This discussion addresses the principal factors affecting the Company’s operations during the past three years and should be read in conjunction with the Company’s financial statements and the Ten-Year Financial Summary which appear elsewhere in this report. Operating results for fiscal years 1997 and 1996 included 52 weeks, while fiscal year 1995 included 53 weeks.

ACQUISITIONS

In January 1997, the Company acquired Park Acquisitions, Inc., parent of Park Communications, Inc. (Park), which included ten network affiliated television stations, 28 daily newspapers and 82 weekly newspapers. The total consideration approximated $715 million, representing the purchase of all the issued and outstanding common stock of Park, the assumption of liabilities (primarily $476 million of Park’s high coupon long-term debt) and transaction costs. In early February 1997, the Company redeemed Park’s high coupon debt and recorded an extraordinary charge of $63 million ($2.39 per share, or $2.37 per share — assuming dilution), representing the debt prepayment premium and the write-off of associated debt issuance costs, net of a $38.6 million tax benefit.

In conjunction with the acquisition, the Company completed sales of certain of the former Park properties for approximately $147 million and purchased new properties for approximately $53 million. These purchases included the Potomac News (Woodbridge, Virginia) in February 1997, and the Reidsville Review (Reidsville, North Carolina) and The Messenger (Madison, North Carolina) in April 1997.

In August 1997, the Company completed the exchange of WTVR-TV (Richmond, Virginia) for three other stations, WSAV-TV (Savannah, Georgia), WJTV-TV (Jackson, Mississippi) and WHLT-TV (Hattiesburg, Mississippi), in order to comply with the Federal Communication Commission’s requirement that WTVR-TV be divested within one year of its January 1997 purchase date.

In August 1996, the Company acquired, for approximately $38 million, the Danville Register & Bee (Danville), a daily newspaper in Virginia. In May 1996, the Company acquired, for approximately $2 million, Professional Communications Systems (PCS), a provider of equipment and studio design services for television stations.

In October 1995, for approximately $232 million, the Company acquired newspaper properties in Lynchburg, Charlottesville, Culpeper and Suffolk, Virginia (Virginia Newspapers) which included four daily and Sunday newspapers and a number of weekly and other publications.

The aforementioned transactions were accounted for as purchases and accordingly, the operations of the acquired properties have been included in the Company’s consolidated results of operations since their dates of purchase. The following discussion of segment operating results is primarily focused on the year-over-year comparative performance of the Company, excluding the operating impact of acquisitions and exchanges during the periods.

Subsequent to the end of the fiscal year, the Company acquired, for approximately $92 million, the Bristol Herald Courier, a daily newspaper in southwestern Virginia, and two affiliated weekly newspapers. Additionally, the Company agreed to purchase The Hickory Daily Record located in northwestern North Carolina and announced the sale of its Kentucky newspaper properties acquired with the 1997 purchase of Park. These transactions are expected to close later in 1998. The acquisitions will be included in the Company’s results of operations from their dates of acquisition.

SEGMENT OPERATING RESULTS

Each segment’s operating results include operating cash flow information in addition to revenues, operating expenses and operating income. Operating cash flow amounts presented with business segment information represent operating income plus depreciation and amortization of intangible assets. Such cash flow amounts vary from net cash provided by operating activities, as presented in the Consolidated Statements of Cash Flows, because cash payments for interest and taxes are not reflected, nor are the cash flow effects of non-operating items or changes in certain operations-related balance sheet accounts. The Company believes the presentation of operating cash flow amounts is important for several reasons. First, fluctuations in depreciation and amortization from year to year are not necessarily indicative of the underlying performance of a company. Second, the year-over-year change in operating cash flow can be a useful measure of performance and present a meaningful indicator of results that may occur in future periods. Finally, acquisition values of communications and media businesses are often based on multiples of operating cash flow.

The preceding chart contains the operating results of the Publishing Segment, including recent acquisitions. In 1997, Publishing Segment revenues increased $53.1 million and operating income rose $10.1 million over 1996 as a direct result of acquisitions. In 1996, Publishing Segment revenues and operating income increased $36.6 million and $9.2 million, respectively, over 1995, due to 1996 and 1995 acquisitions.

