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, 2009





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 ̈Nox





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ̈No ̈





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   ̈
                  Smaller
      Reporting Company  ̈
                  Accelerated
      Filer   ̈
                  Non-Accelerated
      Filer  x





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 ̈Nox





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). YesxNo ̈




Table of Contents


MORRIS
PUBLISHING GROUP, LLC


MORRIS PUBLISHING FINANCE
CO.


QUARTERLY
REPORT


FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009





TABLE
OF CONTENTS




PageFORWARD LOOKING STATEMENTS
                
                iiPART
      I.Item
      1. Financial Statements:Unaudited  condensed
      consolidated balance sheets as of March 31, 2009 and December 31,
      2008
                
                1Unaudited condensed consolidated
      statements of (loss) income for the three month periods ended March 31,
      2009and
      2008
                
                2Unaudited condensed consolidated
      statements of cash flows for the three month periods ended March
      31,2009 and
      2008
                
                3Notes
      to the unaudited condensed consolidated financialstatements
                
                4Item 2.Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                
                15Item 3.Quantitative and Qualitative Disclosures about Market
      Risk
                
                29Item 4.Controls
      and Procedures
                
                29PART
      II.Item 1.Legal
      Proceedings.
                
                30Item 1A.Risk
      Factors
                
                30Item 2.Unregistered Sales of Equity Securities and Use of
      Proceeds.
                
                31Item 3.Defaults
      Upon Senior Securities.
                
                31Item 4.Submission
      of Matters to a Vote of Security Holders.
                
                31Item 5.Other
      Information
                
                31Item 6.Exhibits
                
                31





Throughout
the year 2008, Morris Publishing Group, LLC was a wholly owned subsidiary of
Morris Communications Company, LLC (“Morris Communications”), a privately held
media company. On January 28, 2009, Shivers Trading & Operating Company
(“Shivers”), our indirect corporate parent, and Morris Communications, then our
direct parent, consummated a reorganization of their company structure. In the
reorganization, (i) Morris Communications distributed ownership of all
membership interests in Morris Publishing to MPG Newspaper Holding, LLC (“MPG
Holdings”), a subsidiary of Shivers, and (ii) Shivers distributed beneficial
ownership of Morris Communications to an affiliated corporation, both subject to
the existing pledges of the membership interests of Morris Publishing Group, LLC
and Morris Communications to the administrative agent for the lenders under the
Credit Agreement dated December 14, 2005 (the “Credit Agreement”). Subsequent to
the reorganization, (i) Morris Publishing Group, LLC remains an indirect
subsidiary of Shivers, and (ii) Morris Communications remains an affiliate of
Morris Publishing Group, LLC, but is no longer its parent.





In this
report, Morris Publishing Group, LLC is considered as and will be referred to as
a wholly owned subsidiary of MPG Holdings, a subsidiary of Shivers. “Morris
Publishing,” “we,” “us” “Company” and “our” refer to Morris Publishing Group,
LLC and its subsidiaries and “parent” refers to Shivers. Morris Communications
and its subsidiaries are considered affiliates and guarantors of the senior debt
under the Credit Agreement.





Morris
Publishing Finance Co., a wholly owned subsidiary of Morris Publishing, was
incorporated in 2003 for the sole purpose of serving as a co-issuer of our 7%
Senior Subordinated Notes due 2013, dated as of August 7, 2003, 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.


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, 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 those
described in Part I, Item 1A-Risk Factors included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, as well as
other risks and factors identified from time to time in other SEC
filings.


-ii-
 Table of Contents





Part
I





Morris
      Publishing Group, LLCUnaudited condensed consolidated balance
sheets(Dollars in thousands)
                                            
                                            March
      31, 2009
                                            
                                            
                                            December
      31, 2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                            
                                            $
                                            14,148
                                            
                                            
                                            $
                                            4,782Accounts
      receivable, net of allowance for doubtful accounts of  $1,698
      and $1,823at
      March 31, 2009 and December 31, 2008, respectively
                                            
                                            
                                            27,115
                                            
                                            
                                            
                                            36,975Note
      receivable, net of loss reserve of $11,538 at March 31,
    2009
                                            
                                            
                                            -
                                            
                                            
                                            
                                            11,538Inventories
                                            
                                            
                                            2,499
                                            
                                            
                                            
                                            2,706Assets
      held for sale
                                            
                                            
                                            2,025
                                            
                                            
                                            
                                            2,025Current
      portion of deferred income taxes
                                            
                                            
                                            730
                                            
                                            
                                            
                                            -Income
      taxes receivable
                                            
                                            
                                            3,305
                                            
                                            
                                            
                                            -Prepaid
      and other current assets
                                            
                                            
                                            2,778
                                            
                                            
                                            
                                            903Total
      current assets
                                            
                                            
                                            52,600
                                            
                                            
                                            
                                            58,929NET
      PROPERTY AND EQUIPMENT
                                            
                                            
                                            102,906
                                            
                                            
                                            
                                            105,623OTHER
      ASSETS:Intangible
      assets, net of accumulated amortization of $6,626 and $6,453 at March 31,
      2009and
      December 31, 2008, respectively
                                            
