UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x
              QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
quarterly period ended March 31, 2008
 
 or
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from
to
 
 Commission
File Number: 333-112246
 Morris Publishing Group,
LLC
 Morris
Publishing Finance Co.*
 (Exact
name of Registrants as specified in their charters)
 
 Georgia
              
              26-2569462Georgia
              
              20-0183044(State
      of organization)
              
              (I.R.S.
      Employer Identification Numbers)
 
 725 Broad Street
              
              30901Augusta,
      Georgia
              
              (Zip
      Code)(Address
      of principal executive offices)
 
 (706)
724-0851
 (Registrants’
Telephone Number)
 
 Indicate
by check mark whether the Registrants (1) have filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
 
 Yes   ̈                                     No  x
 
 Indicate
by check mark whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See the
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Check one:
 
 Large Accelerated
      Filer  
              
              Accelerated
      Filer  Non-Accelerated
      Filer  x
              
              Smaller Reporting Company
 
 Indicate
by check mark whether the Registrant Morris Publishing Group, LLC is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes   ̈                                    No  x
 
 Indicate
by check mark whether the Registrant Morris Publishing Finance Co. is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes  x                                    No   ̈
 
 *
              Morris
      Publishing Finance Co. meets the conditions set forth in General
      Instruction H (1) (a) and (b) of Form 10-Q and is therefore
      filing this form with the reduced disclosure
  format.


Table of Contents




MORRIS
PUBLISHING GROUP, LLC


MORRIS
PUBLISHING FINANCE CO.


QUARTERLY
REPORT


FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2008





TABLE
OF CONTENTS





PageiFORWARD LOOKING STATEMENTSPART
      I.Item
      1. Financial Statements:Unaudited  condensed consolidated balance sheets as of
      March 31, 2008 and December 31, 2007
            
            1Unaudited
      condensed consolidated statements of income for the three month periods
      ended March 31, 2008and
      2007
            
            2Unaudited
      condensed consolidated statements of cash flows for the three month
      periods ended March 31,2008 and 2007
            
            3Notes to condensed consolidated financial
      statements
            
            4Item
      2.Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            
            9Item
      3.Quantitative and
      Qualitative Disclosures about Market
Risk
            
            16Item
      4.Controls and
      Procedures
            
            16PART
      II.Item 1.Legal
      Proceedings.
            
            17Item 1A.Risk
      Factors
            
            17Item 2.Unregistered
      Sales of Equity Securities and Use of
      Proceeds.
            
            17Item 3.Defaults Upon
      Senior Securities.
            
            17Item 4.Submission of
      Matters to a Vote of Security
      Holders.
            
            17Item 5.Other
      Information
            
            17Item 6.Exhibits
            
            17





Morris
Publishing Group, LLC is a wholly owned subsidiary of Morris Communications
Company, LLC, a privately held media company. Morris Publishing Finance Co., a
wholly owned subsidiary of Morris Publishing Group, LLC, was incorporated in
2003 for the sole purpose of serving as a co-issuer of our senior subordinated
notes in order to facilitate the offering. Morris Publishing Finance Co. does
not have any operations or assets of any kind and will not have any revenues. In
this report, “Morris Publishing,” “we,” “us” and “our” refer to Morris
Publishing Group, LLC and its subsidiaries. “Morris Communications” refers to
Morris Communications Company, LLC.




Table of Contents




FORWARD LOOKING
STATEMENTS





This
report contains forward-looking statements. These statements relate to future
periods and include statements regarding our anticipated performance. You may
find discussions containing such forward-looking statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 2 of this report.
 
 Generally,
the words “anticipates,” “believes,” “expects,” “intends,” “estimates,”
“projects,” “plans” and similar expressions identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements or industry results, to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements.
 
 Although
we believe that these statements are based upon reasonable assumptions, we can
give no assurance that these statements will be realized. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on these forward-looking statements. These forward-looking statements are made
as of the date of this report. We assume no obligation to update or revise them
or provide reasons why actual results may differ. Important factors that could
cause our actual results to differ materially from our expectations include,
without limitation:
 
 §
              increases
      in financing, labor, health care and/or other costs, including costs of
      raw materials, such as newsprint;
  §
              continued
      decreases in advertising
revenues;
  §
              general
      economic or business conditions, either nationally, regionally or in the
      individual markets in which we conduct business (and, in particular, the
      Jacksonville, Florida market), may deteriorate and have an adverse impact
      on our advertising or circulation revenues or on our business
      strategy;
  §
                other
      risks and uncertainties.


-i-
 Table of Contents




Part
I





Morris
      Publishing Group, LLCUnaudited condensed consolidated balance
sheetsMarch 31,
            
            
            December 31,(Dollars in
      thousands)
            
            2008
            
            
            2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            4,045
            
            
            $
            4,135Accounts
      receivable, net of allowance for doubtful accounts accounts
      of  $2,728 and $2,695 at March 31, 2008 and December 31, 2007,
      respectively
            
            
            42,714
            
            
            
            50,227Note
      receivable
            
            
            10,000
            
            
            
            10,067Inventories
            
            
            3,144
            
            
            
            3,092Due
      from Morris Communications
            
            
            -
            
            
            
            4,384Prepaid
      and other current assets
            
            
            982
            
            
            
            934Total
      current assets
            
            
            60,885
            
            
            
            72,839NET
      PROPERTY AND EQUIPMENT
            
            
            121,068
            
            
            
            123,809OTHER
      ASSETS:Restricted
      cash held in escrow
            
            
            -
            
            
            
            12,392Goodwill
            
            
            170,685
            
            
            
            170,685Intangible
      assets, net of accumulated amortization of $6,086 and $5,912 at March 31,
      2008 and December 31, 2007, respectively
            
            
            8,482
            
            
            
            8,657Deferred
      loan costs and other assets, net of accumulated amortization of loan
      costsof
      $6,178 and $6,116 at March 31, 2008 and December 31, 2007,
      respectively
            
            
            9,359
            
            
            
            9,836Total
      other assets
            
            
            188,526
            
            
            
            201,570Total
      assets
            
            $
            370,479
            
            
            $
            398,218LIABILITIES
      AND MEMBER'S DEFICIENCY IN ASSETSCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            6,103
            
            
            $
            7,635Current
      maturities of long-term debt
            
            
            6,750
            
            
            
            5,625Accrued
      interest
            
            
            3,464
            
            
            
            9,218Current
      portion of deferred taxes
            
            
            804
            
            
            
            688Due
      to Morris Communications
            
            
            1,332
            
            
            
            -Deferred
      revenues
            
            
            15,184
            
            
            
            13,600Accrued
      employee costs
            
            
            7,188
            
            
            
            9,948Current
      portion of post retirement benefits due to Morris
      Communications
            
            
            984
            
            
            
            984Other
      accrued liabilities
            
            
            2,051
            
            
            
            1,397Total
      current liabilities
            
            
            43,860
            
            
            
            49,095LONG-TERM
      DEBT, less current portion
            
            
            418,477
            
            
            
            422,250DEFERRED
      INCOME TAXES, less current portion
            
            
            18,396
            
            
            
            18,628POSTRETIREMENT
      BENEFITS DUE TO MORRIS COMMUNICATIONS
            
            
            21,477
            
            
            
            21,127OTHER
      LONG-TERM LIABILITIES
            
            
            3,804
            
            
            
            3,592Total
      liabilities
            
            
            506,014
            
            
            
            514,692COMMITMENTS
      AND CONTINGENCIES (NOTE 7)MEMBER'S
      DEFICIENCY IN ASSETSMember's
      deficit
            
            
            (138,067
            )
            
            
            (143,712
            )Accumulated
      other comprehensive income
            
            
            1,179
            
            
            
            1,179Loan
      payable to Morris Communications, net
            
            
            1,353
            
            
            
            26,059Total
      member's deficiency in assets
            
            
            (135,535
            )
            
            
            (116,474
            )Total
      liabilities and member's deficiency in assets
            
            $
            370,479
            
            
            $
            398,218See
      notes to unaudited condensed consolidated financial
      statements.