1997 Compared to 1996

Excluding 1997 and 1996 acquisitions, Publishing Segment revenues rose $24.7 million (6%) in 1997. At the Company’s metropolitan newspapers, which include its three largest daily newspapers, advertising revenues increased $20 million as a result of expanded linage (up 4.1%) combined with higher advertising rates (up an average of 3.4%). The year-over-year increase was principally attributable to strong performances in classified advertising, led by the employment and automotive categories, and in retail advertising. A small decrease in circulation revenues of 1.8%, resulting from a decline in circulation volume (down 2.3%) coupled with slightly higher average rates, was more than offset by the growth in general advertising revenues.

Publishing Segment operating expenses, excluding 1997 and 1996 acquisitions, decreased $3.9 million in the current year compared to the prior year. This drop was attributable to a $13.1 million reduction in newsprint expense, due to decreased cost per ton, partially offset by a $2.4 million increase in employee compensation and benefit costs combined with a moderate increase in depreciation expense. Additionally, certain other operating expenses increased, including approximately $4.2 million in one-time costs incurred in 1997 related to re-engineering initiatives at several of the Segment’s locations including the Company’s Tampa, Florida, and Richmond, Virginia, daily newspapers. The majority of the savings generated by these re-engineering efforts will be realized in 1998 and subsequently.

Operating income for the Publishing Segment, excluding 1997 and 1996 acquisitions, rose $28.6 million (59%) in 1997. This growth came principally from increased revenues at the Company’s metropolitan newspapers, particularly in classified and retail advertising, coupled with the substantial decline in newsprint expense.

1996 Compared to 1995

Publishing Segment revenues, excluding 1996 and 1995 acquisitions, increased $7 million (2%) in 1996. At the Company’s metropolitan newspapers, advertising revenues increased $5.5 million, reflecting the effect of a 1.8% average rate increase together with a slight rise in advertising inches. Classified advertising, led by the employment and automotive categories, was the primary contributor to the overall revenue improvement. A small increase in general advertising revenue was more than offset by a decline in retail advertising revenue. Circulation revenues rose 2% in 1996, the result of a 6.3% average rate increase partially offset by a 4% drop in circulation volume.

Publishing Segment operating expenses, excluding 1996 and 1995 acquisitions, decreased $8 million in 1996. Employee compensation and benefit costs dropped $4 million, primarily the result of a re-engineering program implemented at the Company’s Winston-Salem, North Carolina, daily newspaper during the last half of 1995. Other expense reductions were due to the absence of $2.9 million of costs related to the aforementioned re-engineering program at Winston-Salem, and a $2.1 million reduction in depreciation and amortization, primarily the result of certain intangibles becoming fully amortized in 1995. In addition, advertising, promotion and incentive costs dropped $1 million. These reductions more than offset a $2.2 million rise in newsprint expense, due to increased cost per ton.

Operating income for the Publishing Segment, excluding 1996 and 1995 acquisitions, rose $15 million in 1996 from 1995. The majority of this increase was from the Company’s metropolitan newspapers, reflecting growth in classified advertising revenue and reduced employee compensation and benefit costs.

The preceding chart includes the operating results of the Broadcast Television Segment, including recent acquisitions. As a direct result of the acquisitions occurring in 1997, revenues increased $77.3 million and operating income decreased $3.9 million from 1996. In 1996, revenues and operating income increased from 1995 by $9.2 million and $.1 million, respectively, solely as a result of the 1996 acquisition of PCS.

1997 Compared to 1996

Broadcast Television Segment revenues, excluding acquisitions, decreased $4.4 million in 1997 from 1996. The decline was principally the result of soft national and political advertising revenues (the latter due to the absence of several 1996 national and local political issues), which were only partially offset by an increase in local advertising revenues (driven by the automotive category).

Broadcast Television Segment operating expenses, excluding acquisitions, remained essentially flat in 1997. A modest increase in program costs was partially offset by a small decrease in employee compensation and benefit expense.

