This discussion addresses the principal factors affecting the Company’s operations during the past three years and should be read in conjunction with the financial statements and the Ten-Year Financial Summary found in this report.

OVERVIEW

The past three years have been marked by transition as the Company advanced its mission of becoming a leading provider of high-quality news, information and entertainment services in the Southeast. This initiative was accomplished in part through strategic acquisitions and dispositions; however, the Company continues to strengthen its regional presence through growth and expansion of its existing businesses in their current markets, as well as by entering into beneficial strategic alliances.

Since 1997, the Company has engaged in a series of acquisitions, exchanges, investments and dispositions which have significantly increased its penetration of southeastern households through the Company’s chosen media of newspapers, broadcast television and, more recently, the Internet. The growth of the Company’s southeastern presence was punctuated with the following events:

• January 1997, purchase of Park Communications, Inc. (Park), which was followed by the subsequent sale of several non-southeastern Park properties acquired in the transaction.
• February 1997, purchase of the Potomac News (Woodbridge, VA).
• April 1997, purchase of The Reidsville Review (Reidsville, NC) and The Messenger (Madison, NC).
• August 1997, exchange of WTVR-TV (Richmond, VA), due to a Federal Communications Commission regulation, for WSAV-TV (Savannah, GA), WJTV-TV (Jackson, MS) and WHLT-TV (Hattiesburg, MS).
• September 1997, initial investment in Hoover’s, Inc., a leading provider of online financial information.
• January 1998, purchase of the Bristol Herald Courier (Bristol, VA).
• June 1998, sale of the Company’s Kentucky newspaper properties.
• July 1998, purchase of the Hickory Daily Record (Hickory, NC).
• March 1999, additional investment in Hoover’s, Inc.
• May 1999, sale of WHOA-TV (Montgomery, AL).
• June 1999, sale of 20% of the common stock of Denver Newspapers, Inc. (Denver), resulting in a $19 million after-tax gain.
• August 1999, initial investment in AdOne, L.L.P., the leading online database of classified advertising.
• October 1999, investment in ReacTV, an online service which features daily postings of television newscasts linked to additional related news content.
• October 1999, disposition of the Cable Segment, resulting in a $799 million after-tax gain.
• December 1999, announced a program to repurchase up to $250 million of the Company’s Class A common stock.
• December 1999, announced agreement to acquire Spartan Communications, Inc. (Spartan) which is expected to close early in the second quarter of 2000.

The aforementioned transactions culminated in the Company’s ownership of 21 daily newspapers and nearly 100 weeklies and other periodicals, as well as, upon the completion of the Spartan acquisition, ultimate ownership or operation of 26 (21 southeastern) television stations.

The Company’s decision to sell its Cable Segment was influenced by the rapidly moving trend toward consolidation within this specialized industry. The sale of the Cable Segment, for approximately $1.4 billion in cash, resulted in a gain of $799 million (net of income taxes of $510) which is subject to resolution with the buyer of certain post-closing adjustments relating to working capital and income tax matters. It is expected these post-closing items will be resolved during the second quarter and could result in a small additional gain for the Company.

The Cable sale allows the Company to focus its resources specifically on those media segments, namely newspapers and broadcast television, where the Company has achieved critical mass in the Southeast, as well as on the Internet, where geographical distinctions are not as critical. The purchase of Spartan, with its concentration of stations in the Southeast, will be the first step. While the non-cash amortization associated with the acquisition will initially lower net income, all of Spartan’s television stations are ranked either number one or two in their markets and because of their rankings, reputations and strong management, should immediately produce strong cash flow for the Company. Additionally, the Company believes its stock is trading at a discount to its true value and has initiated a program to repurchase up to $250 million of the Company’s Class A common stock. This program will result in several million shares being repurchased and will temper the effect of acquisitions on earnings per share. The Company continues to evaluate opportunities to further its southeastern strategy.

