Note 1: Principles of Consolidation
The accompanying financial statements include the accounts of Media General, Inc., and subsidiaries more than 50% owned (the Company). All significant intercompany balances and transactions have been eliminated. See Note 10 for a summary of the Company’s accounting policies.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain prior year financial information has been reclassified to conform with the current year’s presentation.

The Company’s fiscal year ends on the last Sunday in December. Results for 1997 and 1996 are for the 52 week periods ended December 28, 1997, and December 29, 1996, respectively, while results for 1995 are for the 53 week period ended December 31, 1995.

Note 2: Acquisitions
In January 1997, the Company acquired Park Acquisitions, Inc., parent of Park Communications, Inc. (Park). The acquisition 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. The acquisition and redemption were financed with borrowings under an existing revolving credit facility (see Note 4).

As intended, after 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. The new stations’ results of operations have been included in the Company’s operations beginning with the exchange date.

The acquisitions were accounted for as purchases and the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The amount allocated to FCC licenses and other identifiable intangibles and to excess cost over the net assets acquired relating to Park and the related sale, purchase, and exchange activities was $415 million and $313 million, respectively. These amounts are being amortized on a straight-line basis over periods ranging from 3 to 40 years. The results of operations of these businesses, since their respective dates of acquisition, have been included in the Company’s consolidated results of operations.

The following summary presents the actual consolidated results of operations for the year ended December 28, 1997, and unaudited pro forma consolidated results of operations for the year ended December 29, 1996, as if the acquisition had been completed at the beginning of fiscal year 1996. The pro forma information is presented for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition actually been made as of such date, nor is it necessarily indicative of future operating results:

In August 1996, the Company acquired, for approximately $38 million, the Danville Register & Bee, a daily newspaper in Virginia. Also, in May 1996, the Company acquired, for approximately $2 million, Professional Communications Systems, a provider of equipment and studio design services for television stations. The results of operations of these businesses, since their respective dates of acquisition, have been included in the Company’s consolidated results of operations.

In October 1995, the Company acquired, for approximately $232 million, the assets of several Virginia newspapers (Virginia Newspapers) from Worrell Enterprises, Inc., and its affiliates. The acquisition included four daily newspapers as well as a number of weekly and other publications. Virginia Newspapers’ results of operations have been included in the Company’s consolidated results of operations since the date of acquisition.

Note 3: Investments in Unconsolidated Affiliates
The Company has a one-third partnership interest in Southeast Paper Manufacturing Company (SEPCO), a domestic newsprint manufacturer which also pays licensing fees to the Company. The Company also has a 40% interest in Denver Newspapers, Inc. (DNI), the parent company of The Denver Post, a Denver, Colorado, daily newspaper company.

Summarized financial information for these investments accounted for by the equity method follows:

The summarized information for DNI includes its operating results for the 12 month periods ended November 30, 1997, 1996, and 1995. The Company recognizes, on a one month lag, 40% of DNI’s net income applicable to common stockholders. The carrying value of the Company’s investment in the DNI mandatorily redeemable preferred stock, which is being held to maturity and is included in investments in unconsolidated affiliates, was $49.3 million and $46 million, net of unamortized discounts of $12 million and $15.3 million, at December 28, 1997, and December 29, 1996, respectively.

Other:
Retained earnings of the Company at December 28, 1997, includes $31.8 million related to undistributed earnings of unconsolidated affiliates. During 1997, the Company invested approximately $4.6 million to acquire 18% of the common stock of Hoover’s, Inc., a leading provider of on-line financial information.

Note 4: Long-Term Debt
Long-term debt at December 28, 1997, and December 29, 1996, was as follows:

In December 1996, the Company entered into a seven-year revolving credit facility committing a syndicate of banks to lend the Company up to $1.2 billion. This facility has mandatory commitment reductions of 25% at the end of 2001 and 2002. Interest rates under the facility are typically based on London Interbank Offered Rate (LIBOR) plus a margin ranging from .225% to .75% (.50% at December 28, 1997), based on the Company’s debt to cash flow ratio (leverage ratio), as defined. Under this facility, the Company pays commitment fees (.1875% at December 28, 1997) on the unused portion of the facility at a rate based on its leverage ratio.

In 1992, the Company issued $20 million of New Jersey Economic Development Authority tax-exempt revenue bonds. The bonds are secured by a letter of credit, under which the Company pays an annual fee equal to .125% plus a margin (.50% at December 28, 1997) based on the Company’s leverage ratio. The bonds contain certain optional and mandatory redemption provisions, and the bond proceeds were restricted for capital expenditures related to the Company’s Garden State Paper newsprint operations in New Jersey.