                                            
                                            7,784
                                            
                                            
                                            
                                            7,956Deferred
      loan costs and other assets, net of accumulated amortization of loan costs
      of$7,526
      and $6,822 at March 31, 2009 and December 31, 2008,
      respectively
                                            
                                            
                                            6,760
                                            
                                            
                                            
                                            7,184Total
      other assets
                                            
                                            
                                            14,544
                                            
                                            
                                            
                                            15,140Total
      assets
                                            
                                            $
                                            170,050
                                            
                                            
                                            $
                                            179,692LIABILITIES
      AND MEMBER'S DEFICIENCY IN ASSETSCURRENT
      LIABILITIES:Accounts
      payable
                                            
                                            $
                                            6,116
                                            
                                            
                                            $
                                            5,496Long-term
      debt-current (Note 6)
                                            
                                            
                                            419,478
                                            
                                            
                                            
                                            411,728Accrued
      interest
                                            
                                            
                                            13,212
                                            
                                            
                                            
                                            8,297Current
      portion of deferred income taxes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,326Due
      to Morris Communications
                                            
                                            
                                            3,108
                                            
                                            
                                            
                                            1,772Deferred
      revenues
                                            
                                            
                                            13,796
                                            
                                            
                                            
                                            13,133Accrued
      employee costs
                                            
                                            
                                            4,715
                                            
                                            
                                            
                                            8,252Other
      accrued liabilities
                                            
                                            
                                            1,703
                                            
                                            
                                            
                                            1,153Total
      current liabilities
                                            
                                            
                                            462,128
                                            
                                            
                                            
                                            451,157DEFERRED
      INCOME TAXES, less current portion
                                            
                                            
                                            11,352
                                            
                                            
                                            
                                            13,568OTHER
      LONG-TERM LIABILITIES
                                            
                                            
                                            2,861
                                            
                                            
                                            
                                            2,882Total
      liabilities
                                            
                                            
                                            476,341
                                            
                                            
                                            
                                            467,607COMMITMENTS
      AND CONTINGENCIES (Note 8)MEMBER'S
      DEFICIENCY IN ASSETSMember's
      deficit
                                            
                                            
                                            (288,281
                                            )
                                            
                                            
                                            (275,705
                                            )Loan
      receivable from Morris Communications, net
                                            
                                            
                                            (18,010
                                            )
                                            
                                            
                                            (12,210
                                            )Total
      member's deficiency in assets
                                            
                                            
                                            (306,291
                                            )
                                            
                                            
                                            (287,915
                                            )Total
      liabilities and member's deficiency in assets
                                            
                                            $
                                            170,050
                                            
                                            
                                            $
                                            179,692See notes to unaudited condensed consolidated financial
      statements.


-1-
 Table of Contents


Morris
      Publishing Group, LLCUnaudited condensed consolidated statements of
      operationsThree months ended March
      31,2009
                                  
                                  
                                  2008(Dollars in
      thousands)NET
      OPERATING REVENUES:Advertising
                                  
                                  $
                                  46,244
                                  
                                  
                                  $
                                  65,317Circulation
                                  
                                  
                                  15,919
                                  
                                  
                                  
                                  14,713Other
                                  
                                  
                                  2,051
                                  
                                  
                                  
                                  2,678Total
      net operating revenues
                                  
                                  
                                  64,214
                                  
                                  
                                  
                                  82,708OPERATING
      EXPENSES:Labor
      and employee benefits
                                  
                                  
                                  27,241
                                  
                                  
                                  
                                  34,411Newsprint,
      ink and supplements
                                  
                                  
                                  7,436
                                  
                                  
                                  
                                  9,143Other
      operating costs (excluding depreciation and amortization)
                                  
                                  
                                  25,007
                                  
                                  
                                  
                                  28,020Debt
      restructuring costs
                                  
                                  
                                  2,868
                                  
                                  
                                  
                                  -Depreciation
      and amortization expense
                                  
                                  
                                  3,119
                                  
                                  
                                  
                                  3,524Total
      operating expenses
                                  
                                  
                                  65,671
                                  
                                  
                                  
                                  75,098OPERATING
      (LOSS) INCOME
                                  
                                  
                                  (1,457
                                  )
                                  
                                  
                                  7,610OTHER
      EXPENSES (INCOME):Interest
      expense, including amortization of debt issuance costs
                                  
                                  
                                  7,435
                                  
                                  
                                  
                                  8,022Gains
      on repurchases of debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (8,411
                                  )Reserve
      for note receivable
                                  
                                  
                                  11,538
                                  
                                  
                                  
                                  -Interest
      income
                                  
                                  
                                  (229
                                  )
                                  
                                  
                                  (186
                                  )Other,
      net
                                  
                                  
                                  (48
                                  )
                                  
                                  
                                  (31
                                  )Total
      other expense (income), net
                                  
                                  
                                  18,696
                                  
                                  
                                  
                                  (606
                                  )(LOSS)
      INCOME  BEFORE INCOME TAX (BENEFIT) PROVISION
                                  
                                  
                                  (20,153
                                  )
                                  
                                  
                                  8,216(BENEFIT)
      PROVISION FOR INCOME TAXES
                                  
                                  
                                  (7,577
                                  )
                                  