-1-
 Table of Contents




Morris
      Publishing Group, LLCUnaudited condensed consolidated statements of
      incomeThree
      months ended March 31,(Dollars in
      thousands)
            
            2008
            
            
            2007NET
      OPERATING REVENUES:Advertising
            
            $
            65,317
            
            
            $
            75,043Circulation
            
            
            14,713
            
            
            
            14,208Other
            
            
            2,678
            
            
            
            2,523Total
      net operating revenues
            
            
            82,708
            
            
            
            91,774OPERATING
      EXPENSES:Labor
      and employee benefits
            
            
            34,411
            
            
            
            36,725Newsprint,
      ink and supplements
            
            
            9,143
            
            
            
            11,123Other
      operating costs (excluding depreciation and amortization)
            
            
            28,020
            
            
            
            28,569Depreciation
      and amortization expense
            
            
            3,524
            
            
            
            4,739Total
      operating expenses
            
            
            75,098
            
            
            
            81,156OPERATING
      INCOME
            
            
            7,610
            
            
            
            10,618OTHER
      (INCOME) EXPENSES:Interest
      expense, including amortization of debt issuance costs
            
            
            8,022
            
            
            
            9,319Gain
      on repurchases of debt
            
            
            (8,411
            )
            
            
            -Interest
      income
            
            
            (186
            )
            
            
            (3
            )Other,
      net
            
            
            (31
            )
            
            
            (41
            )Total
      other (income) expense, net
            
            
            (606
            )
            
            
            9,275INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
            
            
            8,216
            
            
            
            1,343PROVISION
      FOR INCOME TAXES
            
            
            2,571
            
            
            
            611INCOME
      FROM CONTINUING OPERATIONS
            
            
            5,645
            
            
            
            732DISCONTINUED
      OPERATIONSIncome
      from discontinued operations
            
            
            -
            
            
            
            102Provision
      for income taxes
            
            
            -
            
            
            
            46INCOME
      FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            
            56NET
      INCOME
            
            $
            5,645
            
            
            $
            788See
      notes to unaudited condensed consolidated financial
      statements.


-2-
 Table of Contents




Morris
      Publishing Group, LLCUnaudited condensed consolidated statements of cash
      flowsThree
      months ended March 31,(Dollars in
      thousands)
            
            2008
            
            
            2007OPERATING
      ACTIVITIES:Net
      income
            
            $
            5,645
            
            
            $
            788Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            3,524
            
            
            
            5,322Deferred
      income taxes
            
            
            (116
            )
            
            
            (1,052
            )Amortization
      of debt issuance costs
            
            
            679
            
            
            
            398Loss
      on sale of fixed assets, net
            
            
            1
            
            
            
            -Gain
      on repurchases of debt
            
            
            (8,411
            )
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            7,580
            
            
            
            8,253Inventories
            
            
            (52
            )
            
            
            (339
            )Prepaids
      and other current assets
            
            
            (48
            )
            
            
            (409
            )Other
      assets
            
            
            (253
            )
            
            
            (163
            )Accounts
      payable
            
            
            (1,532
            )
            
            
            (395
            )Accrued
      employee costs
            
            
            (2,760
            )
            
            
            (4,332
            )Accrued
      interest
            
            
            (5,754
            )
            
            
            (5,207
            )Due
      Morris Communications
            
            
            5,715
            
            
            
            381Deferred
      revenues and other liabilities
            
            
            2,238
            
            
            
            2,864Postretirement
      obligations due to Morris Communications
            
            
            350
            
            
            
            303Other
      long-term liabilities
            
            
            212
            
            
            
            228Net
      cash provided by operating activities
            
            
            7,018
            
            
            
            6,640INVESTING
      ACTIVITIES:Capital
      expenditures
            
            
            (640
            )
            
            
            (3,314
            )Restricted
      cash released from escrow
            
            
            12,444
            
            
            
            -Net
      proceeds from sale of assets
            
            
            31
            
            
            
            -Net
      cash provided by (used in) investing activities
            
            
            11,835
            
            
            
            (3,314
            )FINANCING
      ACTIVITIES:Repurchase
      of senior subordinated debt
            
            
            (10,705
            )
            
            
            -Proceeds
      from revolving credit facility
            
            
            46,000
            
            
            
            16,000Repayments
      on revolving credit facility
            
            
            (29,000
            )
            
            
            (10,000
            )Repayment
      on term loan
            
            
            (1,125
            )
            
            
            -Proceeds
      from other borrowings
            
            
            593
            
            
            
            -Repayment
      on loan payable to Morris Communications
            
            
            (24,706
            )
            
            
            (10,480
            )Net
      cash used in financing activities
            
            
            (18,943
            )
            
            
            (4,480
            )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (90
            )
            
            
            (1,154
            )CASH
      AND CASH EQUIVALENTS, beginning of period
            
            
            4,135
            
            
            
            6,964CASH
      AND CASH EQUIVALENTS, end of period
            
            $
            4,045
            
            
            $
            5,810SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
            
            $
            13,097
            
            
            $
            14,129Income
      taxes paid to Morris Communications
            
            
            2,686
            
            
            
            1,710See
      notes to unaudited condensed consolidated financial
      statements.


-3-
 Table of Contents





MORRIS
PUBLISHING GROUP, LLC


Notes
to condensed consolidated financial statements (unaudited)


(Dollars
in thousands)





1.
            Basis
      of Presentation and Change in Significant Accounting
    Policies




Basis
of presentation– The
accompanying condensed consolidated financial statements furnished herein
reflect all adjustments, which in the opinion of management, are necessary for
the fair presentation of the Company’s financial position and results of
operations. All such adjustments are of a normal recurring nature. Results of
operations for the three month interim period in 2008 are not necessarily
indicative of results expected for the full year. While certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) have been condensed or omitted, the Company believes that the
disclosures herein are adequate to keep the information presented from being
misleading. These condensed consolidated financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2007. The accounting policies followed for the interim
financial reporting period are the same as those disclosed in Note 1 of the
notes to the financial statements included in the Company’s Form 10-K, except
for the adoption of Statement of Financial Accounting Standards (“SFAS”) No.
157, “Fair Value
Measurements” and SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment ofFASB StatementNo. 115”. 
 2.
              Transactions
      with Morris Communications
  Management,
Technology and Shared Services Fees—The Company receives certain
services from, and has entered into certain transactions with the
Parent.
 
 Ø
              Management
      Fee— This fee compensates Morris Communications for corporate
      services and costs incurred on behalf of the Company, including executive,
      legal, secretarial, tax, internal audit, risk management, employee benefit
      administration, airplane usage and other support services. A fee equal to
      the greater of 4.0% of the Company’s annual total operating revenues or
      the amount of actual expenses allocable to the management of the Company’s
      business by Morris Communications (such allocations to be based upon time
      and resources spent on the management of the Company’s business by Morris
      Communications) is charged to the
Company.
 
 These
management fees totaled $3,308 and $4,334 for the three months ended March 31,
2008 and 2007, respectively. The Company has recorded the management fee within
other operating costs in the accompanying consolidated financial
statements.
 
