FINANCIALS MEDIA GENERAL, INC., NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Annual Report Index

Note 1: Principles of Consolidation
The accompanying financial statements include the accounts of Media General, Inc., and subsidiaries more than 50% owned (the Company). The Company’s fiscal year ends on the last Sunday in December. All significant intercompany balances and transactions have been eliminated. See Note 9 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.

Note 2: Acquisitions
In January 1998, the Company acquired, for approximately $93 million, the assets of the Bristol Herald Courier (Bristol), a daily newspaper in southwestern Virginia, and two affiliated weekly newspapers. In July 1998, the Company acquired, for approximately $40 million, the assets of the Hickory Daily Record (Hickory), a daily newspaper in northwestern North Carolina. Both transactions were accounted for as purchases and have been included in the Company’s consolidated results of operations since their respective dates of acquisition. The purchase price has been allocated to the assets acquired based on estimated fair values. The amount allocated to identifiable intangibles (principally subscriber lists) was $8 million, to other assets, net (principally property, plant and equipment) was $17 million, and to excess cost over the net assets acquired was $108 million. Also, in June 1998, the Company completed the sale of its Kentucky newspaper properties for approximately $24 million. The Bristol and Hickory acquisitions were funded with borrowings under an existing revolving credit facility (see Note 4), coupled with proceeds from the disposition of the Kentucky newspaper properties.

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 order to comply with the Federal Communications Commission’s requirement that WTVR-TV be divested within one year of its January 1997 purchase date, 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 (Hatties- burg, Mississippi). The new stations’ results of operations have been included in the Company’s operations beginning with the exchange date.

These acquisitions were also 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.

In August 1996, the Company acquired, for approximately $38 million, the Danville Register & Bee, a daily newspaper in Virginia. The results of operations of this business since its date of acquisition, have been included in the Company’s consolidated results of operations.

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 above summarized information for DNI includes its operating results for the 12 month periods ended November 30, 1998, 1997, and 1996. 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 its June 30, 1999, maturity and is included in investments in unconsolidated affiliates, was $52.7 million and $49.3 million, net of unamortized discounts of $3.2 million and $9.3 million, at December 27, 1998, and December 28, 1997, respectively.

Other:
Retained earnings of the Company at December 27, 1998, included $37.5 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 and Other Financial Instruments
Long-term debt at December 27, 1998, and December 28, 1997, 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 the London Interbank Offered Rate (LIBOR) (5.36% at December 27, 1998) plus a margin ranging from .225% to .75% (.45% at December 27, 1998), based on the Company’s debt to cash flow ratio (leverage ratio), as defined. Under this facility, the Company pays commitment fees (.125% at December 27, 1998) 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 (.45% at December 27, 1998) 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 ($384 million at December 27, 1998), 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 27, 1998, aggregating $907,927,000, are as follows: 1999 — $18,000,000; 2000 — $13,266,000; 2001 — $13,279,000; 2002 — $263,216,000; 2003 — $600,166,000.

At December 27, 1998 and December 28, 1997, the Company had borrowings of $5 million from bank lines and $13 million of senior notes due within one year 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 interest rates on the bank lines were 5.04% and 5.73% at December 27, 1998 and December 28, 1997, respectively.

The Company had interest rate swap agreements totaling $725 million at December 27, 1998, with maturities of approximately one to five 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 27, 1998. The Company enters into interest rate swap agreements, which are not held for trading purposes, to manage interest cost and risk associated with variable interest rates, primarily short-term changes 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.

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued and is effective for fiscal years beginning after June 15, 1999. When adopted, all derivatives will be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending upon the nature of the hedge, a change in its fair value will either be offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. The difference between fair value of the hedge and the item being hedged, known as the ineffective portion, will be immediately recognized in earnings.

The Company’s analysis of the impact of SFAS No. 133 on its results of operations and financial position is ongoing. At a minimum, the Company expects that its interest rate swaps will qualify for hedge accounting under the new standard and will apply SFAS No. 130, Reporting Comprehensive Income, concurrent with the adoption of SFAS No. 133. Initial adoption and subsequent changes in the fair value of the interest rate swaps will give rise to an OCI item, the amount of which will depend on LIBOR rates in effect at those times.

The table below includes information about the carrying values and estimated fair values of the Company’s financial instruments:

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 fair value of the Company’s investment in Hoover’s, Inc., which is not publicly traded, is based on prices recently paid for shares of the Company. 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 has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which was issued by the Financial Accounting Standards Board in June 1997 and became effective for financial statements for periods beginning after December 15, 1997. Disclosures from prior years have been reclassified to conform with the current year’s presentation.