                                  
                                  2,571NET
      (LOSS)  INCOME
                                  
                                  $
                                  (12,576
                                  )
                                  
                                  $
                                  5,645See 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)
                                          
                                          2009
                                          
                                          
                                          2008OPERATING
      ACTIVITIES:Net
      (loss) income
                                          
                                          $
                                          (12,576
                                          )
                                          
                                          $
                                          5,645Adjustments
      to reconcile net (loss) income to cash provided by operating
      activities:Depreciation
      and amortization
                                          
                                          
                                          3,119
                                          
                                          
                                          
                                          3,524Deferred
      income taxes
                                          
                                          
                                          (4,272
                                          )
                                          
                                          
                                          (116
                                          )Amortization
      of debt issuance costs
                                          
                                          
                                          1,165
                                          
                                          
                                          
                                          679Write-off
      of deferred loan costs
                                          
                                          
                                          199
                                          
                                          
                                          
                                          -Reserve
      on note receivable
                                          
                                          
                                          11,538
                                          
                                          
                                          
                                          -(Gain)
      loss on sale of fixed assets, net
                                          
                                          
                                          (8
                                          )
                                          
                                          
                                          1Gains
      on repurchases of debt
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (8,411
                                          )Changes
      in assets and liabilitiesAccounts
      receivable
                                          
                                          
                                          9,859
                                          
                                          
                                          
                                          7,580Inventories
                                          
                                          
                                          207
                                          
                                          
                                          
                                          (52
                                          )Prepaids
      and other current assets
                                          
                                          
                                          (1,875
                                          )
                                          
                                          
                                          (48
                                          )Other
      assets
                                          
                                          
                                          (209
                                          )
                                          
                                          
                                          (253
                                          )Accounts
      payable
                                          
                                          
                                          620
                                          
                                          
                                          
                                          (1,532
                                          )Income
      taxes receivable
                                          
                                          
                                          (3,305
                                          )
                                          
                                          
                                          -Accrued
      employee costs
                                          
                                          
                                          (3,537
                                          )
                                          
                                          
                                          (2,760
                                          )Accrued
      interest expense
                                          
                                          
                                          4,915
                                          
                                          
                                          
                                          (5,754
                                          )Due
      to Morris Communications
                                          
                                          
                                          1,336
                                          
                                          
                                          
                                          5,715Deferred
      revenues and other liabilities
                                          
                                          
                                          1,213
                                          
                                          
                                          
                                          2,238Postretirement
      obligations due to Morris Communications
                                          
                                          
                                          -
                                          
                                          
                                          
                                          350Other
      long-term liabilities
                                          
                                          
                                          (21
                                          )
                                          
                                          
                                          212Net
      cash provided by operating activities
                                          
                                          
                                          8,368
                                          
                                          
                                          
                                          7,018INVESTING
      ACTIVITIES:Capital
      expenditures
                                          
                                          
                                          (233
                                          )
                                          
                                          
                                          (640
                                          )Restricted
      cash released from escrow
                                          
                                          
                                          -
                                          
                                          
                                          
                                          12,444Net
      proceeds from sale of property and equipment
                                          
                                          
                                          12
                                          
                                          
                                          
                                          31Net
      cash (used in) provided by investing activities
                                          
                                          
                                          (221
                                          )
                                          
                                          
                                          11,835FINANCING
      ACTIVITIES:Repurchase
      of senior subordinated debt
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (10,705
                                          )Proceeds
      from revolving credit facility
                                          
                                          
                                          10,000
                                          
                                          
                                          
                                          46,000Repayments
      on revolving credit facility
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (29,000
                                          )Repayment
      of term loan
                                          
                                          
                                          (2,250
                                          )
                                          
                                          
                                          (1,125
                                          )Payment
      of debt issuance costs
                                          
                                          
                                          (731
                                          )
                                          
                                          
                                          -Proceeds
      from other borrowings
                                          
                                          
                                          -
                                          
                                          
                                          
                                          593Advances
      on loan receivable from Morris Communications
                                          
                                          
                                          (5,800
                                          )
                                          
                                          
                                          (24,706
                                          )Net
      cash provided by (used in) financing activities
                                          
                                          
                                          1,219
                                          
                                          
                                          
                                          (18,943
                                          )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                          
                                          
                                          9,366
                                          
                                          
                                          
                                          (90
                                          )CASH
      AND CASH EQUIVALENTS, beginning of period
                                          
                                          
                                          4,782
                                          
                                          
                                          
                                          4,135CASH
      AND CASH EQUIVALENTS, end of period
                                          
                                          $
                                          14,148
                                          
                                          
                                          $
                                          4,045SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
                                          
                                          $
                                          1,156
                                          
                                          
                                          $
                                          13,097Income
      taxes paid to Morris Communications
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,686See 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





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 2009 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 audited consolidated financial statements and the notes
thereto for the year ended December
31, 2008. The accounting policies that are employed are the same as those
shown in Note 1 to the consolidated financial statements as of December 31, 2008
and 2007 and for each of three years ended December 31, 2008.