 Ø
              Technology
      and Shared Services Fee—This
      fee compensates Morris Communications for certain technology and shared
      services and is based on the lesser of 2.5% of the Company’s total net
      operating revenue or the actual technology costs allocated to Morris
      Publishing based upon usage.
 
 The
technology and shared services fees paid to Morris Communications totaled $2,068
and $2,709 for the three months ended March 31, 2008 and 2007, respectively. The
Company has recorded the management fee within other operating costs in the
accompanying consolidated financial statements.
 
 The
Company believes that these fee allocations were made on a reasonable basis, and
approximate all of the material incremental costs it would have incurred had it
been operating on a stand-alone basis; however, there has been no independent
study or any attempt to obtain quotes from third parties to determine what costs
of obtaining such services from third parties would have been.
 
 Employees’ 401(k)
plan- The Company participates in Morris Communications’ 401(k) plan.
Under this plan, contributions by employees to the 401(k) plan are matched (up
to 5% of pay) by Morris Communications. Expenses were allocated to the Company
based on specific identification of employer matching contributions of $842 and
$911 for the three months ended March 31, 2008 and 2007,
respectively.
 
 Retiree health
care benefits- The Company participates in Morris Communications’ retiree
health care plan, which provides certain health care benefits for eligible
retired employees and their dependents. The plan requires the Company to be
separately liable for its portion of the postretirement health benefit
obligation. Accordingly, the Company and Morris Communications have completed a
formal actuarial valuation of the postretirement obligation for the Company as
of and for the year ended December 31, 2007.
 
 Under
Morris Communications’ plan, full-time employees who were hired before January
1, 1992 and retire after ten years of service are eligible for these benefits.
Full-time employees hired on or after January 1, 1992 must have 25 years of
service to be eligible. Generally, this plan pays a percentage of most medical
expenses (reduced for any deductible) after payments made by government programs
and other group coverage. This plan is unfunded. Lifetime benefits under the
plan are limited to $100 per employee. Expenses related to this plan have been
allocated to the Company based on total headcount. The expenses allocated to the
Company, net of the related contributions recorded, were $350 and $237 for the
three months ended March 31, 2008 and 2007, respectively.   -4-
 Table of Contents
  The
Company was also allocated its portion of the postretirement health benefit
obligation. The amounts allocated to the Company, based on total headcount, were
$22,461 and $22,111 as of March 31, 2008 and December 31, 2007,
respectively.
 
 Upon
adoption of SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans”,at the December 31, 2007
measurement date, the Company’s post retirement liability decreased in the
aggregate amount of $1,929 and member’s deficiency in assets decreased by
$1,929, less the $750 income tax effect.
 
 The
following is an estimate of the Company’s net periodic benefit cost for all of
2008:





Service
      cost
            
            $
            352Interest
      cost
            
            
            1,401Unrecognized
      gain from earlier periods
            
            
            -Net
      periodic benefit cost
            
            
            1,753Less:
      estimated cash contributions
            
            
            (353
            )Estimated
      net benefit expense
            
            $
            1,400





Health and
Disability Plan- The
Company has participated in Morris Communications’ health and disability plan
for active employees. Accordingly, Morris Communications has allocated to the
Company certain expenses associated with the payment of current obligations and
the estimated amounts incurred but not yet reported. The expense allocated to
the Company based on the total headcount, was $2,405 and $2,894 for the three
months ended March 31, 2008 and 2007, respectively. 
 The
Company was also allocated its portion of the health and disability obligation.
The amounts allocated to the Company, based on total headcount, were $2,077 and
$2,404 as of March 31, 2008 and December 31, 2007, respectively. The Company has
recorded this liability within accrued employee costs in the accompanying
financial statements.
 
 Workers’
Compensation Expense- The Company has participated in Morris
Communications’ workers’ compensation self-insurance plan. Accordingly, Morris
Communications has allocated to the Company certain expenses associated with the
payment of current obligations and the estimated amounts incurred but not yet
reported. The expenses allocated to the Company, based on a percentage of total
salaries expense, were $619 and $772 for the three months ended March 31, 2008
and 2007, respectively.
 
 Loanreceivable from
(payable to)Morris
Communications - Under the Company’s indenture related to the senior
subordinated notes, the Company is permitted to loan up to $40 million at any
one time to Morris Communications or any of its wholly owned subsidiaries
outside the Publishing Group, solely for purposes of funding its working
capital, capital expenditures and acquisition requirements. The Company is also
permitted to invest in or lend an additional $20 million at any one time
outstanding to Morris Communications or any other Person(s), as defined in the
debt indenture.
 
 The
interest-bearing portion of all loans from the Company to Morris Communications
bear the same rate as the borrowings under the Credit Agreement (for the three
month period ended March 31, 2008, this rate was LIBOR (adjusted to the nearest
1/16th) + 1.00%). The Company distinguishes between intercompany transactions
incurred in the ordinary course of business and settled on a monthly basis
(which do not bear interest) and those of a more long-term nature that are
subject to an interest accrual. Interest is accrued on the average outstanding
long-term balance each month.
 
 Given the
historical practice of Morris Publishing and Morris Communications settling a
significant portion of the outstanding loan receivable balance with a dividend,
this arrangement is considered in substance a capital distribution transaction
and is classified as contra-equity within member’s deficit. In addition,
interest accrued on this loan receivable is reported as contra-equity within
member’s deficiency in assets for the periods presented.
 
 The
amount outstanding on the intercompany loan payable to Morris Communications was
$1,353 as of March 31, 2008. The amount outstanding on the intercompany loan
receivable due from Morris Communications was $4,446 as of December 31, 2007,
offset by $30,505 loan payable to Morris Communications for income taxes payable
on the GateHouse sale.
 
 During
the three month periods ended March 31, 2008 and 2007, the Company reported the
$223 and $520, respectively, in accrued loan receivable interest as
contra-equity. As of March 31, 2008, the total accumulated interest accrued
on the loan receivable was $5,353.
 
 The
average interest rate for the three month periods ended March 31, 2008 and 2007
was 4.875% and 6.25%, respectively, on average loan receivable balances of
$18,426 (excluding the income taxes payable on the GateHouse sale) and $32,493,
respectively.


-5-
 Table of Contents


Restricted
payments - The
Company is permitted under its debt arrangement to make restricted payments,
which includes dividends and loans to affiliates in excess of the permitted
limits described above, up to the sum of (1) 100% of the Company’s cumulative
consolidated income before interest, taxes, depreciation and amortization
(“Consolidated EBITDA”, as defined in the indenture) earned subsequent to the
debt’s August 2003 issue date less (2) 140% of the consolidated interest expense
of the Company for such period. 
 At March
31, 2008, the Company had approximately $81 million available for future
restricted payments under the credit indenture.
 
 Restricted cash
released from escrow - The Company elected to have $12,350 of the net
proceeds from the November 30, 2007 sale of the fourteen daily newspapers, three
nondaily newspapers, a commercial printing operation and other related
publications to GateHouse Media Inc. deposited into an escrow account in order
to potentially fund other acquisitions by the Company or Parent through a
tax-deferred Section 1031 exchange. Interest earned on the cash balance in the
escrow account totaled $42 in 2007 and $52 during the three month period ended
March 31, 2008.
 
 At the
end of the first quarter of 2008, the Company’s Parent acquired qualified
replacement property using the $12,444 in the Company’s escrow account. At the
same time, the Parent distributed $12,444 to the Company to pay down balances
due on the Company’s revolving credit facility.
 