Excluding acquisitions, Broadcast Television Segment operating income declined $5.6 million in the current year. The drop was primarily attributable to reduced national and political advertising revenues, especially at the Company’s largest station, WFLA-TV in Tampa. The Company completed the transfer of the network affiliation at its Jacksonville station (WJWB-TV) from ABC to Warner Brothers in February 1997. As anticipated, WJWB-TV posted weak 1997 results. Conversely, the full-year impact of the network switch from ABC to NBC in August 1996 at the Company’s WCBD-TV station in Charleston resulted in growth, but only partially compensated for WJWB-TV’s reduced results.

1996 Compared to 1995

Broadcast Television Segment revenues, excluding acquisitions, increased $4.9 million in 1996, up 7.1% from 1995. The revenue growth was principally the result of increases in political, national and local spot sales at the Company’s Tampa station. National and local revenues were aided by the broadcast of the Summer Olympics, as well as increases in the automotive and department store categories, while political revenues increased due to state issues and strong presidential and state election advertising. These increases were partially offset by a decrease in revenues at the Company’s station in Jacksonville, largely attributable to advertiser reluctance in the face of that station’s then impending network switch from ABC to Warner Brothers.

Broadcast Television Segment operating expenses, excluding acquisitions, rose $4.4 million in 1996 over 1995. The majority of this increase was attributable to increased programming costs of $3.2 million (51%) due to the addition of new programs in the fall of 1995 at WFLA-TV, as well as a rise in employee compensation and benefit costs of $.8 million (4.4%) over 1995 levels.

Broadcast Television Segment operating income, excluding acquisitions, increased $.6 million in 1996. The improvement was attributable to strong revenue growth at the Company’s WFLA-TV station in Tampa, which more than offset increased programming costs and lackluster performances at the Company’s Jacksonville and Charleston television stations.

1997 Compared to 1996

Revenues at the Company’s Cable Television Segment rose $7.2 million in 1997, up 4.9% from 1996. The increase was attributable to the Company’s Fairfax County, Virginia, cable system (Fairfax Cable), as a result of a 3.4% increase in the number of subscribers (to 235,500 at December 28, 1997), together with a combined average increase of 5.4% in basic and expanded subscriber rates. This rate increase along with subscriber growth produced a 2.6% improvement in average revenue per subscriber (excluding pay-per-view).

The Telecommunications Act of 1996 (1996 Act) eliminated rate regulation of cable services other than the basic service tier after March 31, 1999. The 1996 Act also removed previously applicable estrictions that had prevented most local telephone companies from offering cable services in the areas where they provide telephone services. This development and the advent of wireless and direct broadcast satellite services likely will increase competition in the areas served by the Company’s cable systems. The Company is developing several strategic initiatives for its Fairfax Cable system, including entry into the high speed data transmission and commercial and residential telephone markets. The Company estimates that the capital investment required for it to compete effectively in those markets could exceed $200 million over a ten-year period.

Cable Television Segment operating expenses remained essentially flat in the current year. An increase in programming costs more than offset reductions in compensation and employee benefit costs and depreciation expense.

Cable Television Segment operating income improved $7.3 million (30%) in 1997 from 1996. The increase was due principally to revenue growth at Fairfax Cable of $7.2 million, up 5.3% in 1997 as a result of both rate and subscriber count increases. These subscriber count increases prompted a commensurate rise in programming costs, which were essentially offset by reduced compensation and employee benefits costs; this reduction reflected the current-year benefit of the restructuring process implemented in 1996 at Fairfax Cable.

1996 Compared to 1995

Cable Television Segment revenues rose $12 million in 1996, up 9% from 1995. The increase was attributable to the Company’s Fairfax Cable system, as a result of a 2.7% increase in the number of subscribers (to 227,700 at December 29, 1996), together with average increases in basic and expanded subscriber rates of 6.5% and 9.2%, respectively. These rate increases combined with subscriber growth produced a 7% improvement in average revenue per subscriber (excluding pay-per-view).

Cable Television Segment operating expenses decreased $2 million in 1996 from 1995. A $3.1 million (11%) decline in 1996 of employee compensation and benefit costs, reflecting the results of a restructuring process implemented at Fairfax Cable, and a $1.3 million decrease in maintenance and repair expense, more than offset a $3.3 million (12%) increase in programming costs.