As
further described in Note 4, certain expenses, assets and liabilities of Morris
Communications Company, LLC (“Morris Communications”) have been allocated to the
Company. These allocations were based on estimates of the proportion of
corporate expenses, assets and liabilities related to the Company, utilizing
such factors as revenues, number of employees, salaries and wages expenses, and
other applicable factors. In the opinion of management, these allocations have
been made on a reasonable basis. The costs of these services charged to the
Company may not reflect the actual costs the Company would have incurred for
similar services as a stand-alone company. The Company and Morris Communications
have executed various agreements with respect to the allocation of assets,
liabilities and costs.





Throughout
the year 2008, Morris Publishing Group, LLC (“Morris Publishing”, “Company”) was
a wholly owned subsidiary of Morris Communications, a privately held media
company. On January 28, 2009, Morris Communications and its subsidiaries (other
than the Company) consummated a reorganization of their company structure. In
the reorganization, Morris Communications distributed ownership of all
membership interests in the Company to MPG Newspaper Holding, LLC (“MPG
Holdings”), subject to the existing pledge of the membership interests to the
administrative agent for the lenders under the Credit Agreement dated December
14, 2005 (the “Credit Agreement”). At the time of the distribution, MPG Holdings
and Morris Communications were both beneficially owned by Shivers Trading &
Operating (“Shivers”), and the transfer was completed without consideration,
other than as distributions or capital contributions among related companies
(see note 6). No adjustments have been made to these financial statements due to
this transfer.





In this
quarterly report, Morris Publishing is considered as and will be referred to as
a wholly owned subsidiary of MPG Holdings, a subsidiary of Shivers and Morris
Communications and its subsidiaries are considered affiliates and guarantors of
the senior debt under the Credit Agreement. Morris Communications will
continue to provide management and related services to the Company, as well as
all of its operating subsidiaries.





2.
            Going
      Concern





Several
factors relating to the Company’s outstanding debt raise significant uncertainty
about its liquidity and ability to continue as a going concern. Specifically,
the Company’s debt far exceeds the current value of its assets, and the
Company’s creditors may have the right to accelerate the maturity of the debt
before the end of May 2009.




-4-
 Table of Contents





The
Credit Agreement includes an event of default if the Company, as borrower,
defaults in the payment when due of any principal or interest due on any other
indebtedness having an aggregate principal amount of $5,000 or more (such as the
Company not making the February 1, 2009 interest payment of $9,747 due on the
$278,478 of 7% Senior Subordinated Notes due 2013 (the “Notes”)). Waiver
No. 5 to the Credit Agreement(“Waiver No. 5”, as described in note 9) has
waived until 5 p.m. New York time on May 28, 2009 (the "Expiration Time”) any
default that arose from the Company’s failure to make the interest
payment.





In
addition, the holders (the “Holders”) of over 80% of the Notes have also granted
forbearance (as described in note 9) until the Expiration Time for any
default under the Notes’ indenture (the “Indenture”) that arose from the
non-payment of the interest. Morris Communications along with its subsidiaries
are not guarantors of the Notes.





If the
Company has not paid the overdue interest (plus default interest), amended or
restructured the Notes, or obtained an extension of the Expiration Time, it
would be in default under both the Indenture and the Credit Agreement. As a
result, the Company may be required to prepay the entire principal due on the
senior debt and the Notes and Morris Communications may be required to pay on
its guaranty of the senior debt under the Credit Agreement.





In view
of the current volatility in the credit markets and the market conditions in the
newspaper industry, it is likely that the Company will be dependent on the
ability of Morris Communications or its guarantor subsidiaries to a) enter into
a transaction that would induce a lender to refinance the senior debt, b) raise
sufficient funds to purchase the loans and commitments from the existing senior
creditors, or c) raise sufficient funds to refinance the senior debt with a new
loan from the guarantor. The failure of Morris Communications or its guarantor
subsidiaries to consummate any of the transactions noted above would likely
require the Company to refinance the existing bank debt or seek an amendment of
the terms of the Credit Agreement, either of which could increase its cost of
borrowing, or if such efforts are unsuccessful, the senior creditors could
accelerate the senior debt and foreclose on their security interests in
substantially all of the Company's assets.





Even if
the Company has paid the overdue interest (plus default interest), or amended or
restructured the Notes by the Expiration Time, it is possible that the Company
might not be in compliance with the financial covenants under the Credit
Agreement, which may not be determined until the Company and Morris
Communications complete their consolidated financial statements for the first
quarter of 2009. Such consolidated financial statements must be delivered to the
senior creditors no later than May 30, 2009, two days after the Expiration Time.
In addition, the Company will be unlikely to meet the financial covenants under
the Credit Agreement when the Company and Morris Communications deliver their
consolidated financial statements for the second quarter of 2009 no later than
August 29, 2009 (when the relaxed financial covenants under Amendment
No. 3 to the Credit Agreementterminate). A failure to amend or refinance
before the relaxed covenants terminate would prevent the Company from borrowing
on the revolver and it may be required to prepay the entire principal due under
the Credit Agreement.