The Company’s debt covenants contain a minimum net worth requirement ($349 million at December 28, 1997), and require the maintenance of an interest coverage ratio and a leverage ratio, as defined. Long-term debt maturities during the five years subsequent to December 28, 1997, aggregating $280,000,000, are as follows 1998 — $18,000,000; 1999 — $13,000,000; 2000 — $13,000,000; 2001 — $13,000,000; 2002 — $223,000,000.

At December 28, 1997, the Company had borrowings of $5 million from bank lines and $13 million of senior notes due in 1998 classified as long-term debt in accordance with the Company’s intention and ability to refinance these obligations on a long-term basis under existing facilities.

The Company had interest rate swap agreements totaling $800 million at December 28, 1997, with maturities of approximately one to six years which 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. The Company enters into interest rate swap agreements, which are not held for trading purposes, to manage interest cost and risk associated with increasing variable interest rates, primarily short-term increases in LIBOR. The Company uses the accrual method to account for all interest rate swap agreements. Realized gains or losses on termination of interest rate swaps are deferred and amortized over their remaining original terms as an adjustment to interest expense. Amounts which are due to or from interest rate swap counterparties are recorded as an adjustment to interest expense in the periods in which they accrue. The Company’s exposure to credit loss on its interest rate swap agreements in the event of nonperformance by the counterparties is believed to be remote due to the Company’s requirement that counterparties have a strong credit rating.

Estimated fair values of the Company’s financial instruments are as follows:

The fair value of the Company’s investment in DNI Preferred Stock, which is not publicly traded, was estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investment. The Company’s investment in Hoover’s, Inc. approximates its fair value. The fair values of the interest rate swaps are based on the estimated amounts the Company would receive or pay to terminate the swaps. Fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based on the Company’s incremental borrowing rates for similar types of borrowings. The borrowings under the Company’s revolving credit facility and bank lines approximate their fair value.

Note 5: Business Segments
The Company is a diversified communications company with four principal business segments located primarily in the Southeast United States. The Publishing Segment, the Company’s largest segment based on revenues and operating income, currently in cludes twenty daily (ten of which were acquired in 1997) and a number of weekly newspapers and other publications. The Broadcast Television Segment consists of fourteen (eleven of which were acquired in 1997) television stations and a provider of equipment and studio design services. The Cable Television Segment includes two cable television operations and a cable advertising unit. The Newsprint Segment includes the Company’s recycled newsprint operations. Intersegment sales (principally newsprint) comprise less than 1% of consolidated totals and are not shown separately. Corporate assets are principally property, plant and equipment and investments in unconsolidated affiliates.

Other income, net, for 1995 includes a $3.6 million gain from the sale of the Company’s interest in a Mexican newsprint operation.

Operations for 1994 include recognition of a gain of $91.5 million ($83.3 million after-tax; $3.20 per share, or $3.17 per share — assuming dilution) related to the sale of the Company’s investment in Garden State Newspapers, Inc.

Information as to revenues, profitability and assets is as follows:

Note 6: Taxes on Income
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109), which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this “liability” method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and iabilities by applying enacted statutory tax rates applicable to future years in which the differences are expected to reverse.

The Company’s federal income tax returns through fiscal year 1993 have been examined and closed by the Internal Revenue Service. The Company’s federal income tax returns for the years 1994 and 1995, and various state tax returns, are currently under examination by the IRS and state tax authorities, respectively. The results of these examinations are not expected to be material to the Company’s results of operations, financial position or cash flows.

Significant components of income taxes are as follows:

Temporary differences which give rise to significant components of the Company’s deferred tax liabilities and assets at December 28, 1997, and December 29, 1996, are as follows:

Reconciliation of income taxes computed at the federal statutory tax rate to actual income tax expense is as follows:

Net of refunds, in 1997, 1996 and 1995, the Company paid income taxes of $29.4 million, $42.9 million and $18.4 million, respectively.

Note 7: Common Stock and Stock Options
Holders of the Class A common stock are entitled to elect 30% of the Board of Directors and, with the holders of Class B common stock, also are entitled to vote on the reservation of shares for stock awards and on certain specified types of major corporate reorganizations or acquisitions. Class B common stock can be converted into Class A common stock on a share-for-share basis at the option of the holder. Both classes of common stock receive the same dividends per share.

In January 1997, the Directors’ Deferred Compensation Plan became effective for each non-employee member of the Board of Directors of the Company. The plan provides that each non-employee Director shall receive half of his or her annual compensation for services to the Board in the form of Deferred Stock Units (DSU); each non-employee Director additionally may elect to receive the balance of his or her compensation in cash or DSU. DSU accounts do not entitle non-employee Directors to any rights of a holder of common stock. DSU account balances may be settled as of a non-employee Director’s retirement date by a cash lump-sum payment, a single distribution of common stock, or annual installments of either cash or common stock over a period of up to ten years. Expense recognized in 1997 under the plan was $550,000.