 3.
              Recently
      Issued Accounting Standards
 
 In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. This statement does not require any new fair value measurements;
rather, it applies under other accounting pronouncements that require or permit
fair value measurements. The provisions of this statement are to be applied
prospectively as of the beginning of the fiscal year in which this statement is
initially applied, with any transition adjustment recognized as a
cumulative-effect adjustment to the opening balance of retained earnings. The
provisions of SFAS No. 157 are effective for the fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”)
FAS 157-2, which delays the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods within those years for
all non-financial assets and non-financial liabilities, except those that are
recognized at fair value in the financial statements on a recurring basis (at
least annually). The adoption of SFAS No. 157 for the Company’s financial assets
and financial liabilities did not have a material impact on its consolidated
financial statements. The Company is evaluating the effect, if any, that the
implementation of SFAS No. 157 for non-financial assets and non-financial
liabilities will have on its financial position, results of operations, and cash
flows.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment ofFASBStatement No. 115”(“SFAS
No. 159”). SFAS No. 159 provides the option to report certain financial assets
and liabilities at fair value, with the intent to mitigate volatility in
financial reporting that can occur when related assets and liabilities are
recorded on different bases and is effective for fiscal years beginning after
November 15, 2007. The Company’s adoption of SFAS No. 159 had no effect on its
financial position, results of operations, and cash flows.
 
 4.
              Long-Term
      Debt
 
 During
the first quarter of 2008, the Company repurchased $19.1 million of its $300
million 7% senior subordinated notes for a total purchase price, including
accrued interest, of $10.9 million. In addition, the Company wrote off $0.3
million in unamortized loan fees related to these extinguished bonds. The gain
on these redemptions was $8.4 million. At March 31, 2008, $280.9 million was
outstanding on the senior subordinated notes.
 
 During
the quarter the Company paid $1.1 million in principal due on the Tranche A term
loan and has another $4.5 million in principal payments due by the end of
2008.
 
 In
addition, the Company borrowed $593 against a bank swing line loan.
 
 At March
31, 2008 and December 31, 2007, total debt was $425.2 million and $427.9
million, respectively, with $56.0 million and $39.0 million outstanding on the
$175 million revolving credit facility, respectively.
 
 At March
31, 2008, the interest rate on the $87.8 million Tranche A term loan outstanding
was 4.0% and the weighted average interest rate on the revolver was
4.173%.
 
 The
average interest rate on the debt outstanding was approximately 6.0072% and
6.6932% at March 31, 2008 and December 31, 2007, respectively. The commitment
fee on the unborrowed funds available under the revolver was 0.375% at March 31,
2008 and December 31, 2007.
  At March
31, 2008, the Company could borrow and use for general corporate purposes
approximately $41 million under the Company’s most restrictive covenants which
were from the senior bank credit facility and the Company was in compliance with
all covenants under its debt arrangements.
  -6-
 Table of Contents
 On July
3, 2007, the Company, as borrower, entered into an Amendment No. 1 under the
2005 Credit Agreement. The 2005 Credit Agreement contains financial covenants
requiring the Company to meet certain financial tests on an on-going basis,
including minimum interest coverage ratio, minimum fixed charge coverage ratio,
and maximum cash flow ratios, based upon consolidated financial results of
Morris Communications and substantially all of its subsidiaries (including the
Company). The amendment relaxes these financial tests for an 18 month period
from and including June 30, 2007 through but excluding December 31, 2008. The
$0.2 million in debt issuance costs associated with this amendment were deferred
and are being amortized over the life of the term loan.
  Without
either an improvement in the Morris Communications consolidated financial
results in 2008 or a reduction of the Company’s indebtedness, the Company is at
risk of failing to meet one or more of its financial covenants as of December
31, 2008, in which event Company would be unable to borrow on the revolver and
may be required to prepay the entire principal due under the Credit
Agreement.  The Company intends to carefully monitor the consolidated
financial results and to take any necessary steps to avoid default, which steps
may include (i) further amendments or refinancing of the 2005 Credit Agreement,
which could increase the Company’s cost of capital, or (ii) the sale or transfer
of a portion of the assets within the Morris Communications consolidated group
to third parties or to affiliates with the sales proceeds being used to reduce
the Company’s indebtedness.
  5.
              Goodwill
      and Other Intangible Assets
 
 Goodwill
is the excess of cost over fair market value of tangible net assets acquired.
Goodwill is not presently amortized but tested for impairment annually or when
the facts or circumstances at any of the Company’s reporting units indicate a
possible impairment of goodwill as a result of a continual decline in
performance or as a result of fundamental changes in a market in accordance with
SFAS No. 142, “Goodwill and
Other Intangible Assets”.
 
 Other
intangible assets acquired consist primarily of mastheads and licenses on
various acquired properties, customer lists, as well as other assets. Other
intangible assets acquired (mastheads and domain names) which have indefinite
lives and are not currently amortized, are tested for impairment annually or
when facts or circumstances indicate a possible impairment of the intangible
assets as a result of a continual decline in performance or as a result of
fundamental changes in a market.
 
 Certain
other intangible assets acquired (subscriber lists, non-compete agreements and
other assets) are amortized over their estimated useful lives (from 5 to 20
years).
 
 During
December 2007, the Company performed the required impairment tests of goodwill
and the indefinite-lived intangible assets, which resulted in no
impairments.
 
 Amortization
expense of other intangible assets for the three month period ended March 31,
2008 was $175.
 
 Changes
in the carrying amounts of goodwill and other intangible assets of the Company
for the three months ended March 31, 2008 were as follows:




Goodwill
                
                
                Other
      intangible assetsBalance
      at December 31, 2007
                
                $
                170,685
                
                
                $
                8,657Amortization
      expense
                
                
                -
                
                
                
                (175
                )Balance
      at March 31, 2008
                
                $
                170,685
                
                
                $
                8,482
  The
remaining expense for the last nine months of 2008 and for the four succeeding
years for the existing finite-lived intangible assets is as
follows:





2008
            
            $
            5252009
            
            
            6812010
            
            
            6652011
            
            
            5362012
            
            
            419


-7-
 Table of Contents


Other
finite-lived and indefinite-lived intangible assets at March 31, 2008 and
December 31, 2007 were as follows:





Cost
            
            
            Accumulated amortization
            
            
            Net costMarch
      21, 2008:Finite-lived
      intangible assetsSubscriber
      lists
            
            $
            9,354
            
            
            $
            5,240
            
            
            $
            4,114Non-compete
      agreements and other assets
            
            
            51
            
            
            
            39
            
            
            
            12Total
      finite-lived intangible assets
            
            
            9,405
            
            
            
            5,279
            
            
            
            4,126Indefinite-lived
      intangible assetsNewspaper
      mastheads
            
            
            5,031
            
            
            
            792
            
            
            
            4,239Domain
      names
            
            
            132
            
            
            
            15
            
            
            
            117Total
      indefinite-lived intangible assets
            
            
            5,163
            
            
            
            807
            
            
            
            4,356Total
      other intangible assets
            
            $
            14,568
            
            
            $
            6,086
            
            
            $
            8,482December
      31, 2007:Finite-lived
      intangible assetsSubscriber
      lists
            
            $
            9,354
            
            
            $
            5,066
            
            
            $
            4,288Non-compete
      agreements and other assets
            
            
            51
            
            
            
            38
            
            
            
            13Total
      finite-lived intangible assets
            
            
            9,405
            
            
            
            5,104
            
            
            
            4,301Indefinite-lived
      intangible assetsNewspaper
      mastheads
            
            
            5,031
            
            
            
            792
            
            
            
            4,239Domain
      names
            
            
            132
            
            
            
            15
            
            
            
            117Total
      indefinite-lived intangible assets
            
            
            5,163
            
            
            
            807
            
            
            
            4,356Total
      other intangible assets
            
            $
            14,568
            
            
            $
            5,911
            
            
            $
            8,657





6.
            Discontinued
      Operations





On
November 30, 2007, the Company completed the sale (“GateHouse sale”) of fourteen
daily newspapers, three nondaily newspapers, a commercial printing operation and
other related publications to GateHouse Media, Inc.
("GateHouse").