The Company is a diversified communications company, located primarily in the southeastern United States, which has four business segments: Publishing, Broadcast Television, Cable Television and Newsprint. The Publishing Segment, the Company’s largest based on revenue and segment profit, includes 21 daily newspapers and nearly 100 weekly newspapers and other publications, the Company’s 40% interest in DNI, as well as its on-line financial data service. The Broadcast Television Segment consists of 14 network-affiliated broadcast 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. A wholly owned mill, as well as the Company’s 33% interest in Southeast Paper Manufacturing Company (SEPCO), comprises the Newsprint Segment which produces recycled newsprint for sale primarily to publishers.

Management measures segment performance based on operating cash flow (operating income plus depreciation and amortization) as well as profit or loss from operations before interest, income taxes, and acquisition related amortization. Amortization of the excess of cost over fair value of net identifiable assets, as well as FCC licenses and other intangibles, is not allocated to individual segments although the intangible assets themselves are included in identifiable assets for each segment. Investments in DNI and SEPCO are not allocated to segment assets although the equity income is included in the Publishing and Newsprint Segments, respectively. Intercompany sales are accounted for as if the sales were at current market prices and are eliminated in the consolidated financial statements. The Company’s reportable segments, which are managed separately, are strategic business enterprises that provide distinct products and services using diverse technology and production processes.

Information by segment is as follows:

*Intercompany revenues are less than 1% of consolidated revenues and have been eliminated.

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, 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 liabilities 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 27, 1998, and December 28, 1997, 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 1998, 1997 and 1996, the Company paid income taxes of $56.5 million, $29.4 million and $42.9 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 Director additionally may elect to receive the balance of his or her compensation in cash or DSU. Other than dividend credits, deferred stock units do not entitle Directors to any rights due to a holder of common stock. DSU account balances may be settled as of the 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 both 1998 and 1997 under the plan was $550,000.

Stock-based awards are granted to key employees in the form of nonqualified stock options and restricted stock under the 1995 Long-Term Incentive Plan (LTIP). 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 were granted under the terms of the plan, 2,000 shares of which were forfeited by December 27, 1998. 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 27, 1998, 26,425 shares granted in 1995 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 the shares. Unearned compensation, which is shown as a separate component of stockholders’ 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 1998, 1997 and 1996 was $1,050,000, $1,843,000 and $1,198,000, respectively.

In 1996, the Company adopted the disclosure-only provisions of 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 1998, 1997 and 1996 in accordance with the provisions of SFAS No. 123, earnings per share would have declined $0.05 ($0.04 assuming dilution), $0.03 and $0.02 in 1998, 1997 and 1996, and pro forma net income (loss) and earnings (loss) per share would have been $69,730,000, ($11,452,000) and $69,896,000; and $2.62 ($2.59 assuming dilution), ($0.43) and $2.63, respectively (per share amounts assuming dilution are identical unless otherwise indicated). The 1996 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 amounts reflect expense for two years of vesting. 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 1998, 1997 and 1996, respectively: risk-free interest rates of 5.61%, 6.54% and 5.57%; dividend yields of 1.45%, 1.57% and 1.75%; volatility factors of .287, .287 and .282; and an expected life of 8 years.

A summary of the Company’s stock option activity, and related information for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 follows:

The following table summarizes information about stock options outstanding at December 27, 1998:

(*) Exercisable during lifetime of optionee
(**) Exercisable during the continued employment of the optionee and for a three-year period thereafter
(***) Exercisable during the continued employment of the optionee and for a three-year period thereafter with the exception of 122,000 options which were issued on 1/28/98 for $46.38 with a remaining contractual life of nine years

Note 8: Retirement Plans
The Company has adopted SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The Company has non-contributory defined benefit retirement plans which cover substantially all employees, and non-contributory unfunded supplemental executive retirement and ERISA excess plans which supplement the coverage available to certain executives. The Company also provides certain health and life insurance benefits for retired employees. The union employees at the Company’s wholly owned newsprint mill participate in multi-employer defined benefit and defined contribution pension plans. The previously mentioned plans are collectively referred to as the “Plans.”

The assumptions used in the measurement of the Company’s benefit obligation are shown as follows:

For measurement purposes, a 9.25% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually each year to a rate of 4.75% for 2007 and remain at that level thereafter.