Cable Television Segment operating income increased $14 million in 1996 from 1995. The increase reflects revenue growth at Fairfax Cable, up 10.4% in 1996 as a result of both rate and subscriber count increases, as well as reduced compensation and employee benefit costs; together, these more than offset an increase in programming costs.

1997 Compared to 1996

Newsprint Segment revenues declined $12.9 million (10%) in 1997, largely reflecting the results of the Company’s Garden State Paper (Garden State) newsprint mill, located in Garfield, New Jersey. The decline resulted from a 14.5% decrease in the average realized selling price per ton, partially offset by a 5.1% rise in tons sold. Average realized newsprint selling prices fell during the current year from $572 per ton in 1996 to $488 per ton in 1997. However, the market showed continued improvement throughout the year, as evidenced by a 7% average selling price increase from $456 per ton during the first quarter of 1997 to the above-mentioned $488 per ton for the full year.

Newsprint Segment operating expenses dropped $3.4 million in 1997 from the comparable 1996 amount. The cost of Garden State’s principal raw material, recovered newspapers (ONP), dropped $3.7 million (15%). The average cost of ONP in 1997 was $73 per ton, down 16% from last year’s $87 per ton, due to lower market demand for ONP during the current year. The decline in ONP cost together with decreases of $1.1 million in maintenance costs, due mainly to improved production and decreased downtime, and $.7 million in energy expense, attributable to lower average fuel prices during the year, more than offset a $1.9 million increase in the cost of chemicals used to enhance the quality of newsprint produced.

The Newsprint Segment produced an operating loss of $7 million in 1997, a sharp contrast to the $2.5 million income posted in 1996. The decline resulted from an $84 decrease in average realized selling price per ton as compared to a year ago, partially offset by a drop in ONP expense. During 1997, as newsprint consumption increased, the Company’s average realized newsprint selling price per ton rose and, in the fourth quarter of 1997, began to exceed equivalent 1996 levels. This trend of gradual improvement in realized newsprint selling prices is expected to continue into 1998 1996 Compared to 1995

Newsprint Segment revenues declined $12.4 million (9%) in 1996, largely reflecting the results of the Company’s Garden State Paper newsprint mill. The decline resulted from a 9% decrease in tons sold, as the average realized selling price remained essentially even with 1995. Average newsprint selling prices began the year at $652 per ton, and dropped to $444 per ton by year-end, reflecting the results of an industry cycle of declining selling prices and weak demand.

Newsprint Segment operating expenses dropped $3 million in 1996 from the comparable 1995 amount, due to a $12 million (32%) drop in the cost of ONP. The average cost of ONP in 1996 was $87 per ton, down 28% from 1995’s $121 per ton, due to lower market demand throughout the year. This decline in ONP expense more than offset the rise in other expenses, including a $4.4 million (18%) increase in energy costs due to a severe winter which limited the available supply of low cost fuel, a $2.8 million (32%) rise in maintenance and repair expense related to production problems, a $1.3 million increase in consultant fees related to a process re-engineering project at Garden State, a $1 million increase in chemical costs in order to increase quality, and a $1 million rise in employee compensation and benefit costs.

Newsprint Segment operating income fell $9.4 million in 1996 from 1995. The decrease resulted from the reduction in tons sold in the current year (down 9% from prior year levels), which more than offset the decrease in operating costs.

UNCONSOLIDATED AFFILIATES

1997 Compared to 1996

The Company’s investment income from unconsolidated affiliates decreased $6.2 million in 1997 from the comparable 1996 amount. The decrease was attributable to the Company’s share of reduced operating results at its Southeast Paper Manufacturing Company (SEPCO) newsprint affiliate, which decreased $11.2 million from last year. Despite a 5.6% increase in tons sold, revenues declined 11.2% as a result of a decrease in SEPCO’s average realized newsprint selling price to $492 per ton in 1997 from $583 per ton in 1996.
Income earned from the Company’s Denver Newspapers, Inc. (DNI), affiliate increased $5 million in 1997 over 1996 due to a $4 million increase in the Company’s share of DNI’s net income applicable to common stockholders and a $1 million increase in income from the Company’s DNI preferred stock investment. DNI’s improved results were attributable to solid advertising revenue growth coupled with reduced newsprint expense which, together, more than offset the effects of a modest decrease in circulation revenues and increases in other operating expenses.