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets”, the results of operations of all
newspapers, publications and businesses included in the GateHouse sale have been
recorded as discontinued operations during the three month period ended March
31, 2007.
 
 During
the first quarter of 2007, income from discontinued operations, net of the
provision for income taxes, was $0.1 million, with total operating revenues of
$15.9 million and total operating costs of $15.8 million.


7.
            Commitments
      and Contingencies





The
Company and its subsidiaries are parties to several claims and lawsuits arising
in the course of their normal business activities. Although the ultimate outcome
of these suits cannot be ascertained at this time, it is the opinion of
management that these matters, when resolved, will not have a material effect on
the Company’s condensed consolidated financial statements.


-8-
 Table of Contents


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





The
following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements as of and for the three month periods ended
March 31, 2008 and 2007 and with our consolidated financial statements as of
December 31, 2007 and 2006 and for each of three years ended December 31, 2007,
filed on Form 10-K.





Overview





Morris
Publishing currently owns and operates 13 daily newspapers as well as nondaily
newspapers, city magazines and free community publications in the Southeast,
Midwest, Southwest and Alaska.





While
most of our revenue is generated from advertising and circulation from our
newspaper operations, we also print and distribute periodical publications and
operate commercial printing operations in conjunction with our newspapers. In
addition, our newspaper operations generate revenues from both print and online
media formats.





Linage,
the number of inserts, internet page views, along with rate and mix of
advertisement are the primary components of advertising revenue. The advertising
rate depends largely on our market reach, primarily through circulation, and
market penetration. The number of copies sold and the amount charged to our
customers are the primary components of circulation revenue. Our other revenue
consists primarily of commercial printing and other online revenue.





During
the first quarter of 2008, advertising and circulation revenue represented 79.0%
and 17.8%, respectively, of our total net operating revenue.  Our
advertising revenue consisted of 51.9% in retail, 40.4% in classified and 7.7%
in national. Online advertising revenue, included in all advertising categories
above, represented 10.7% of our total first quarter 2008 advertising
revenue.





Our
advertising results exhibit that from time to time, each individual newspaper
may perform better or worse than our newspaper group as a whole due to certain
local or regional conditions. The material variances in the advertising
categories listed above and at each newspaper are discussed in more detail in
our results of operations, which follows.





We
continue to see overall declines in circulation at our newspapers which is
consistent with the industry as a whole; however, a portion of our decline also
comes from the discontinuation of unprofitable distribution routes in some of
our markets. We continue to focus on circulation retention efforts through
lengthened subscriptions periods, new payment methods, and increased service
levels.





Employee
and newsprint costs are the primary costs at each newspaper. Our operating
performance is affected by newsprint prices, which historically have fluctuated.
Newsprint costs have represented 10 - 15% of total operating expenses.Historically, newsprint
has been subject to significant price fluctuations from year to year, unrelated
in many cases to general economic trends. Supply and demand has typically
controlled pricing.





Critical
accounting policies and estimates





Critical
accounting policies are those that are most significant to the portrayal of our
financial position and results of operations and require difficult, subjective
and complex judgments by management in order to make estimates about the effect
of matters that are inherently uncertain. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts in our condensed consolidated financial statements. We evaluate our
estimates on an on-going basis, including those related to our allowances for
bad debts, asset impairments, post-retirement benefits, self-insurance and
casualty, management fees, income taxes and commitments and contingencies. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities.





Although
actual results have historically been reasonably consistent with management’s
expectations, the actual results may differ from these estimates or our
estimates may be affected by different assumptions or conditions.




Other
than our adoption during the first quarter of 2008 of Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”
and SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities-Including an
Amendment ofFASB
StatementNo. 115”, we


-9-
 Table of Contents


Information
availability





Our
quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on
Form 8-K and all amendments to those reports are available free of charge on our
Web site, morris.com , as soon as feasible after such reports are electronically
filed with or furnished to the Securities and Exchange Commission. In addition,
information regarding corporate governance at Morris Publishing and our parent,
Morris Communications Company, LLC (“Morris Communications”), is also available
on our Web site. The information on our Web site is not incorporated by
reference into, or as part of, this Report on Form 10-Q.
  Financial
summary for the three months ended March 31, 2008 compared to March 31,
2007





Financial
Summary.The following table summarizes our consolidated financial
results for the three months ended March 31, 2008 and 2007:





Three
      months ended March 31,(Dollars in
      millions)
            
            2008
            
            
            2007
            
            
            %
      change period over periodTotal
      net operating revenues
            
            $
            82.7
            
            
            $
            91.8
            
            
            
            (9.9
            %)Total
      operating expenses
            
            
            75.1
            
            
            
            81.2
            
            
            
            (7.5
            %)Operating
      income
            
            
            7.6
            
            
            
            10.6
            
            
            
            (28.3
            %)Interest
      expense
            
            
            8.0
            
            
            
            9.3
            
            
            
            (13.9
            %)Gain
      on repurchases of debt
            
            
            (8.4
            )
            
            
            -
            
            
            
            -Other
            
            
            (0.2
            )
            
            
            -
            
            
            
            -Other
      (income) expense, net
            
            
            (0.6
            )
            
            
            9.3
            
            
            
            (106.5
            %)Income
      from continuing operations before taxes
            
            
            8.2
            
            
            
            1.3
            
            
            
            512.4
            %Provision
      for income taxes
            
            
            2.6
            
            
            
            0.6
            
            
            
            320.8
            %Income
      from continuing operations
            
            
            5.6
            
            
            
            0.7
            
            
            
            672.3
            %Income
      from discontinued operations, net of provision for income
      taxes
            
            
            -
            
            
            
            0.1
            
            
            
            (100.0
            %)Net
      income
            
            $
            5.6
            
            
            $
            0.8
            
            
            
            617.4
            %





Operating income from
continuing
operations




During
the first quarter, operating income was $7.6 million, down $3.0 million, or
28.3%, from the same quarter last year, reflecting a difficult print advertising
environment, partially mitigated by operating cost savings. Total net operating
revenues were $82.7 million, down $9.1 million, or 9.9%, and total operating
costs were $75.1million, down $6.1 million, or 7.5%.
 
 Advertising
revenue was $65.3 million, a decrease of $9.8 million, or 13.0%, from first
quarter of 2007. Retail, classified and national advertising revenue were down
8.3%, 19.0% and 8.7%, respectively.
 
 The first
quarter of 2008 included one more Sunday, benefiting this year’s quarter over
quarter advertising revenue comparisons, as Sundays usually generate more print
advertising revenue than the other six days of the week. This year’s second
quarter year over year advertising revenue comparisons will be unfavorably
impacted by Easter Sunday occurring during March compared to April last year. In
addition, early Easters typically do not generate as much advertising revenue as
when the holiday falls later in the year.
 
