
     $30,000,000 and $75,000,000, respectively, through 2003. During 1997, the
     Company rolled $24,000,000 of borrowings under the revolving credit
     facility into the acquisition credit facility per the lenders permission as
     the borrowings were utilized to finance acquisitions. All borrowings under
     the Credit Agreement bear interest at the lender's base rate plus a
     percentage determined based upon the Company's most recent quarterly
     leverage ratio as defined in the Credit Agreement (8.49% at December 31,
     1997). The interest is payable quarterly or at other increments if the
     Company has chosen a LIBOR interest rate for a period greater than 90 days.
     These borrowings are secured by substantially all of the Company's assets.
     The term loan is payable in varying quarterly installments beginning in
     December 1996 through December 2003. The lender may require prepayments
     based upon the meeting of certain cash flow criteria as defined in the
     Credit Agreement.

     The Credit Agreement requires the Company to enter into interest rate swap
     agreements for notional amounts of at least 50% of its total outstanding
     floating rate debt under the Credit Agreement. At December 31, 1997, the
     Company had several interest rate swap agreements. These financial
     instruments, which are not held for trading purposes, expire from 1998 to
     2001. The swap agreements set rates in the range of 5.14% to 5.61%. The
     notional amount related to these agreements was $200,000,000 at December
     31, 1997. The Company has no intentions of terminating these instruments
     prior to their expiration dates unless it repays a portion of its bank debt
     in advance of scheduled payments. The Company estimates the fair value of
     these instruments at December 31, 1997 to be $1,576,000.

     On December 21, 1995, the Company issued and sold 35,000 units through a
     public offering consisting in the aggregate of $35,000,000 in principal
     amount of 13.25% senior accrual debentures (the "Debentures") due in 2006
     and 560,000 shares of Holdings Class B-1 common stock, the proceeds of
     which were used to finance the acquisition of Act III. An estimated value
     of $5,600,000 was assigned to the shares of Class B-1 common stock
     resulting in a discount of the same amount on the Debentures. This discount
     is being amortized through charges to interest expense over the life of the
     Debentures using the effective interest method.

     Interest on the Debentures for the period of issuance until June 15, 2001
     will accrue at the stated interest rate, compounded on a semi-annual basis,
     and will be payable in cash on that date in an aggregate amount of
     $35,879,000. Thereafter, interest on the Debentures will accrue at the
     stated rate and will be payable semi-annually in arrears on June 15 and
     December 15 of each year, commencing December 15, 2001. The Company is
     required to redeem $2,772,000 in aggregated principal of the Debentures on
     June 15, 2001.

     On December 21, 1995, the Company issued and sold $125,000,000 of 10.25%
     senior subordinated notes (the "Notes") due on December 15, 2005 in a
     public offering, the proceeds of which were used to finance the Act III
     Acquisition. The Notes are unsecured and are subordinated to all existing
     and future debt of the Company.

                                     F-51
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

       Interest on the Notes is payable semi-annually on June 15 and December 15
       of each year, commencing June 15, 1996. The Notes are subject to
       redemption on or after December 15, 2000 at the option of the Company at
       redemption prices specified in the debt agreement. In addition, on or
       prior to December 15, 1998, the Company may redeem additional principal
       amounts of the Notes with the proceeds from an initial public offering of
       equity at redemption prices specified in the agreement, so long as 67% of
       the original principal of the Notes is still outstanding.

       Concurrent with the Act III Acquisition, the Company made a tender offer
       for $100,000,000 9 5/8% senior subordinated notes (the "9 5/8 Notes")
       originally issued by Act III. At December 31, 1997, $185,000 of the 9 5/8
       Notes were still outstanding.

       The Credit Agreement, Debentures and Notes contain covenants which, among
       other restrictions, require the Company to comply with certain financial
       ratios and provisions and limit the Company's ability to incur additional
       indebtedness and pay dividends. The Company was in compliance with all
       covenants as of December 31, 1997.

       The Company has estimated the fair value of long-term debt at December
       31, 1996 and 1997 to approximate the carrying value. The fair value was
       estimated by discounting the future cash flows of loans with similar
       terms and remaining maturities at the Company's current borrowing rate.