RESULTS OF OPERATIONS

1999’s results were heavily impacted by the one-time $799 million after-tax gain resulting from the sale of the Company’s Cable Segment, as well as the $19 million after-tax gain generated from the sale of 20% of the common stock of Denver. Additionally, the Company incurred a $1.3 million after-tax extraordinary charge representing costs associated with the early redemption of debt. Inclusive of these unique and nonrecurring items, net income for 1999 was $881.3 ($33.25 per share, or $32.78 per share — assuming dilution). For the year, income from continuing operations was $69.9 million ($2.64 per share, or $2.60 per share — assuming dilution) compared with $53.4 million ($2.01 per share, or $1.98 per share — assuming dilution) in 1998. This 31% increase was fully attributable to the Denver gain. Absent this gain, a profit reversal (from a profit of $26 million to a loss of $6 million) in the Newsprint Segment and, to a much lesser degree, an 11% decrease in Broadcast Segment profits were only partially offset by the combination of a solid year-over-year performance within the Publishing Segment (up 11%), a 26% decline in interest expense due to decreased debt, and $9.4 million of interest income attributable to the investment of proceeds from the Cable Segment sale.

Excluding an extraordinary item in 1997, net income increased from $52.5 million ($1.99 per share, or $1.97 per share — assuming dilution) in 1997 to $70.9 million ($2.67 per share, or $2.63 per share — assuming dilution) in 1998. The $63 million extraordinary charge, net of an income tax benefit of $38.6 million, related to the redemption of Park’s high coupon debt. The $18.4 million (35%) increase in net income was primarily due to robust Newsprint Segment profits which rose to more than four times their 1997 level, combined with solid contributions from the Publishing Segment which posted an 11% year-over-year profit improvement. Partially offsetting the segment operating income growth was a moderate increase in intangible amortization expense, a result of the Bristol and Hickory acquisitions mentioned in the foregoing list, and in Corporate expense, due to personnel and other costs related to the implementation of new company-wide financial, benefit plan and human resource information systems. The significant growth of the Company over the past several years and the need for better information has occasioned these infrastructure investments.

Publishing

Excluding investment income from unconsolidated affiliates, operating income for the Publishing Segment increased $18.5 million (14%) in 1999 over the comparable 1998 amount; $3.5 million of this increase was directly attributable to acquisitions and dispositions occurring in those years. Excluding acquisitions and dispositions, this robust performance was driven by an $11.8 million increase in revenues combined with a $3.2 million decrease in operating expenses. The following three-year chart illustrates a strong increase in general advertising and classified advertising revenues (both led by the automotive category), which more than offset lackluster retail advertising revenues (down in the grocery and department store categories in 1999).

PUBLISHING SEGMENT Advertising Revenues by Categories

Newsprint expense decreased 14% in 1999 from the prior year as a result of lower cost per ton, but was partially offset by a 2% increase in employee compensation and benefits expense due to enhanced employee benefit offerings.

In June 1999, the Company completed the sale of 20% of the outstanding common stock of Denver Newspapers, Inc.; the Company retained a 20% ownership in the common stock of Denver. Investment income earned from that affiliate decreased $3.6 million (from income of $3.2 million in 1998 to a loss of $.4 million in 1999). These comparisons reflect the Company’s 40% ownership in 1998, versus its 20% ownership beginning June 30, 1999. The reduced income was primarily attributable to increased circulation, production and newsprint expense, which were only partially mitigated by a rise in both circulation and advertising revenues, all the result of circulation gains in the intensely competitive Colorado market.

Excluding investment income from unconsolidated affiliates, operating income for the Publishing Segment increased $16.6 million (14%) in 1998 over the comparable 1997 amount; $4.6 million of this increase was directly attributable to acquisitions and dispositions occurring in those years. Excluding acquisitions and dispositions, this good performance increase resulted from a $22 million rise in revenues, partially offset by a $10 million increase in operating expenses. This year-over-year revenue gain was the result of a strong performance in classified advertising (led by the employment category) and retail advertising (driven by preprints), as illustrated in the preceding chart. Approximately half of the higher expense level was attributable to a 6.2% rise in newsprint expense due to higher newsprint prices; other contributing factors included a rise in marketing and promotion cost, an increase in facilities expense, and increased cost associated with new niche products.

Income earned from Denver decreased $3.5 million in 1998 from 1997. This reduced income was primarily attributable to increased newsprint costs, principally due to higher prices. Additionally, increased advertising and circulation revenues only partially offset the associated rise in promotion and circulation expense in the extremely competitive Colorado market.

Broadcast Television

Broadcast operating income decreased $4.7 million in 1999, down 11% from 1998. This decline was driven by a $1.9 million drop in revenues combined with a $2.8 million increase in operating expenses. Throughout the industry, advertising spending was severely hindered in 1999 by the lack of political activity and the absence of advertising associated with an Olympic year. The Company’s largest station, WFLA in Tampa, bore the brunt of the impact from this lack of political spending, while simultaneously suffering from a generally weak national advertising market. WFLA’s 23% decline in operating profits in 1999 more than accounted for the entire Segment’s shortfall from the prior year’s level. An overall increase in operating expense at the Company’s remaining stations was more than offset by a corresponding rise in revenues produced by these stations. Higher 1999 expense levels ensued as a result of improved programming and higher employee compensation and benefits expense, as the Company continued to invest in its smaller stations in an effort to improve their audience shares. The Segment has begun to reap the benefits of its endeavors as average annual demographic ratings reflected increased audience share at seven of those stations. Excluding WFLA, the Company’s remaining stations posted a combined 1% increase in operating profits despite the challenges posed by the combination of 1999 being an off-election and non-Olympic year.

The following chart illustrates the revenues related to advertising time sales at the Company’s only large-market station, WFLA in Tampa, and the smaller stations over the past three years. Local advertising steadily produced higher year-over-year revenues at all stations, as did national advertising at the smaller stations; however, WFLA continued to experience a depressed national market. Additionally, political advertising revenues clearly suffered in off-election years.

BROADCAST SEGMENT Advertising Time Sales by Categories

Broadcast operating income rose $2 million in 1998, up 5% from 1997. This improved performance resulted from a $14.5 million revenue increase, partially offset by a $12.5 million increase in operating expenses. This year-over-year revenue gain was due to strong political advertising (resulting from election primaries and 1998 general elections, combined with local and national issue-oriented advertising), as well as to solid local advertising revenues (led by the automotive and fast food categories). These strong results more than offset weak national advertising revenues at WFLA in Tampa. The higher 1998 expense levels were anticipated as the Company initiated steps in 1997 to invigorate the performance of the stations acquired in that year. These steps included upgrading programming and equipment, increasing staff levels and competitively compensating personnel in conjunction with the repositioning and relaunching of all of these stations. As a result of these initiatives, programming costs increased 24%, reflecting higher costs of existing programming and purchases of additional syndicated programming, and employee compensation and benefits expense rose 9%.

Newsprint

Excluding investment income from its unconsolidated affiliate, the Newsprint Segment produced an operating loss of $13.3 million in 1999, a sharp contrast to the $12.1 million operating profit posted in 1998. Virtually all of this negative profit swing was attributable to weak newsprint selling price which plagued the entire newsprint industry throughout 1999. Although the average realized selling price began to gradually rise in the second half of the current year, it still remained well below the 1998 level, as the following chart illustrates:

GARDEN STATE PAPER COMPANY Average Newsprint Selling Price

Depressed newsprint revenues in 1999 resulted from a 15% drop in the average realized selling price per ton, combined with a 5% decrease in tons sold. Early year production difficulties at the Company’s Garden State mill exacerbated the effect of weak selling prices. As newsprint has become more of a global commodity, the delicate balance between supply and demand is constantly challenged. Prior-year newsprint strikes in Canada, the financial crisis in Asia and increased production capacity in foreign countries all contributed to an excess supply of newsprint in 1999.

The Company’s income from its share of SP Newsprint Company (SPNC), formerly Southeast Paper Manufacturing Company, decreased $6.2 million in 1999 from $12.8 million to $6.6 million in the current year. Despite a 7% increase in tons sold, revenues declined 7% as a result of a $71 per ton decrease in SPNC’s average realized selling price. In November 1999, SPNC acquired Smurfit Newsprint Corporation’s Newberg, Oregon mill, which posted a $3.4 million loss in that portion of 1999 during which it was owned by SPNC. Despite reduced revenues at SPNC’s Dublin mill and the loss incurred at the newly acquired Newberg mill, SP Newsprint remained profitable in 1999 as a result of increased production and sales volume together with an overall efficient production performance.

Excluding investment income from its unconsolidated affiliate, Newsprint operating income rose $15.6 million in 1998, rebounding from a loss of $3.5 million in 1997 to income of $12.1 million in 1998. This profit turnaround was driven by a $13.5 million increase in revenues, coupled with a $2.1 million reduction in operating expenses. Improved revenues resulted from a 7% rise in the average realized selling price per ton, combined with a 4% increase in tons sold. While newsprint selling prices gradually rose over the course of 1997, they maintained a higher level throughout 1998 as depicted on the preceding graph. Production efficiencies facilitated reduced expense levels in 1998, including a 13% decline in energy expense (due to both a shift to purchasing natural gas in the competitively-priced open market as well as to a mild 1998 winter) and an 18% decrease in chemical expense.