In May 1995, shareholders approved the 1995 Long-Term Incentive Plan (LTIP) which reserved and made available 1,300,000 shares of Class A common stock for stock-based awards to key employees, of which 1,000,000 are reserved for nonqualified stock options and 300,000 are reserved for restricted stock awards. The plan is administered by the Compensation Committee of the Board of Directors. Grant prices of stock options are determined by the Committee and shall not be less than the fair market value on the date of grant. Options are exercisable during the continued employment of the optionee but not for a period greater than ten years and not for a period greater than one year after termination of employment, and they become exercisable at the rate of one-third each year from the date of grant. Restricted stock is awarded in the name of each of the participants; these shares have all the rights of other Class A shares, subject to certain restriction and forfeiture provisions. In 1997, 91,000 shares, of which 89,000 shares remain restricted at December 28, 1997, were granted under the terms of the plan. Restrictions on the shares expire no more than ten years after the date of award, or earlier if pre-established performance targets are met. The plan will continue until terminated by the Company.

Options to purchase Class A common stock were granted to key employees under the 1976 and 1987 nonqualified stock option plans prior to the 1995 LTIP. The Company will not make any future awards under these plans and past awards are not affected. Options outstanding under the plans are exercisable during the continued employment of the optionee, but not for a period greater than ten years after the date of grant for options granted subsequent to the 1991 amendment to the 1987 plan and for a period of not greater than three years after termination of employment.

Restricted shares of the Company’s Class A common stock were granted to certain key employees under the 1991 restricted stock plan. The Company will not make any future awards under the plan and past awards are not affected. At December 28, 1997, 78,700, and 114,300 shares granted in 1995 and 1991, respectively, remain restricted under the terms of the plan. Shares were awarded in the name of each of the participants; these shares have all the rights of other Class A shares, subject to certain restrictions and forfeiture provisions. Restrictions on the shares expire no more than ten years after the date of the award, or earlier if certain performance targets are met.

Unearned compensation was recorded at the date of the restricted stock awards based on the market value of shares. Unearned compensation, which is shown as a separate component of stockholder’s equity, is being amortized to expense over a vesting period (not exceeding ten years) based upon expectations of meeting certain performance targets. The amount amortized to expense in 1997, 1996 and 1995 was $1,843,000, $1,198,000 and $1,361,000, respectively.

In 1996, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” As permitted by the provisions of SFAS No. 123, the Company continues to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based awards. Accordingly, since stock options are issued at fair market value on the date of grant, the Company does not recognize compensation cost related to its stock option plans.

The following information is provided solely in connection with the disclosure requirements of SFAS No. 123. If the Company had elected to recognize compensation cost related to its stock options granted in 1997, 1996 and 1995 in accordance with the provisions of SFAS No. 123, earnings per share would have declined $0.03, $0.02 and $0.01 in 1997, 1996 and 1995, and pro forma net income (loss) and earnings (loss) per share would have been ($11,452,000), $69,896,000 and $52,936,000; and ($0.43), $2.63 and $2.00, respectively (per share amounts assuming dilution are identical). The 1996 and 1995 pro forma amounts are not indicative of future effects of applying the provisions of SFAS No. 123 since a three year vesting period is used to measure pro forma compensation expense and 1996 and 1995 amounts reflect expense for two years and one year of vesting, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively:risk-free interest rates of 6.54%, 5.57% and 7.78%; dividend yields of 1.57%, 1.75% and 2.03%; volatility factors of .287, .282 and .324; and an expected life of 8 years.

A summary of the Company’s stock option activity, and related information for the years ended December 28, 1997, December 29, 1996 and December 31, 1995 follows:

The following table summarizes information about stock options outstanding at December 28, 1997:

(*) exercisable during lifetime of optionee
(**) exercisable during the continued employment of the optionee and for a three-year period thereafter

Note 8: Retirement Plans
The Company has a non-contributory defined benefit retirement plan which covers substantially all employees. Benefits are based on salary and years of service. The Company’s funding policy is to contribute annually the tax-deductible amounts required by statute. Plan assets include marketable securities, U.S. government obligations and cash equivalents. The Company also has a non-contributory unfunded executive supplemental retirement plan which supplements the coverage available to certain executives under the defined benefit retirement plan.

Certain employees of the Company’s newsprint operations participate in multi-employer defined benefit and defined contribution pension plans. The plans provide benefits to substantially all union employees.

Net pension cost for 1997, 1996 and 1995 is summarized below