If this
was to occur, it could lead to an event of default under the Indenture.
Specifically, there is an event of default under the Indenture if the Company
fails to pay other indebtedness (such as the senior debt) exceeding $5,000 upon
final maturity or within 20 days of an acceleration. In such an event, the
Company cannot assure the Holders that it would have sufficient assets to pay
any amounts due on the Notes. As a result, the Holders may receive no payments
or less than the full amount they would be otherwise entitled to receive on the
Notes and Holdings’ equity interest in the Company may be
worthless.





In
response to all the factors described above, the Company is pursuing
alternative sources of funds or means of financing to repay or refinance the
amounts outstanding on the Credit Agreement and the Company is attempting to
refinance or restructure the amounts outstanding on the Notes. As a result of
their efforts, the Company has spent a total of $2,868 in legal, investment
banking and consulting fees during the first quarter of 2009. However, the
timing and ultimate outcome of such efforts cannot be determined at this
time.





As a
result of the aforementioned factors and related uncertainties, there is
substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include all
adjustments relating to the recoverability or classification of recorded asset
amounts or the amounts or classification of liabilities should the Company be
unable to continue as a going concern.


-5-
 Table of Contents





3.
            Reserve
      on Note Receivable





During
the fourth quarter of 2007, the Company completed the sale of fourteen daily
newspapers, three non-daily newspapers, a commercial printing operation and
other related publications to GateHouse (the “GateHouse
sale”). The total purchase price was $115,000 plus reimbursement for the net
working capital. The gain on sale was $49,567, net of the $30,505 provision for
income taxes. In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets ”, the gain from the
sale of the assets, net of closing costs and the provision for income taxes, was
recorded as discontinued operations in the fourth quarter of 2007.





One
hundred five million dollars was received at closing in cash, with the remainder
payable in the form of a one-year $10,000 promissory note bearing interest at 8%
per annum. The note receivable was unsecured and originally matured on November
30, 2008. The Company received $2,500 of the total working capital reimbursement
at closing with the remainder due prior to the promissory note’s maturity
date.





At the
end of 2008, the Company renegotiated the terms of the note receivable, with
GateHouse agreeing to pay the original $10,000 note balance plus the $2,980
remaining net working capital reimbursement over nine equal monthly
installments, together with interest at a rate of 8% per annum. The first $1,442
monthly payment, along with the accrued interest on the working capital
receivable, was made in December of 2008.





During
January of 2009, the note was amended to postpone the remaining monthly
principal payments by three months, with the next principal payment becoming due
on April 15, 2009 and the final payment due on November 15, 2009. However,
GateHouse failed to pay the principal due on April 15, 2009; making only the $78
interest payment.





On May 1,
2009, the Company subsequently entered into a second amendment to the note
postponing the next principal payment on the note until December 31, 2009, with
the final monthly payment on the note becoming due and payable in full on
October 15, 2010 (see note 9).





However,
given GateHouse’s reported losses in the last three years and its reported
liquidity problems, the Company is uncertain as to the timing of any future
principal payments. In accordance with SFAS No. 114 (as amended), “Accounting byCreditors for Impairment of a
Loan”, the Company has reserved the $11,538 due on the note within
continuing operations during the first quarter of 2009.





4.
            Transactions
      with Affiliates




Management,
Technology and Shared Services Fees— The Company receives certain
services from, and has entered into certain transactions with, Morris
Communications.





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 $2,569 and $3,308 for the three month periods ended
March 31, 2009 and 2008, respectively. The Company has recorded the management
fee within other operating costs in the accompanying consolidated financial
statements.


-6-
 Table of Contents


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 the Company based upon
usage.





The
technology and shared services fees paid to Morris Communications totaled $1,605
and $2,068 for the three month periods ended March 31, 2009 and 2008,
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. Prior to July
13, 2008 (the “suspension date”), contributions by employees to the 401(k) plan
were matched (up to 5% of pay) by Morris Communications. The Company has
indefinitely suspended the employer matching contributions for employee
contributions made after the suspension date.





Expenses,
allocated to the Company based on specific identification of employer matching
contributions, were $842 for the three month period ended March 31,
2008.





RetireeHealthCareBenefits—
Effective December 31, 2008, Morris Communications terminated its retiree health
care plan effective with respect to claims incurred on and after January 1,
2009. At that time, the plan ceased to provide benefits to (1) former employees
and their eligible dependents and (2) regular full time and eligible part time
employees upon their separation from service.





Expenses
related to Morris Communications’ plan, allocated to the Company based on total
headcount, were $350 for the three months ended March 31, 2008.





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 $1,984 and $2,405 for the three
month periods ended March 31, 2009 and 2008, respectively.





The
Company was also allocated its portion of Morris Communications’ health and
disability obligation. The amounts allocated to the Company, based on total
headcount, were $1,528 and $1,974 as of March 31, 2009 and December 31, 2008,
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 $403 and $619
for the three month periods ended March 31, 2009 and 2008,
respectively.





Loan Receivable
fromMorris
Communications—
Under its debt arrangements, the Company is permitted to loan up to
$40,000 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 $20,000 at any one
time outstanding to Morris Communications or any other Person(s), as defined in
the debt Indenture.


-7-
 Table of Contents


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, 2009, 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.





