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: