FINANCIALS MEDIA GENERAL, INC., FINANCIAL REVIEW AND MANAGEMENT ANALYSIS

Annual Report Index

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.

ACQUISITIONS AND DISPOSITIONS

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. In June of the same year, the Company completed the sale of its Kentucky newspaper properties for approximately $24 million. Additionally, the Company sold certain commercial printing assets in October 1998.

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. 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. Additionally, 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 a small provider of broadcast equipment and studio design services for television stations.

The aforementioned acquisitions 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 respective dates of purchase. See Note 2 to the accompanying consolidated financial statements for additional information regarding these acquisitions.

Subsequent to the end of the fiscal year, the Company announced the sale of its Montgomery, Alabama, television station. That transaction is expected to close later in 1999.

SEGMENT OPERATING RESULTS

Each segment’s operating results include segment operating cash flow information in addition to revenues, operating expense and operating income. The segment operating cash flow amounts presented represent operating income plus depreciation and amortization. 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 presents 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 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, dispositions, and exchanges during the periods. For example, results from the former Park properties are included in the discussion below when comparing 1998 to the prior year, due to the January 1997 acquisition date which allows for meaningful comparative information between the years; however, Park results have been excluded for purposes of comparing 1997 to 1996. Other acquisitions and dispositions have been treated similarly. Additionally, operating income amounts vary from segment profit, as presented in Note 5 to the accompanying consolidated financial statements, because investment income from unconsolidated affiliates is not reflected within operating income as presented below. Instead, income from such affiliates is addressed on a separate basis within both the Publishing and Newsprint discussion.

The preceding chart contains the operating results of the Publishing Segment, including recent acquisitions and dispositions. In 1998, Publishing Segment revenues and operating income increased $10.3 million and $4.6 million, respectively, over the prior year due to acquisitions (offset partially by dispositions). In 1997, Publishing Segment revenues increased $53.1 million, and operating income rose $14.3 million over 1996 as a direct result of acquisitions.

1998 Compared to 1997

Excluding acquisitions and dispositions, Publishing Segment revenues improved $22 million (5%) in 1998 over 1997. At the Company’s three largest daily metropolitan newspapers, revenues rose $14.4 million as a result of expanded linage (up 2.4%) and higher advertising rates (up 2.9%). This increase was principally the result of strong performances in classified advertising (led by the employment category) and retail advertising (driven by preprints). Additionally, the Company’s Virginia and North Carolina community newspapers produced a revenue increase of $5 million over the prior year, primarily due to solid classified advertising.

Publishing Segment operating expense, excluding acquisitions and dispositions, increased $10 million in 1998. Approximately half of this increase was attributable to a 6.2% rise in newsprint expense due to higher newsprint prices. Other contributing factors included a $1.3 million rise in marketing and promotion cost, a $1.7 million increase in facilities expense, and increased cost associated with new niche products.

Excluding acquisitions and dispositions, operating income for the Publishing Segment increased $12 million (11%) in 1998 over the comparable 1997 amount. The improved operating results were principally due to robust advertising revenues, partially offset by increased newsprint expense.

Investment income earned from the Company’s Denver Newspapers, Inc. (DNI), affiliate decreased $3.3 million in 1998 from the previous year. 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 advertising and circulation expense in the intensely competitive Colorado market.

1997 Compared to 1996

Excluding acquisitions, Publishing Segment revenues rose $24.7 million (6%) in 1997. At the Company’s metropolitan 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 expense, excluding acquisitions, decreased $2.9 million in 1997 compared to 1996. 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 modest 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.

Operating income for the Publishing Segment, excluding acquisitions, rose $27.6 million 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.

Income earned from DNI 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.

The preceding chart presents the operating results of the Broadcast Television Segment, including 1997 and 1996 acquisitions. As a direct result of those acquisitions, 1997 revenues and operating income increased $77.3 million and $15 million, respectively, over 1996.

1998 Compared to 1997

Broadcast Television Segment revenues increased $14.5 million in 1998, up 9% from 1997. This increase was due to strong political advertising revenues resulting from election primaries and the 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). Together, these strong results more than offset weak national advertising revenues at the Company’s largest station, WFLA-TV in Tampa. In addition, PCS, the Company’s provider of equipment and studio design services, generated particularly strong revenues, up $6.9 million, reflecting expanded broadcast equipment sales and increased studio design and sport facility projects.

Operating expense in the Broadcast Segment rose $12.5 million in 1998. Approximately half of this rise was attributable to the increased cost of goods sold related to higher revenues produced by PCS during the current year. The remainder resulted from a 24% increase in programming costs, reflecting higher costs of existing programming and purchases of additional syndicated programming, and a 9% rise in overall employee compensation and benefits expense. The higher 1998 expense levels were anticipated as steps were initiated 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 virtually all of these stations. November rating books indicated increased audience share at seven of the nine relaunched stations, reflecting the positive results achieved from these efforts.

Broadcast operating income increased $2 million in 1998. The improvement was attributable to strong political and local advertising revenues, which more than offset increased programming, employee compensation and benefits expense.

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 expense, excluding acquisitions, remained essentially flat in 1997. A modest increase in programming cost was partially offset by a small decrease in employee compensation and benefit expense.

Excluding acquisitions, Broadcast Television Segment operating income declined $3.6 million in 1997. The drop was primarily attributable to reduced national and political advertising revenues, especially at the Company’s Tampa station, WFLA-TV. 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.

1998 Compared to 1997

During 1998, the Company renewed the majority of its cable franchise agreements with several municipalities in northern Virginia for 15-year terms. As part of the June agreement with Fairfax County, the Company agreed not to raise subscriber rates for a period of one year. Although this rate increase moratorium affected the 1998 results of the Cable Television Segment, the long-term benefits of the agreement will override the short-term negative impact on the Company.

Despite the moratorium, revenues in the Company’s Cable Television Segment rose $3.7 million in 1998. The increase was attributable to the Company’s Fairfax County, Virginia, cable system (Fairfax Cable), as a result of a 2.6% increase in the number of subscribers (to 241,600 at December 27, 1998), together with a combined average increase of 1.4% in basic and expanded subscriber rates over the prior year.

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 restrictions 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 have begun to increase competition in the areas served by the Company’s cable systems. Among the strategic initiatives the Company is developing for its Fairfax Cable system is high speed data services (HSDS). The Company incurred modest expense during 1998 related to the initiation of HSDS, which was launched in the first quarter of 1999. The Company expects to incur operating losses related to this new business during the initial years of rollout, but believes the long-term revenue and profit streams will provide an excellent return on its investment. Additionally, the Company continues to explore possibilities in the commercial and residential telephone markets. The Company estimates that the capital investment required for it to compete effectively in HSDS and telephony could exceed $200 million over a ten-year period.

Cable Television Segment operating expense increased $5 million in 1998. This increase was primarily attributable to a $4.9 million rise in programming costs, due to higher contractual rates paid to program providers combined with the increased costs associated with the expansion of the subscriber base at Fairfax Cable.

Cable operating income declined $1.3 million in 1998 from the earlier-year period. While Fairfax’s growing subscriber base produced higher revenues, it also contributed to a rise in programming costs which the Segment could not fully absorb due to the rate increase moratorium. Subscriber rate increases are planned during the second half of 1999.

1997 Compared to 1996

Revenues at the Company’s Cable Television Segment rose $7.1 million in 1997, up 5% from 1996. The increase was the result of a 3.4% rise in the number of subscribers (to 235,500 at December 28, 1997) at Fairfax Cable, together with a combined average increase of 5.4% in basic and expanded subscriber rates. These rate increases along with subscriber growth produced a 2.6% improvement in average revenue per subscriber (excluding pay-per-view).

Cable Television Segment operating expense remained essentially flat in 1997. An increase in programming costs more than offset reductions in compensation and employee benefit costs.

Cable Television Segment operating income improved $6 million (20%) in 1997 from 1996. The increase was due principally to revenue growth at Fairfax Cable of $7.1 million, up 5% in 1997 as a result of both rate and subscriber count increases. These subscriber count increases prompted a commensurate rise in programming costs, which was essentially offset by reduced compensation and employee benefits costs; this reduction reflected the benefit of the restructuring process implemented in 1996 at Fairfax Cable.

1998 Compared to 1997

Newsprint Segment revenues increased $13.5 million (12%) in 1998, reflecting the improved results of the Company’s Garden State Paper (Garden State) newsprint mill, located in Garfield, New Jersey. This increase resulted from a 6.8% rise in the average realized selling price per ton, combined with a 4% increase in tons sold. Newsprint selling prices gradually rose throughout 1997 and continued to show modest increases during 1998, such that the average realized price rose from $488 per ton in 1997 to $522 per ton in the current year.

Newsprint Segment operating expense dropped $2.1 million in 1998. This favorable decrease was the result of production efficiencies. The most significant of these was a 13% decline in energy expense, due to both a shift to purchasing natural gas in the competitively-priced open market as well as a mild 1998 winter, and an 18% decrease in chemical expense. These cost reductions were only partially offset by a 10% rise in the cost of Garden State’s principal raw material, recovered newspapers (ONP), which was due to both increased consumption and demand-driven price increases.

Newsprint operating income rose $15.6 million, rebounding from a loss of $3.5 million in 1997 to income of $12.1 million in 1998. The significant increase resulted from a $34 increase in average realized selling price per ton in the current year over the comparable prior-year period, coupled with reduced chemical and energy costs.

The Company’s investment income from its Southeast Paper Manufacturing Company (SEPCO) newsprint affiliate increased $4.5 million (54%) in 1998 from the comparable 1997 amount. SEPCO’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.

1997 Compared to 1996

Newsprint Segment revenues declined $12.9 million (10%) in 1997, reflecting the results of the Company’s Garden State Paper newsprint mill. The decline was attributable to 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 price fell from $572 per ton in 1996 to $488 per ton in 1997. However, the market showed continued improvement throughout 1997, 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 expense decreased $3.3 million in 1997 from the comparable 1996 amount due primarily to a $3.7 million (15%) drop in ONP cost. The average cost of ONP in 1997 was $73 per ton, down 16% from 1996’s $87 per ton due to lower market demand for ONP during 1997. 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 $3.5 million in 1997, a sharp contrast to the $6.1 million income posted in 1996. The decline resulted from an $84 decrease in average realized selling price per ton as compared to the preceding year, 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.

The Company’s share of the operating results of SEPCO decreased $11.2 million in 1997 from 1996. 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.

INTEREST EXPENSE

Interest expense of $66 million in 1998 was essentially even with 1997. Interest expense in 1997 increased $44.2 million over 1996 primarily due to a $654 million rise in average debt outstanding during 1997 as a result of acquisitions made in that year. The effective interest rate during each year was just under 7%.

The Company’s interest expense is affected by changes in short-term interest rates, primarily changes in LIBOR on the debt outstanding under its revolving credit facility. However, the Company limits the effects of interest rate changes through the use of interest rate swap agreements (see Note 4 to the accompanying consolidated financial statements). If short-term interest rates were to be either higher or lower by one percentage point throughout 1999 and the Company’s interest rate swap agreements and long-term debt levels were consistent with 1998, the Company’s interest expense and income before taxes would change by less than $900,000. This amount is determined by considering the impact of the hypothetical interest rates on the Company’s borrowing cost, short-term investment balances, and interest rate swap agreements.

PROVISION FOR INCOME TAXES

The Company’s effective tax rate was 36.25% in 1998, down from 39.2% (excluding the extraordinary item) in 1997, but up slightly compared to 35.8% in 1996. The decline in effective tax rate in the current year from the prior year was principally the result of a favorable settlement of a state tax examination, while the rise in 1997 was due to a higher proportion of nondeductible intangible asset amortization related to 1997 acquisitions. 1998 income tax expense rose $6.5 million (19%) over the prior year on a pretax earnings increase of $24.9 million (29%). Conversely, income tax expense declined $5.4 million (14%) in 1997 from 1996 on a pretax earnings decrease of $23.4 million (21%). See Note 6 to the accompanying consolidated financial statements for additional information regarding income taxes.