 Our first
quarter results continue to reflect the industry’s shift from run of press and
insert advertising to online advertising. Compared to 2007, print advertising
revenue was $40.5 million, down $9.8 million, or 19.6%, and insert advertising
revenue was $12.4 million, down $0.9 million, or 6.5%. Advertising revenue from
specialty products printed by us, but not a part of main newspaper product, was
$3.6 million, unchanged from the first quarter last year.
 
 Online
advertising revenue, included in all advertising categories above, was $8.8
million, up $1.0 million, or 12.4%, from last year, with $0.7 million of the
increase from the retail advertising category. Unique page views, a key measure
of interest in our newspapers’ Web sites, continued to grow and were 27.1%
higher than in 2007. Total page views were up 11.4%.
 
 While our
total advertising revenue results continued to be impacted by the weak
advertising environment in Florida, the poor performances from our other six
larger market newspapers, together, contributed significantly to our net
decline. Our existing Florida newspapers and publications, which accounted for
35.8% our total advertising revenue, contributed 76.6% of our entire net decline
in advertising revenue.
 
 Advertising
revenue in Jacksonville, our largest newspaper, was down $6.8 million, or 25.7%,
primarily due to the downturn in the Florida real estate market. The
Jacksonville Sunweeklies were down $0.3 million, or 25.7%.


-10-
 Table of Contents


Our St.
Augustine newspaper was down $0.3 million, or 11.2%; all from the classified
category.
 
 Our other
six metropolitan newspapers combined were down $2.8 million, or
7.9%.
 
 In
Savannah, our newspaper’s advertising revenue was down $0.8 million, or 12.6%,
with significant weakness in the classified category.
 
 Augusta’s
advertising revenue was down $0.5 million, or 6.0%, with declines in all
categories.
 
 The
Amarillo and Lubbock newspapers were each down $0.5 million, or 8.7% and 7.4%,
respectively, with significant declines in the retail and national
categories.
 
 Our
Athens and Topeka newspapers’ advertising revenue were each down $0.2 million,
or 7.4% and 5.0%, respectively. Athens’ decline was all from the classified
category.
 
 Total
combined advertising revenue from our other five daily newspapers was up $0.2
million, or 3.6%, from the prior year, primarily due to the net gain in the
classified category.
 
 Advertising
revenue from all of our nondaily publications was down $0.1 million, or
1.2%.
 
 During
the first quarter of 2008, circulation revenue was $14.7 million, up $0.5
million, or 3.6%, from the same period last year, due to home delivery price
increases and a change in the way Jacksonville sells home delivery
subscriptions.
 
 Other
income was $2.7 million, up $0.2 million, or 6.2%, with the increase in Skirt! license fees offset
somewhat by the decline in commercial printing revenue. Total income from all
Skirt! license
agreements, including royalty fees, was $0.6 million compared to $0.2 million in
the prior year.
 
 Total
labor and employee benefit costs were $34.4 million, down $2.3 million, or 6.3%;
newsprint, ink and supplements costs were $9.1 million, down $2.0 million, or
17.8%; and other operating costs were $28.0 million, down $0.5 million, or 1.9%.
Depreciation and amortization expense was $3.5 million, down $1.3 million, or
25.6%, with a large portion of intangible assets becoming fully amortized during
last year.
 
 Our total
2008 operating costs were favorably impacted by the savings from the decrease in
consumption of newsprint, the reduction in supplements cost, the reduction in
employee health insurance costs and the decrease in FTE’s (or full time
equivalents).
 
 Discontinued
operations
 
 On
November 30, 2007, we completed the sale of fourteen daily newspapers, three
nondaily newspapers, a commercial printing operation and other related
publications to GateHouse Media, Inc. ("GateHouse").
 
 In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets”, the results of operations of all
newspapers, publications and businesses included in the sale to GateHouse
(“GateHouse sale”) have been recorded as discontinued operations during the
three month period ended March 31, 2007.
 
 During
the first quarter of 2007, income from discontinued operations, net of the
provision for income taxes, was $0.1 million, with total operating revenues of
$15.9 million and total operating costs of $15.8 million.
 
 Net income and
other
 
 Interest
and loan amortization expense totaled $8.0 million, down $1.3 million from $9.3
million last year primarily due to the reduction in our outstanding debt. At the
end of the first quarter, we had $425.2 million in outstanding debt compared to
$530 million at the end the same period last year.
 
 During
March of 2008, we repurchased $19.1 million of our $300 million 7% senior
subordinated notes for a total purchase price, including accrued interest, of
$10.9 million. In addition, we wrote off $0.3 million in unamortized loan fees
related to the extinguishment of these bonds. Including
the $8.4 million gain on these repurchases of debt, income from continuing
operations before income taxes for the quarter was $8.2 million, up $6.9 million
from $1.3 million in the prior year.  The
provision for income taxes from continuing operations was $2.6 million, up $2.0
million from the same quarter last year primarily due to the gain on the
redemption of debt.
 
 Our
effective tax rate was 31.3% for the first quarter of 2008 compared to 45.5% for
the same period last year.
 -11-
 Table of Contents
  Income
from continuing operations was $5.6 million, up $4.9 million from $0.7 million
during the first quarter of 2007.


Net
income during the first quarter of 2007 was $0.8 million.
 
 Results
of operations from continuing operations for the three months ended March 31,
2008 compared to March 31, 2007
 
 Net operating
revenue from continuing operations. The table below presents the total
net operating revenue from continuing operations and related statistics for the
three months ended March 31, 2008 compared to March 31, 2007:


Three months ended March
31,
            
            
            Percentage change(Dollars in
      millions)
            
            2008
            
            
            2007
            
            
            2008 vs. 2007Net
      operating revenuesAdvertisingRetail
            
            $
            33.9
            
            
            $
            37.0
            
            
            
            (8.3
            %)Classified
            
            
            26.4
            
            
            
            32.6
            
            
            
            (19.0
            %)National
            
            
            5.0
            
            
            
            5.5
            
            
            
            (8.7
            %)Total
      advertising revenues
            
            
            65.3
            
            
            
            75.1
            
            
            
            (13.0
            %)Circulation
            
            
            14.7
            
            
            
            14.2
            
            
            
            3.6
            %Other
            
            
            2.7
            
            
            
            2.5
            
            
            
            6.2
            %Total
      net operating revenues
            
            $
            82.7
            
            
            $
            91.8
            
            
            
            (9.9
            %)





Retail advertising
revenue:





Retail
advertising revenue was $33.9 million, down $3.1 million, or 8.3%, from the
prior year.
 
 Insert
retail revenue was $11.0 million, down $0.8 million, or 6.6%, while print retail
advertising revenue was $16.8 million, down $3.0 million, or 15.4%, from the
same quarter last year. Retail advertising revenue from specialty products
printed by us, but not a part of main newspaper product, was $3.4 million,
unchanged from last year. Retail online revenue was $2.7 million, up $0.7
million, or 37.8%, from the first quarter last year.
 
 Jacksonville’s
retail advertising was down $2.0 million, or 19.8%, with the majority of
the decline from retailers dependent on the housing industry. St. Augustine was
unchanged from last year.
 
 As for
our other daily newspapers, Lubbock was down $0.4 million, or 11.0%, and
Amarillo was down $0.3 million or 12.3%, with their revenue declines primarily
from grocery stores and other major retail advertisers.
 
 Topeka
and Augusta were each down $0.2 million, or 6.9% and 4.4%,
respectively. Augusta’s declines were primarily from banks, hospitals and
larger major retailers.
 
 Savannah’s
and Athens’ retail advertising revenue was unchanged from last
year.
 