The
Company accounts for this arrangement as a capital distribution transaction and
classifies such borrowings as contra-equity within member’s deficiency in
assets, given the historical practice of the Company and Morris Communications
settling a significant portion of the outstanding loan receivable balance with a
dividend. In addition, interest accrued on this loan receivable has been
reported as contra-equity within member’s deficiency in assets for the three
month periods ended March 31, 2009 and 2008.





During
the three month periods ended March 31, 2009 and 2008, the Company reported the
$202 and $223, respectively, in interest accrued on the intercompany loan
receivable as contra-equity. The average interest rate for the three month
periods ended March 31, 2009 and 2008 was 3.333% and 4.875%, respectively, on
average loan receivable balances of $24,100 and $18,426 (excluding the
income taxes payable on the GateHouse sale), respectively.





At March
31, 2009, the amount outstanding on the intercompany loan due from Morris
Communications was $24,072, and the accumulated interest accrued on the
intercompany loan receivable was $6,062, resulting in a net intercompany
receivable of $18,010. The amount outstanding on the intercompany loan due from
Morris Communications was $12,210 as of December 31, 2008.





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.





No
dividends were declared or recorded in the first three months of 2008 or 2009
and the Company is currently prohibited under its debt covenants from making any
restricted payments.





Restricted cash
released from escrow—
During the fourth quarter of 2007, the Company elected to have $12,350 of the
net proceeds from the GateHouse sale deposited into an escrow account in order
to potentially fund other acquisitions by the Company or Morris Communications
through a tax-deferred Section 1031 exchange. At the end of the first quarter of
2008, Morris Communications acquired qualified replacement property using the
amount (including interest) in the Company’s escrow account. At the same time,
Morris Communications returned the escrow funds by using its cash to pay down
balances due on the Company’s revolving credit facility.





Income
taxes— On
January 28, 2009, the Company amended
its Tax Consolidation agreement with Morris Communications and Shivers to
include Questo, Inc. ("Questo") as the new ultimate common parent of the group
and to include MPG Holdings as the Company’s new parent, for tax periods after
the reorganization. The Amendment does not change the Company’s financial rights
or obligations. The Company remains obligated to pay to its parent entities an
amount equal to the federal income tax liability that it would pay (taking into
account net operating loss carry forwards and carry backs) as if the Company
were filing separate tax returns as a C corporation. The parent entities remain
obligated to indemnify the Company for any tax liability of any other member of
the consolidated group.





The
Company is a single member limited liability company and is not subject to
income taxes. However, the Company’s results are included in the consolidated
federal income tax return of its ultimate parent. Tax provisions are settled
through an intercompany account and its parent makes income tax payments based
on results of the Company. Under the terms of the agreement, the Company remits
taxes for its current tax liability to its parent entity. Accordingly, the
Company recognizes an allocation of income taxes in its separate financial
statements in accordance with the agreement as if it filed a separate income tax
return.


-8-
 Table of Contents


The
Company accounts for income taxes under the provisions of the liability method
(SFAS No. 109, “Accounting for
Income Taxes”), which requires the recognition of deferred tax assets and
liabilities for future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and their
respective tax bases. The recognition of future tax benefits is required to the
extent that realization of such benefits is more likely than not.





5.
            Recently
      Issued Accounting Standards





In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. 140-4 and FIN No. 46(R)-8, “Disclosures about Transfers of
Financial Assets and Interests in Variable Interest Entities”, which will
increase disclosure requirements for public companies for reporting periods that
end after December 15, 2008. The purpose of this FSP is to promptly improve
disclosures by public entities and enterprises until the pending Amendments to
SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”, and FIN No. 46 (revised December 2003), “Consolidation of Variable Interest
Entities”, are finalized and approved by the Board. Effective at the end
of the first reporting period (interim and annual) after issuance of the FSP for
public entities, the FSP amends SFAS No. 140 to require public entities to
provide additional disclosures about transfers of financial assets and variable
interests in qualifying special-purpose entities. It also amends FIN No. 46(R)
to require public enterprises to provide additional disclosures about their
involvement with variable interest entities. The implementation of this standard
did not have an impact on the Company’s financial statements.





In
October 2008, the FASB issued FSP No. 157-3“Determining Fair Value of a
Financial Asset in a Market That Is Not Active” (“FSP No. 157-3”). FSP
No. 157-3 clarified the application of SFAS No. 157 in an inactive market. FSP
No. 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of this standard
did not have an impact on the Company’s financial statements.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. In February 2008, the FASB issued FSP No. 157-2, “Effective Date of SFAS No.
157”, which delayed the effective date of SFAS No. 157 for non-financial
assets and liabilities, except for those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until January 1,
2009. The implementation of this standard did not have an impact on the
Company’s financial statements.





6.
            Long-Term Debt





The
following table summarizes the debt outstanding as of March 31, 2009 and
December 31, 2008:





March
      31,
                              
                              
                              December
      31,2009
                              
                              
                              2008Credit AgreementTranche
      A
                              
                              $
                              81,000
                              
                              
                              $
                              83,250Revolving
      debt
                              
                              
                              60,000
                              
                              
                              
                              50,000Total
                              
                              
                              141,000
                              
                              
                              
                              133,250Senior Subordinated
    Indenture*
                              
                              
                              278,478
                              
                              
                              
                              278,478Total
      Current Maturities of Long-Term Debt
                              
                              $
                              419,478
                              
                              
                              $
                              411,728*February
      1, 2009 interest payment of $9,747 has not been paid by Company as of
      March 31, 2009.