With the passage of time, actual experience differs from the assumptions used in determining the Company’s pension and postretirement benefit obligations. These differences, coupled with external economic factors, cause periodic revision of the assumptions. The effects of actual versus assumed experience, as well as changes in assumptions, give rise to actuarial gains and losses in the table that follows. These actuarial gains and losses represent both better than expected return on plan assets and other changes in assumptions and are recognized over the expected service period of active participants.

The following table provides a reconciliation of the changes in the Plans’ benefit obligations and fair value of assets, and a statement of the funded status over the periods ended December 27, 1998, and December 28, 1997:

The following table provides the components of net periodic benefit cost for the Plans for fiscal years 1998, 1997 and 1996:

The Company’s policy is to fund benefits under the supplemental executive retirement, excess, and postretirement benefits plans as claims and premiums are paid. As of December 27, 1998, and December 28, 1997, the benefit obligation related to the supplemental executive retirement and ERISA excess plans included in the above tables was $21.1 million and $18.8 million, respectively.

Assumed health care cost rates have an effect on the amounts reported for the health care plans. A one percent change in assumed health care cost trend rates would have the following effects:

The Company also sponsors a thrift plan covering substantially all employees. Company contributions represent a partial matching of participant contributions up to a maximum of 3.3% of the employee’s salary. Contributions charged to expense under the plan were $5.0 million, $4.5 million and $4.2 million in 1998, 1997 and 1996, respectively.

Note 9: Other

Revenue recognition
Advertising revenue is recognized when advertisements are published or aired, or when related advertising services are rendered. Subscription revenue is recognized on a pro-rata basis over the term of the subscription. Newsprint revenue is recognized upon shipment of newsprint.

Depreciation and amortization
Plant and equipment are depreciated, primarily on a straight-line basis, over their estimated useful lives which are generally 40 years for buildings and range from 3 to 20 years for machinery and equipment. Depreciation deductions are computed by accelerated methods for income tax purposes. Internal use software is amortized on a straight-line basis over its estimated useful life, not to exceed 5 years.

Excess of cost over fair value of net identifiable assets of acquired businesses through 1970 (approximately $32 million) is not amortized unless there is evidence of diminution in value; such excess cost incurred after 1970 is being amortized by the straight-line method over periods not exceeding 40 years. FCC licenses and other intangibles are being amortized by the straight-line method over periods ranging from 3 to 40 years. Amortization of the excess of cost over fair value of net identifiable assets of acquired businesses and FCC licenses and other intangibles was $34.3 million, $31.1 million and $7.9 million in 1998, 1997 and 1996, respectively.

Management periodically evaluates the recoverability of long-lived assets by reviewing current and projected profitability or cash flows of such assets.

Interest
In 1998, 1997 and 1996, the Company’s interest expense was $66 million, $65.4 million and $21.3 million, respectively, which is net of $.2 million, $1.8 million and $.3 million of interest costs capitalized for those years. Interest payments made during 1998, 1997 and 1996, net of amounts capitalized, were $65.3 million, $62.2 million and $23.3 million, respectively.

Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less whose carrying amount approximates fair value.

Inventories
Inventories, principally raw materials, are valued at the lower of cost or market. The cost of raw material used in the production of newsprint is determined on the basis of average cost. The cost of newsprint inventories is determined on the first-in, first-out method.

Other current assets
Other current assets included program rights of $12.6 million and $10.8 million at December 27, 1998, and December 28, 1997, respectively.

Accrued expenses and other liabilities
Accrued expenses and other liabilities consisted of the following:

Lease obligations
The Company rents certain facilities and equipment under operating leases. These leases extend for varying periods of time ranging from one year to more than twenty years and in many cases contain renewal options. Total rental expense amounted to $14.2 million in 1998, $12.3 million in 1997 and $11.8 million in 1996. Minimum rental commitments under operating leases with noncancelable terms in excess of one year are as follows: 1999 — $10.7 million; 2000 — $8.8 million; 2001 — $7.7 million; 2002 — $7.2 million; 2003 — $3.9 million; subsequent years — $6.1 million.

Concentrations of credit risk
Media General is a diversified communications company which sells products and services to a wide variety of customers located principally in the eastern United States. The Company’s trade receivables result primarily from its publishing, broadcast television, cable television and newsprint operations. The Company routinely assesses the financial strength of significant customers, and this assessment, combined with the large number and geographic diversity of its customer base, limits its concentration of risk with respect to trade receivables.

Earnings per share
The following chart is a reconciliation of the numerators and the denominators of the basic and diluted per-share computations for income before extraordinary item, as presented in the Consolidated Statements of Operations.