 Bluffton Today, our free
distribution daily newspaper, was up $0.2 million, or 41.7%, with gains from its
new weekly Hilton Head
Today and Beaufort
Today specialty publications.
 
 Total
combined retail advertising revenue from our Brainerd, Conway, and two Alaska
newspapers was down $0.1 million, or 4.9%, with declines at each
newspaper.
 
 Retail
advertising for the nondaily publications was unchanged from the same quarter
last year.
 
 Classified advertising
revenue:
 
 Total
classified advertising revenue was $26.4 million, down $6.2 million, or 19.0%,
from the first quarter of 2007.
 
 Classified
print advertising revenue was $20.3 million, down $6.2 million, or 23.4%, and
online classified revenue was $5.7 million, up only $0.1 million, or 1.5%, from
the same period last year. Classified insert and specialty advertising revenue
were each down slightly from last year.
  -12-
 Table of Contents
  Our
Jacksonville newspaper’s classified advertising revenue was down $4.2 million,
or 33.7%, and our St. Augustine newspaper was down $0.3 million, or
21.5%, with their declines attributed to the downturn in the local real
estate market.
 
 As for
our other daily newspapers, our Savannah newspaper’s classified advertising
revenue was down $0.7 million, or 21.8%.
 
 Our
Athens and Amarillo newspapers were each down $0.2 million, or 18.6% and 6.1%,
respectively.
 
 Total
combined classified advertising revenue from our other eight newspapers was down
$0.4 million, or 4.0%, from the first quarter of 2007, with the $0.1 million
declines in Augusta, Bluffton, Lubbock, and Topeka. Conway was up $0.1 million,
or 14.3%.
 
 Classified
advertising from our nondaily publications was down $0.1 million, or 5.0%, from
last year.
 
 National advertising
revenue:
 
 Total
national advertising revenue was $5.0 million, down $0.5 million, or 8.7%, from
the first quarter last year, with Jacksonville down $0.5 million, or
14.4%.
 
 The $0.2
million declines in Augusta and Savannah were offset by the combined gain from
Topeka, St. Augustine, Juneau and Kenai.
 
 Circulation:
 
 Volume-Daily
circulation volume was down 6.4%, with significant declines in Amarillo,
Jacksonville, Lubbock and Savannah and Sunday circulation volume was down 6.7%,
with significant declines in Amarillo, Athens, Augusta, Lubbock and Savannah.
These declines were the direct result of our cutting distribution in
unprofitable areas.
 
 In
addition, we eliminated expensive third-party circulation programs that many
advertisers believe have limited value, and we implemented price increases in
many of our markets.
 
 The
increase in the cost of fuel may impact our sales and retention efforts, as many
of our subscribers have less discretionary income.
 
 Revenue
anddistributioncost-During
the first quarter, Jacksonville began selling its newspapers directly to the
subscriber and paying its carriers a delivery fee. Previously, Jacksonville, as
all of our other newspapers currently do, sold its newspapers directly to the
carriers and derived its revenue from the wholesale rate to the carrier. This
change will favorably impact Jacksonville’s circulation revenue throughout the
year while increasing our distribution costs.
 
 Net operating
expense from continuing operations. The table below presents
the total operating expenses from continuing operations and related statistics
for the newspaper operations for three months ended March 31, 2008 compared to
March 31, 2007:


Three months ended March
31,
            
            
            Percentage change(Dollars in
      millions)
            
            2008
            
            
            2007
            
            
            2008 vs. 2007Operating
      expensesLabor
      and employee benefits
            
            $
            34.4
            
            
            $
            36.7
            
            
            
            (6.3
            %)Newsprint,
      ink and supplements
            
            
            9.1
            
            
            
            11.1
            
            
            
            (17.8
            %)Other
      operating costs
            
            
            28.1
            
            
            
            28.6
            
            
            
            (1.9
            %)Depreciation
      and amortization
            
            
            3.5
            
            
            
            4.8
            
            
            
            (25.6
            %)Total
      operating expenses
            
            $
            75.1
            
            
            $
            81.2
            
            
            
            (7.5
            %)





Labor and employee benefits
from continuing operations:





Our
salaries and wages totaled $24.3 million, down $1.3 million, or 5.2%. Average
FTE’s (or full time equivalents) were down 291, or 9.6%, and average pay rate
was up 4.9%. Jacksonville’s average FTE’s were down 166, or 18.4%, contributing
57.2% of our average total net decrease.
 
 Commissions
and bonuses were $4.1 million, down $0.1 million, or 3.0%, from last year, due
to the decrease in advertising sales.
 
 Employee
medical insurance cost was $2.4 million, down $0.5 million, or 16.9%, due to the
decreases in plan participants and in claims experience.
 
 Compared
to the first quarter last year, post retirement benefit cost was $0.3 million,
up $0.1 million, or 47.8%.


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 Table of Contents


Newsprint, ink and
supplements cost from continuing operations:





Compared
to last year, total newsprint expense was $8.0 million, down $1.5 million, or
16.0%, due to a 13.8% decrease in newsprint consumption coupled with a 2.5%
decrease in the average cost per ton of newsprint.
 
 Supplements
expense decreased $0.4 million, or 39.9%, to $0.6 million, and ink expense
decreased $0.1 million, or 8.8%, to $0.5 million.
 
 Other operating
costs:
 
 The
combined technology and shared services fee from our parent and management fee
charged to continuing operations by our parent under the management agreement
totaled $5.4 million, down $0.6 million, or 9.9%, from $6.0 million in the first
quarter last year. Excluding these fees, other operating costs were slightly up
from the first quarter last year.
 
 Liquidity
and capital resources
 
 We
believe that our principal sources of liquidity, which are existing cash and
cash equivalents, cash flows provided from operating activities, and the
borrowing capacity under revolving credit facilities, will be sufficient to meet
our ongoing operating needs. Cash flow generated from operations is our primary
source of liquidity.
 
 Our
primary needs for cash are funding operating expense, debt service on our bank
credit facilities and the senior subordinated notes, capital expenditures,
income taxes, dividends and loans to affiliates, acquisitions and working
capital. We have pursued, and will continue to pursue, a business strategy that
includes selective acquisitions and new product development.
 
 Cash was
$4.0 million at March 31, 2008, down $0.1 million from $4.1 million at December
31, 2007.
 
 Operating
activities. Net cash provided by operations was $7.1 million for the
first three months of 2008, up $0.5 million from $6.6 million for the same
period in 2007.
 
 Current
assets were $60.9 million and current liabilities were $45.5 million as of March
31, 2008 as compared to current assets of $72.8 million and current liabilities
of $49.1 million as of December 31, 2007. We manage our working capital through
the utilization of our revolving credit facility. The outstanding balance on the
revolving credit facility is classified as a long-term liability, in accordance
with its terms.
 
 Investment
activities. Net cash provided by investing activities was $11.8 million
for the first three months of 2008 compared to $3.3 million used by investing
activities for the same period in 2007.
 
 On
November 30, 2007, we sold fourteen daily newspapers, three nondaily newspapers,
a commercial printing operation and other related publications to GateHouse
Media Inc. At close, we elected to have $12.4 million of the net proceeds
deposited into an escrow account in order to fund other acquisitions by
ourselves or our parent through a tax-deferred Section 1031
exchange.
 
 At the
end of the first quarter of 2008, our Parent acquired qualified replacement
property using the $12.4 million in our escrow account. At the same time, our
Parent distributed $12.4 million to us to pay down balances due on our revolving
credit facility.
 
 For the
first three months in 2008, we spent $0.6 million on property, plant and
equipment.
 