-9-
 Table of Contents






The
weighted average interest rate on the Company’s total debt outstanding was 5.84%
and 5.78% at March 31, 2009 and December 31, 2008, respectively. At March 31,
2008, the weighted average interest rate on the $425,227 total debt outstanding
was 6.01%.





At March
31, 2009, the Company had $60,000 outstanding on its revolving line of credit,
up $10,000 from $50,000 at December 31, 2008. The commitment fee on the
unborrowed funds available under the revolver was 0.50% at March 31, 2009 and
December 31, 2008.





At March
31, 2009, the interest rate on both the $81,000 term loan and the revolver was
3.5625%. During the three months ended March 31, 2009, the Company paid $2,250
in principal due on the term loan, with another $7,875 of principal payments due
by the end of 2009.





At March
31, 2008, the interest rate on the $87,725 Tranche A term loan outstanding was
4.0% and the weighted average interest rate on the $56,000 outstanding on the
revolver was 4.173%. The commitment fee on the unborrowed funds available under
the revolver was 0.375%.





During
the three months ended March 31, 2008, the Company paid $1,125 in principal due
on the term loan and borrowed $593 against a bank swing line loan.





During
the first and second quarter of 2008, the Company repurchased a total of $21,522
of its $300,000 7% Senior Subordinated Notes. The amount outstanding on the
Notes was $278,478 at March 31, 2009 and December 31, 2008.





During
the first quarter of 2008, the Company repurchased a total of $19,116 of its
$300,000 7% Senior Subordinated Notes for a total purchase price, including
closing costs, of $10,705, plus accrued interest. The pre-tax gains on these
repurchases was $8,411. In addition, the Company wrote off $334 in unamortized
loan fees related to these extinguished notes. The amount outstanding on the
Senior Subordinated Notes was $280,884 at March 31, 2008.





During
the first quarter of 2009, the Company failed to pay the $9,747 interest payment
which was due on February 1, 2009 on the notes. As a result, the Company entered
into the following agreements with the lenders under the Credit Agreement and
the Holders (see note 9 for subsequent amendments and waivers):





Amendment
No 4. and Waiver No. 2 to the Credit Agreement—
On January 28, 2009, the Company, as borrower, entered into Amendment No. 4 and
Waiver No. 2 to the Credit Agreement (“Amendment No. 4), which waived until
March 3, 2009 any default that arose from the Company’s failure to pay the
interest payment due on the Senior Subordinated Notes. The Credit Agreement
includes an event of default if the Company defaults in the payment when due of
any principal or interest due on any other indebtedness having an aggregate
principal amount of $5,000 or more (such as its outstanding notes or bank credit
facilities).





Amendment
No. 4 also required the Company, by March 3, 2009, to enter into control
agreements in favor of the lenders to perfect the security interest of the
lenders in all deposit accounts, except for deposit accounts aggregating less
than $500 for the Company, Morris Communications and their subsidiaries.
Waiver No. 3 (as described below) extended this compliance deadline to
April 6, 2009.





Prior to
Amendment No. 4, the Credit Agreement provided for revolving credit
commitments of $100,000, in addition to the $83,250 outstanding on the term
loan. Amendment No. 4 reduced the limit on loans available under the
revolving facility from $100,000 to $70,000, but further limited the amount
available to $60,000 without the consent of lenders holding a majority of the
commitments under the Credit Agreement.





In
addition, Amendment No. 4 provided for an immediate increase of the variable
interest rate under the Credit Agreement (previously scheduled for April 1,
2009) of 0.500% and waived until April 11, 2009 any default that may exist from
the Company’s failure to cause to be filed continuation statements as may be
necessary to maintain perfection of security interests in assets of some of the
subsidiary guarantors.


-10-
 Table of Contents





Amendment
No. 4 also contained provisions which permitted Morris Communications, its
beneficial owners, and its subsidiaries (other than the Company) to consummate a
reorganization of their company structure, without causing a default under the
Credit Agreement (see Note 1).





After the
reorganization, the lenders under the Credit Agreement maintain all of their
existing security interests in the assets of the Company, Morris Communications
and the subsidiary guarantors. Various covenants, restrictions and other
provisions of the Credit Agreement were modified to reflect the reorganized
corporate structure, without materially changing the substantive effect of the
provisions on either the Company, Morris Communications or the subsidiary
guarantors. The Company did not transfer or receive any assets or liabilities in
the reorganization.





As a
result of the reorganization, the Company amended its Tax Consolidation
Agreement with Morris Communications and Shivers to include Questo, Inc.
("Questo") as the new common parent of the group and to include MPG Holdings as
its new parent, for tax periods after the reorganization (see Note
4).