       As of December 31, 1997, scheduled maturities, including debt discount,
       are summarized as follows:

          1998                                         $   23,562,000
          1999                                             31,513,000
          2000                                             42,017,000
          2001                                             42,963,000
          2002                                             42,963,000
          Thereafter                                      232,049,000
                                                     -----------------

                                                       $  415,067,000
                                                     =================
                                                      
                                     F-52
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

8.     Income Taxes

       The income tax benefit consists of the following:

<TABLE> 
<CAPTION> 

                                                Period from
                                                 inception
                                               (June 2, 1995)
                                                  through                        Year ended
                                                 December 31,                   December 31,
                                                    1995                    1996           1997
        <S>                                   <C>                 <C>                <C> 
        Current tax expense:
          Federal                             $              -    $               -  $      166,000
          State                                         14,000            1,593,000       2,678,000
                                              -----------------   -----------------  -----------------

                                                        14,000            1,593,000       2,844,000

          Deferred tax benefit:
             Federal                                  (324,000)          (8,779,000)     (5,884,000)
             State                                     (25,000)          (2,988,000)     (2,448,000)
                                              -----------------   -----------------  -----------------

                                                      (349,000)         (11,767,000)     (8,332,000)
                                              -----------------   -----------------  -----------------
                                                                                   
             Net income tax benefit           $       (335,000)   $     (10,174,000) $   (5,488,000)
                                              =================   =================  =================
</TABLE> 

                                     F-53
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

    Reconciling amounts, stated below as a percentage of pretax income, between
    the statutory federal income tax rate and the Company's effective tax rate
    are as follows:

<TABLE> 
<CAPTION> 


                                                          Period from       
                                                           inception        
                                                         (June 2, 1995)     
                                                            through                        Year ended
                                                          December 31,                     December 31,
                                                              1995                    1996             1997
        <S>                                            <C>                    <C>                <C> 
        U.S. federal statutory rate                               35.0%                35.0%             35.0%
        State and local taxes, net                                 1.2                  4.3              (1.5)
        Amortization of goodwill                                     -                 (7.9)             (9.5)
        Other                                                      0.6                    -                 -
        Change in valuation allowance                            (18.8)                   -                 -
                                                       ----------------      ---------------    --------------
                                                                                              
        Effective tax rate                                        18.0%                31.4%             24.0%
                                                       ================      ===============    ==============
</TABLE> 


       The components of the net deferred tax liability at December 31, 1996 and
1997 are as follows:

<TABLE> 
<CAPTION> 


                                                                               December 31,
                                                                        1996                 1997
        <S>                                                      <C>                  <C> 
        Property and equipment                                   $     (9,699,000)    $     (7,624,000)
        Programming rights                                                770,000              239,000
        Bad debts                                                       1,739,000            1,885,000
        Intangible assets                                            (131,966,000)        (119,912,000)
        Accrued interest                                                  576,000              783,000
        Net operating loss and charitable carryforwards                61,357,000           46,073,000
        Other assets                                                    2,649,000            2,879,000
        Other                                                          (4,882,000)          (2,098,000)
                                                                 -------------------  -------------------

        Net deferred tax liability                               $    (79,456,000)    $    (77,775,000)
                                                                 ===================  ===================
</TABLE> 

       At December 31, 1997, the Company had net operating loss and charitable
       contribution carryforwards of approximately $109,857,000 and $10,000,000,
       respectively, for federal income tax purposes, available to reduce future
       taxable income. To the extent not used, federal net operating loss
       carryforwards expire in varying amounts beginning in 2003. In addition,
       the Company had net operating loss carryforwards of approximately
       $38,604,000 for state and local income tax purposes in various
       jurisdictions.

       A corporation that undergoes a "change of ownership" pursuant to Section
       382 of the Internal Revenue Code is subject to limitations on the amount
       of its net operating loss carryforwards which may be used in the future.
       An ownership change occurred on January 4, 1996. The annual limitation on
       the use of the net operating loss is $10,050,000. The Company estimates
       the

                                     F-54
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


       consolidated financial position or results of operations. No assurance
       can be given that an ownership change will not occur as a result of other
       transactions entered into by the Company, or by certain other parties
       over which the Company has no control. If a "change in ownership" for
       income tax purposes occurs, the Company's ability to use "pre-change
       losses" could be postponed or reduced, possibly resulting in accelerated
       or additional tax payments which, with respect to tax periods beyond
       1997, could have a material adverse impact on the Company's consolidated
       financial position or results of operations.

       In 1996, the tax benefit related to the repurchase of stock options of
       approximately $3,850,000 was recorded as a reduction of goodwill. In
       1997, an adjustment of approximately $4,500,000 was made to goodwill
       resulting from a change in management's estimate of the ultimate tax
       benefit of acquired assets, liabilities and carryforwards related to the
       Act III Acquisition.