NET INCOME

Net income for 1998 was $70.9 million ($2.67 per share, or $2.63 per share — assuming dilution) compared to $52.5 million ($1.99 per share, or $1.97 per share — assuming dilution) in 1997, excluding that year’s extraordinary item. This $18.4 million (35%) increase in net income was primarily due to robust Newsprint Segment profits which rose to more than four times their prior-year 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, and in Corporate expense, due to personnel and other costs related to the implementation of new company-wide financial, benefit plan and human resource systems. The significant growth of the Company over the past few years and the need for better information has occasioned these infrastructure investments, as well as the addition of resources necessary to support them.

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 an income 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 1997. Net income fell $18 million ($23 million pretax) in 1997 due primarily to declining Newsprint Segment results which were down $21.5 million. Increases in interest expense ($44.2 million) and amortization expense ($23.2 million) related to acquisitions slightly more than offset segment operating profit increases in other business segments. The Publishing and Cable Segments had particularly strong performances, posting year-over-year segment profit increases of 60% and 20%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Funds generated by operating activities during 1998 totaled $140.3 million, up $20.9 million from 1997. The increase was due to a rise in net income (adjusted for the extraordinary item) combined with a $5 million distribution from SEPCO, partially offset by an increase in funds used for working capital. Funds generated from operating and financing activities, coupled with proceeds from the sale of the Kentucky properties, supplied the $133 million used for the acquisition of Bristol and Hickory, the $49 million for capital expenditures and the $15 million for the payment of dividends to stockholders.

Total debt outstanding at December 27, 1998, was $928.1 million, up $28 million from the year-ago level of $900.1 million. This increase was attributable to $133 million in borrowings related to the 1998 acquisitions of Bristol and Hickory, coupled with increased income tax payments. A substantial portion of the 1998 borrowings were repaid by the end of 1998 with funds generated from operations along with proceeds from the sale of the Company’s Kentucky newspapers. At December 27, 1998, the Company had $350 million in unused credit lines available from its committed $1.2 billion revolving credit facility which has commitment reductions of 25% at the end of both 2001 and 2002, and expires in 2003.

The Company anticipates that internally generated funds provided by operations, 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 1999. Additionally, the Company anticipates receiving a $53.2 million principal and dividend payment on its preferred stock investment in Denver Newspapers, Inc., by June 30, 1999, that security’s mandatory redemption date.

YEAR 2000

The Company continues to address issues regarding the transition to the Year 2000 through a specially created task force comprised of corporate, divisional and operating unit personnel. The project has been divided into five phases: 1) identification/analysis, 2) plan development/scheduling, 3) remediation, 4) testing/integration, and 5) monitoring/continuous improvement. The Company made significant strides in all phases during 1998 and has substantially completed the first two phases for both information systems and operating systems with embedded technology. All phases are expected to be completed by the third quarter of 1999.

Inherent in all phases is assessing the Year 2000 compliance of key suppliers and customers. The Company has initiated formal communications with these parties and most have indicated that there should be no disruption in their relationships with us. However, the Company cannot assure timely compliance of third parties and therefore could be adversely affected by failure of a significant third party to become Year 2000 compliant.

Amounts expended exclusively to ensure Year 2000 compliance continue to be funded by cash flow from operations and have not had, nor are they expected to have, a material impact on the Company’s financial position, results of operations or cash flows. If the Company does not successfully complete significant portions of its Year 2000 project, its financial condition could be adversely impacted; the Company does not consider the possibility of such an occurrence to be reasonably likely. While the Company believes its existing business recovery plans are adequate to address reasonably likely Year 2000 issues, the Company has a separate initiative underway to revise its business recovery plans. This initiative is much broader than the Year 2000 project but will certainly consider Year 2000 issues.

OUTLOOK FOR 1999

With the integration of its two recently acquired newspapers, the relaunching of nine of its broadcast stations, and the renewal of its cable franchises, the Company laid the groundwork in 1998 for its continued success. Although there has been recent softness in some categories of newspaper advertising and continued weakness in national television advertising revenues, most major economic trends remain favorable. The mid- 1999 lapse of the rate increase moratorium will enable the Cable Segment to resume more traditional rates of growth, and the rollout of HSDS should offer increased revenue opportunities. Despite the newsprint market’s supply and demand factors, which may not facilitate favorable pricing levels in the near term, the Company expects 1999 to be a good year.

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