 For the
first three months in 2007, we spent $3.3 million on property, plant and
equipment, of which, $2.1 million was spent on Savannah's new printing
press.
 
 For 2008,
we expect our total capital expenditures to be between $10 million and $15
million.
  Financing
activities. Net cash used in financing activities was $18.9 million for
the first three months of 2008 compared to $4.5 million for the same period in
2006.
 
 Period end debt
summary:
 
 Total
debt was $425.2 million at March 31, 2008, down from $427.9 million at December
31, 2007. We had $56 million outstanding on our $175 million revolving credit
facility, up $17 million from $39 million at December 31, 2007   -14-
 Table of Contents
  During
the first quarter of 2008, we repurchased $19.1 million of our $300 million 7%
senior subordinated notes for a total purchase price of $10.7 million. At March
31, 2008, $280.9 million was outstanding on the senior subordinated
notes.
 
 During
the quarter we paid $1.1 million in principal due on the Tranche A term loan and
have another $4.5 million in principal payments due by the end of
2008.
 
 In
addition, we borrowed $593 against a bank swing line loan.
 
 At March
31, 2008, the interest rate on the $87.8 million Tranche A term loan outstanding
was 4.0% and the weighted average interest rate on the revolver was
4.173%.
 
 As of
March 31, 2007, our total debt was $530 million, with $55 million outstanding on
the revolving credit facility.
 
 As of
March 31, 2008, our annualized cost of debt outstanding was approximately 6.01%,
down from 6.75% at the end of the same quarter last year.
 
 We are in
compliance with all covenants under our bond indenture and credit facilities. At
March 31, 2008, we could borrow and use for general corporate purposes
approximately $41 million under the most restrictive covenants of our debt
arrangements.
  On July
3, 2007, we, as borrower, entered into an Amendment No. 1 under the 2005 Credit
Agreement. The 2005 Credit Agreement contains financial covenants requiring us
to meet certain financial tests on an on-going basis, including minimum interest
coverage ratio, minimum fixed charge coverage ratio, and maximum cash flow
ratios, based upon consolidated financial results of Morris Communications and
substantially all of its subsidiaries (including us). The amendment relaxes
these financial tests for an 18 month period from and including June 30, 2007
through but excluding December 31, 2008.
 
 Without
either an improvement in the Morris Communications consolidated financial
results in 2008 or a reduction of our indebtedness, we are at risk of failing to
meet one or more of our financial covenants as of December 31, 2008, in which
event we would be unable to borrow on the revolver and may be required to prepay
the entire principal due under the Credit Agreement.  We intend to
carefully monitor the consolidated financial results and to take any necessary
steps to avoid default, which steps may include (i) further amendments or
refinancing of the Credit Agreement, which could increase our cost of capital,
or (ii) the sale or transfer of a portion of the assets within the Morris
Communications consolidated group to third parties or to affiliates with the
sales proceeds being used to reduce our indebtedness.
  Loan receivable
from/ (payable
to)to Morris Communications:
 
 Our
indenture, with certain restrictions described in Note 2 of our unaudited
condensed consolidated financial statements, allows us to make loans both to and
from Morris Communications. The amount outstanding on the intercompany loan due
to Morris Communications was $1.4 million as of March 31, 2008, down $24.7
million from $26.1 million as of December 31, 2007. At December 31, 2007, the
balance due to our parent included the $30.5 million in income taxes payable on
the gain on sale of the discontinued operations.
 
 The
interest-bearing portion of all loans from us to our parent bear the same rate
as the borrowings under the Credit Agreement (currently, this rate is LIBOR
(adjusted to the nearest 1/16th) + 1.0%). We distinguish between intercompany
transactions incurred in the ordinary course of business and settled on a
monthly basis (which do not bear interest) and those of a more long-term nature
that are subject to an interest accrual. Interest is accrued on the average
outstanding long-term balance each month.
  Given the
historical practice of us and our parent settling a significant portion of the
outstanding loan receivable balance with a dividend, this arrangement is
considered in substance a capital distribution transaction and is classified as
contra-equity within member’s deficit. In addition, interest accrued on this
loan receivable is reported as contra-equity within member’s deficiency in
assets for the periods presented. (See Note 2)
 
 The
amount outstanding on the intercompany loan payable to Morris Communications was
$1.4 million as of March 31, 2008. The amount outstanding on the intercompany
loan receivable due from Morris Communications was $4.4 million as of December
31, 2007, offset by $30.5 million loan payable to Morris Communications for
income taxes payable on the GateHouse sale.
 
 During
the three month periods ended March 31, 2008 and 2007, we reported the $0.2
million and $0.5 million, respectively, in accrued loan receivable interest as
contra-equity. As of March 31, 2008, the total accumulated interest accrued on
the loan receivable was $5.4 million.
 
 The
average interest rate for the three month periods ended March 31, 2008 and 2007
was 4.875% and 6.25%, respectively, on average loan receivable balances of $18.4
million (excluding the income taxes payable to our Parent on the GateHouse sale)
and $32.5 million, respectively.
 
 Dividends:
 
 We, with
certain restrictions under our indenture, may make dividend payments to our
parent to fund its cash needs for general business purposes, capital
expenditures and acquisitions. At March 31, 2008, we had an additional $81
million available for future restricted payments under the notes
indenture.
 
 Morris
Publishing Finance Co. overview
 
 Morris
Publishing Finance Co., a wholly-owned subsidiary of Morris Publishing Group,
LLC, was incorporated in 2003 for the sole purpose of serving as a co-issuer of
our senior subordinated notes in order to facilitate the offering. Morris
Publishing Finance Co. does not have any operations or assets of any kind and
generates no revenue.


-15-
 Table of Contents


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





There
have been no material changes regarding the registrants’ market risk position
from the information provided in our annual report dated December 31, 2007 filed
with the Securities and Exchange Commission on Form 10-K.





Although
some of our outstanding debt is at a fixed rate, increases in the interest rates
applicable to borrowings under our bank credit facilities would result in
increased interest expense and a reduction in our net income. (See the
quantitative and qualitative disclosures about market risk are discussed under
the caption “Market Risk” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations in said annual report and Note 4 to our
unaudited condensed consolidated financial statements as of and for the three
months ending March 31, 2008 regarding long-term debt).





Based on
our $144.3 million of variable rate debt at March 31, 2008, a 1.0% increase or
decrease in interest rates on this variable-rate debt would increase or decrease
annual interest expense by $1.4 million and net income by $0.9 million,
respectively.




ITEM
4. CONTROLS AND PROCEDURES





Our
management carried out an evaluation, with the participation of our chief
executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 2008. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.





There has
not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13A-15(d) under the Exchange Act
that occurred during the three month period ended March 31, 2008, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




-16-
 Table of Contents




Item 1. Legal Proceedings.





None.





Item
1A. Risk Factors.





None.




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





None.




Item
3. Defaults Upon Senior Securities.





None.





Item
4. Submission of Matters to a Vote of Security Holders.





None.




Item
5. Other Information.





None.





Item
6. Exhibits.





31.1
            
            Rule 13a-14(a)
      Certifications31.2
            
            Rule 13a-14(a)
      Certifications32.1
            
            Section 1350
      Certifications  -17-
 Table of Contents




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





MORRIS
      PUBLISHING GROUP, LLCDate: May 14, 2008
            
            By:
            
            /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
              and
      as its Principal Financial Officer)





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




MORRIS
      PUBLISHING FINANCE CO.Date: May 14, 2008
            
            By:
            
            /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
              and
      as its Principal Financial Officer)




-18-