1996 Compared to 1995

The Company’s investment income from unconsolidated affiliates rose $8.2 million in 1996 over 1995. The most significant portion of the increase came from the Company’s share of the operating results of its SEPCO newsprint affiliate, which increased $6.7 million over the previous year. SEPCO established new annual records for income and production in 1996. The improvement was primarily attributable to significantly lower production costs (mainly due to reduced ONP expense), as well as a slight increase in revenues. For the year, SEPCO’s average realized selling price approximated $583 per ton compared to $578 per ton in 1995.

Income earned from the Company’s Denver Newspapers, Inc., affiliate increased $1.4 million in 1996 over 1995 due to a $.9 million increase in the Company’s share of DNI’s net income applicable to common stockholders and a $.5 million increase in income from the Company’s DNI preferred stock investment. DNI’s improved operating results were attributable to strong advertising revenue growth which more than offset the effect of increased operating expenses (principally newsprint).

INTEREST EXPENSE

Interest expense of $65.4 million represented a $44.2 million increase over 1996. This was due primarily to a $654 million rise in average debt outstanding in 1997, the result of recent acquisitions. The Company’s average effective borrowing rate of 6.9% in 1997 was up slightly from 1996.

Interest expense of $21.3 million in 1996 represented a $5.7 million increase over the prior year. The increase was due primarily to the $108 million rise in average debt outstanding, the result of 1996 and 1995 acquisitions, partially offset by a reduction in the Company’s average effective borrowing rate to 6.8%.

NON-OPERATING ITEMS

Other income, net, remained relatively flat in 1997 from 1996. A reduction in gains from sales of miscellaneous fixed assets was essentially offset by a rise in current-year interest income on proceeds from the sales of former Park properties together with the absence of prior-year expenses related to acquisitions.

Other income, net, decreased $3.8 million in 1996 from 1995. The decline was primarily the result of the absence of 1995’s $3.6 million pre-tax gain on the sale of the Company’s interest in a Mexican newsprint affiliate, combined with a decline of interest earned on short-term investments held by the Company prior to the 1995 Virginia Newspapers acquisition. Together, these offset an increase in gains from various fixed asset sales.

PROVISION FOR INCOME TAXES

Excluding the extraordinary item, the Company’s effective tax rate was 39.2% in 1997, up from 35.8% in the previous year. Income tax expense declined $5.4 million (14%) in 1997 on a pretax earnings decrease of $23.4 million (21%). The increase in effective rate was due to a higher proportion of nondeductible intangible asset amortization related to recent acquisitions. See Note 6 to the accompanying consolidated financial statements for additional information regarding income taxes.

Excluding the gain and related income taxes on the Company’s first quarter 1995 sale of its interest in a Mexican newsprint operation, the Company’s effective tax rate was 35.8% in 1996, up slightly from 35% in the previous year. Income tax expense rose $11.9 million (43%) over 1995 on a pretax earnings increase of $31.6 million (40%).

NET INCOME

The Company incurred a net loss of $10.5 million ($.40 per share; both basic and assuming dilution) in 1997 as the result of a $63 million charge, net of a tax benefit of $38.6 million, ($2.39 per share, or $2.37 per share — assuming dilution) related to the redemption of Park’s high coupon debt in February 1997. Excluding this extraordinary item, net income declined from $70.5 million in 1996 to $52.5 million in the current year. This $18 million ($23 million pre-tax) decrease in net income was primarily attributable to newsprint related operations; Garden State’s pre-tax operating profit declined $9.5 million and the Company’s share of SEPCO’s income was down $11.2 million. Increases in interest expense ($44.2 million) and amortization expense ($25.7 million) related to acquisitions slightly more than offset operating profit increases in other businesses. The Publishing Segment and Cable Segment had particularly strong performances with increases in operating profits of 78% and 29%, respectively.