9.     Mandatorily Redeemable Cumulative Preferred Stock

       On January 4, 1996, the Company issued $115,000,000, 15% mandatorily
       redeemable cumulative preferred stock (the "Preferred Stock"). Dividends
       accrue on the outstanding shares of Preferred Stock at a rate of 15% per
       year compounding annually. Accrued dividends are payable on March 15,
       2001 and will be payable annually subsequent to that date. In connection
       with the issuance of the Preferred Stock, the Company issued 2,406,307
       warrants to purchase Class B-1 common stock at $.001 per share. These
       warrants are currently exercisable and do not expire. Accretion to record
       the value of the Preferred Stock at its redemption value is calculated
       using the effective interest method. Such amounts have been charged to
       additional-paid-in-capital.


10.    Supplemental Disclosures of Cash Flow Information

       The Company paid interest of $33,828,000 and $34,666,000 during the years
       ended December 31, 1996 and 1997, respectively.

       During the years ended December 31, 1996 and 1997, the programming rights
       increased $44,679,000 and $31,800,000 due to the assumption of
       programming liabilities.

       During the years ended December 31, 1996 and 1997, the Company paid
       approximately $1,749,000 and $3,600,000, respectively, for income taxes.


                                     F-55
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

11.  Commitments and Contingencies

     Leases

     The Company has operating lease agreements for land, office space, office
     equipment and other property which expire on various dates through 2005.
     Rental expense was $750,000 and $884,000 during the years ended December
     31, 1996 and 1997, respectively. As of December 31, 1997, minimum required
     annual payments under noncancellable operating leases are as follows:

          1998                                                  $     978,000
          1999                                                        968,000
          2000                                                        984,000
          2001                                                        836,000
          2002                                                        715,000
          Thereafter                                                1,230,000
                                                                --------------

                                                                $   5,711,000
                                                                ==============


     Programming Contracts

     Programming contracts acquired under license agreements are recorded as an
     asset and a corresponding liability at the inception of the license period.
     In addition to the programming contracts payable at December 31, 1997, the
     Company has $17,575,000 of commitments to acquire programming rights for
     which the license period has not commenced and, accordingly, for which no
     asset or liability has been recorded. Future minimum payments arising from
     such commitments outstanding at December 31, 1997, excluding $18,976,000 of
     barter commitments, are as follows:

          1998                                                  $  14,798,000
          1999                                                     11,437,000
          2000                                                      9,351,000
          2001                                                      5,868,000
          2002                                                      3,632,000
          Thereafter                                                1,167,000
                                                                --------------

                                                                $  46,253,000
                                                                ==============



     Litigation

     The Company currently and from time to time is involved in litigation
     incidental to the conduct of its business. In the opinion of management, no
     existing or contingent claims will have a material adverse effect on the
     Company's financial position or results of operations.

     Employment Contracts

     The Company has entered into an employment contract with an executive
     officer of the Company providing for a minimum aggregate amount of $500,000
     payable annually commencing September 13, 1995 for an initial term of eight
     years. Additionally, the Company has guaranteed annual bonus arrangements
     with two other executive officers which have historically been paid.

                                     F-56
<PAGE>
 
Sullivan Broadcast Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

12.  Related Party Transactions

     Operating expenses include reimbursements to ABRY Partners, Inc. ("ABRY"),
     an entity related through common ownership, for the Company's allocable
     share of rent paid by ABRY for the Company. These expenses approximated
     $73,000 and $106,000 for the years ended December 31, 1996 and 1997,
     respectively, and are included in selling, general and administrative
     expenses in the Company's consolidated statement of operations.

     The Company also pays ABRY a management fee for financial and other
     advisory services. Management fees paid to ABRY approximated $252,000 and
     $265,000 for the years ended December 31, 1997 and 1997, respectively, and
     are included in selling, general and administrative expenses in the
     Company's consolidated statement of operations.

13.  Subsequent Event

     On February 23, 1998, the Company entered into a Plan of Merger (the
     "Merger"). Under the terms of the Merger, 100% of the issued and
     outstanding common stock of the Company will be acquired by means of a
     merger. The Merger is subject to approval of the FCC and is expected to
     close prior to August 1998.


                                     F-57
<PAGE>
 
Sullivan Broadcasting Company, Inc.
Valuation and Qualifying Accounts                                  Schedule II
(in Thousands)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                               Charged to
                                  Beginning    Costs and               Ending
                                  Balanace     Expenses    Deductions  Balance
                                  ---------    ----------  ----------  -------
<S>                               <C>          <C>         <C>         <C>

Year Ended December 31, 1994:(a)
 Allowance for Doubtful Accounts   1,182,000    1,051,000   (751,000)  1,482,000

Year Ended December 31, 1995:(a)
 Allowance for Doubtful Accounts   1,482,000      404,000   (903,000)    983,000

Year Ended December 31, 1996:(a)
 Allowance for Doubtful Accounts     983,000      876,000   (562,000)  1,297,000
</TABLE> 

                                     F-58