The Company’s share of the operating results of SP Newsprint increased $4.5 million (54%) in 1998 from the comparable 1997 amount. SPNC’s revenues rose 4.3% as a result of a 6.4% rise in the average realized selling price, which more than offset the effect of a 2.3% decrease in tons sold.

Interest Income and Expense

Interest expense in 1999 decreased $16 million from 1998 due to a $230 million reduction in average debt outstanding. Immediately following the sale of the Cable Segment in October 1999, a portion of the proceeds was used to repay all amounts then outstanding under the Company’s revolving credit agreements and to terminate the associated interest rate swaps. As has been the case in the past, from time to time the Company may employ such swaps and other derivative financial instruments as part of an overall risk management strategy. If used, the objective would be to manage specific risks and exposures, not to trade such instruments for profit or loss. Interest expense increased 3% in 1998 over 1997. The effective interest rate during each year was approximately 7%.

In October 1999, the Company invested the remaining proceeds from the Cable sale of approximately $665 million in prime-rated commercial paper and earned interest income of $9.4 million on these investments.

Income Taxes

The Company’s effective tax rate on income from continuing operations was approximately 39%, 36%, and 40% in 1999, 1998, and 1997. The lower 1998 effective tax rate was principally due to a favorable settlement of a state tax examination.

LIQUIDITY

Several unique and non-recurring events transpired during 1999 which afforded the Company unprecedented financial flexibility. Proceeds from the Cable Segment sale, the Denver common stock sale and the Denver preferred stock redemption, provided $1.5 billion in funds in 1999. In addition, operating activities generated $124.2 million. These combined cash inflows supplied the funds to repay all outstanding bank debt and terminate the associated interest rate swaps, and to fund $60.8 million of capital expenditures, $22.7 million of stock repurchases, and $16 million of dividends. The remaining funds were more than adequate for the cash needs of the Company in 1999, resulting in cash equivalents and short-term investments of approximately $640 million at year end.

The Company anticipates several significant cash outflows in 2000. Tax payments related to the Cable Segment sale of approximately $510 million will be made in March and April. Additionally, the pending acquisition of Spartan Communications for approximately $605 million is expected to close early in the second quarter. Finally, the stock repurchase program initiated in December will continue in 2000. At December 26, 1999, the Company had available $1.2 billion from its committed revolving credit facility which has commitment reductions totaling 25% by the end of 2001 and 2002, and expires in 2003. The Company anticipates that current investments, together with internally generated funds provided by operations and existing credit facilities, will be more than adequate to finance the aforementioned transactions, projected capital expenditures, dividends to stockholders, and working capital needs in 2000.

YEAR 2000

The Company successfully prepared for the transition to the year 2000; no significant problems were encountered and total Year 2000 costs were not material.

OUTLOOK FOR 2000

The new millennium is ripe with possibilities for the Company to intensify its southeastern focus as well as expand and grow its existing properties. The completion of the pending Spartan acquisition early in the second quarter of 2000 will add 13 television stations to the Broadcast Segment and significantly increase the Company’s presence in southeastern households. The Broadcast Segment is positioned for a strong year; the hotly contested political races and upcoming Olympics should bolster WFLA’s results and enhance the improved performance at the smaller stations. The Publishing Segment should experience continued growth despite slightly higher newsprint prices. Although the Newsprint Segment is not expected to achieve the performance level of 1998, the combination of production efficiencies and the announcement of modest price increases should produce moderate improvement over 1999. To some degree, all of the Company’s Segments either have been, or will be, affected by the Internet. While it is not yet clear exactly how e-commerce will ultimately shape our business, the Company continues to position itself to participate in this rapidly expanding online world.

Certain statements in this annual report that are not historical facts are “forward-looking” statements, as that term is defined by the federal securities laws. Forward-looking statements include statements related to pending transactions, the Company’s share repurchase program, the impact of the Internet and expectations regarding newsprint prices, advertising levels and broadcast ratings. Forward-looking statements, including those which use words such as the Company “believes,” “anticipates,” “expects,” “estimates” and similar statements, are made as of the date of this report and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements.

Some significant factors that could affect actual results include: changes in advertising demand, the availability and pricing of newsprint, changes in interest rates, regulatory rulings and the effects of acquisitions, investments and dispositions on the Company’s results of operations and its financial condition.

Return to Financials Index