Net income for 1996 was $70.5 million ($2.68 per share, or $2.65 per share — assuming dilution) compared to $53.2 million ($2.04 per share, or $2.01 per share — assuming dilution) in 1995. Net income for 1995 included the after-tax gain of $2.5 million ($.10 per share, or $.09 per share — assuming dilution) from the sale of the Company’s interest in a Mexican newsprint affiliate. Excluding the impact of the 1995 gain, 1996 net income was up 39% from the prior year reflecting strong growth in operating income in the Publishing Segment due to improvements at the metropolitan daily newspapers, the addition of the Virginia Newspaper properties, and increased operating income in the Cable Television Segment due mainly to revenue growth.

LIQUIDITY AND CAPITAL RESOURCES

Funds generated by operating activities during 1997 totaled $119.3 million, down $7.2 million from 1996. The decrease was due to a decline in net income (excluding the extraordinary item) and the absence of the prior-year distribution of $15.6 million from SEPCO, partially offset by a rise in non-cash amortization resulting from recent acquisitions. Funds generated from operating activities coupled with funds provided from the sales of non-southeastern Park properties and new borrowings, supplied $277 million for acquisitions (excluding the debt and other liabilities assumed), $85 million for premiums and costs related to the early redemption of Park debt, $42 million for capital expenditures and $14 million for the payment of dividends to stockholders.

Total debt outstanding at December 28, 1997, was $900 million, up $624 million (principally the result of the Park acquisition) from the year-ago level of $276 million, but down $148 million from the March 30, 1997, level of $1,048 million. The majority of the debt reduction in the current year was funded with the net proceeds from the sales of certain of the former Park properties; the balance was derived from cash flow from operations. At December 28, 1997, the Company had $390 million in unused credit lines available from its committed revolving credit facility expiring in 2003.

In connection with the borrowings related to the Park acquisition, in 1997 the Company entered into additional interest rate swap agreements aggregating $600 million. These interest rate swaps, coupled with existing ones, have maturities ranging from one to six years and totaled $800 million at December 28, 1997. These instruments are used solely to manage interest rate risk and effectively convert the Company’s variable rate debt to fixed rate debt with a weighted average interest rate of 6.8% at December 28, 1997. See Note 4 to the accompanying consolidated financial statements for additional information regarding interest rate swaps.

The Company anticipates that internally generated funds provided by operations during 1998, together with existing credit facilities, will be more than adequate to finance other possible acquisitions, projected capital expenditures, dividends to stockholders, and working capital needs in the future. Additionally, the Company expects to receive $58.6 million in dividends and return of principal on its mandatorily redeemable preferred stock investment in Denver Newspapers, Inc., by June 30, 1999, that security’s redemption date.

YEAR 2000

As is true with many companies today, the Company is heavily reliant on technology to deliver its services. Because some forms of technology in use today employ systems that are not capable of dealing with the year 2000 transition, the Company has assembled a taskforce to review all its systems to ensure against a year 2000 malfunction. While we have found that such systems do exist in Media General, the growth of the Company and the availability of new technology have jointly caused us to upgrade or replace substantial portions of our fundamental systems in recent years with year 2000 compliant systems. In addition, we are in the process of installing a new, corporate-wide, financial information system and have just completed the first replacement phase of a new human resources information system, both of which are year 2000 compliant. While the overall cost of this effort is still being evaluated, the benefits received from the new technology for many of its operational systems are expected to amply justify the cost of replacement; these costs are not expected to be material to the Company’s consolidated results of operations or financial position.

OUTLOOK FOR 1998

The quick integration of recently acquired companies into Media General has strengthened the Company’s ability to provide communications throughout the Southeast and to capitalize on emerging opportunities. The Company anticipates that all of its segments will produce year-over-year operating income and cash flow increases, and the Publishing Segment is expected to show particularly strong results. Results for the Newsprint Segment are directly affected by the newsprint market’s price levels, which have shown gradual improvement throughout 1997 and are expected to show continued improvement in 1998. Due to strong growth in advertising and newsprint revenues, the Company’s net income is expected to increase.

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