The $731
in debt issuance costs associated with Amendment No. 4 were deferred and are
being amortized ratably through May, 2009, the date when, pursuant to the Mandatory
Transaction provision of Amendment No. 3 to the Credit Agreement, the credit
facility was originally required to be repaid. Subsequently, Amendment No. 5 to
the Credit Agreement eliminated the Mandatory Transaction requirement (see note
9).





In
addition, the Company wrote off $199 in deferred loan costs during January of
2009.





Waiver No. 3 to the Credit
Agreement— On
February 26, 2009, the Company entered into Waiver No. 3 to the Credit Agreement
(“Waiver No. 3”) which extended the original waiver period from March 3, 2009
until April 6, 2009, or earlier, if upon termination of the Forbearance
Agreement (as described below). The Company expensed $184 in debt issuance costs
associated with Waiver No. 3.





Forbearance
Agreement—
On February 26, 2009, the Company entered into a forbearance agreement (the
“Forbearance Agreement”) with holders of over $226,000 of outstanding principal
amount of the notes, with the Holders agreeing not to take any action as a
result of the payment default to enforce any of the rights and remedies
available to them under the Indenture for a period ending on April 6, 2009 (the
“Forbearance Period”). Under the agreement, the Forbearance Period could be
terminated earlier for various reasons, which include the lenders under the
Credit Agreement accelerating the maturity of the obligations under the Credit
Agreement or terminating the Waiver (as described below), the occurrence of any
other default under the Indenture, or the Company’s filing for bankruptcy
protection or breaching the covenants under the Forbearance
Agreement.





7.
            Intangible
      Assets





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 in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets”.





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).


-11-
 Table of Contents






At
December 31, 2008, the Company performed the required impairment tests of the
indefinite-lived intangible assets, which resulted in no
impairments.





Intangible
assets subject to amortization (primarily advertiser and subscriber lists) are
tested for recoverability whenever events or change in circumstances indicate
that their carrying amounts may not be recoverable. The carrying amount of each
asset group is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use of such asset group. The Company performed
impairment tests on its long lived assets (including intangible assets subject
to amortization) on all of its reporting units as of December 31, 2008. No
impairment loss was recognized.





Amortization
expense of other intangible assets for the three month periods ended March 31,
2009 and 2008 was $172 and $175, respectively.





Changes
in the carrying amounts of intangible assets of the Company for the three months
ended March 31, 2009 were as follows:





Other
      intangible assetsBalance
      at December 31, 2008
                        
                        $
                        7,956Amortization
      expense
                        
                        
                        172Balance
      at March 31, 2009
                        
                        $
                        7,784






Other
finite-lived and indefinite-lived intangible assets at March 31, 2009 and
December 31, 2008 were as follows:





Cost
                      
                      
                      Accumulated amortization
                      
                      
                      Net costMarch
      31, 2009:Finite-lived
      intangible assetsSubscriber
      lists
                      
                      $
                      9,196
                      
                      
                      $
                      5,769
                      
                      
                      $
                      3,427Non-compete
      agreements and other assets
                      
                      
                      50
                      
                      
                      
                      49
                      
                      
                      
                      1Total
      finite-lived intangible assets
                      
                      
                      9,246
                      
                      
                      
                      5,818
                      
                      
                      
                      3,428Indefinite-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
                      
                      $
                      14,409
                      
                      
                      $
                      6,625
                      
                      
                      $
                      7,784


-12-
 Table of Contents





Cost
                        
                        
                        Accumulated amortization
                        
                        
                        Net costDecember
      31, 2008:Finite-lived
      intangible assetsSubscriber
      lists
                        
                        $
                        9,196
                        
                        
                        $
                        5,598
                        
                        
                        $
                        3,598Non-compete
      agreements and other assets
                        
                        
                        50
                        
                        
                        
                        48
                        
                        
                        
                        2Total
      finite-lived intangible assets
                        
                        
                        9,246
                        
                        
                        
                        5,646
                        
                        
                        
                        3,600Indefinite-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
                        
                        $
                        14,409
                        
                        
                        $
                        6,453
                        
                        
                        $
                        7,956






The
remaining expense for the last nine months of 2009 and for the five succeeding
years for the existing finite-lived intangible assets is as
follows:




Remainder
      of 2009
                  
                  $
                  5092010
                  
                  
                  6652011
                  
                  
                  5362012
                  
                  
                  4192013
                  
                  
                  3552014
                  
                  
                  176




8.
            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.





9.
            Subsequent
      Events





Credit
Agreement— On
April 6, 2009, Amendment
No. 5 and Waiver No. 4to the Credit Agreement (“Waiver No. 4”) waived any
default that arose from the failure to make the $9,747 interest payment which
was due on February 1, 2009 on the Notes until April 24, 2009.





In
addition, Waiver No. 4 deleted the Mandatory Transaction requirement added by Amendment
No. 3 to the Credit Agreement. Prior to its deletion, the Mandatory
Transaction requirement would have required the Company, Morris
Communications or one or more of their subsidiaries to consummate a
transaction (or at least sign a binding letter of intent to do so) that would
generate sufficient funds to either prepay all loans under the Credit
Agreement or purchase an assignment of all loans and commitments of the lenders
at par, no later than the delivery date of Morris Communications’ financial
statements for the quarter ending March 31, 2009 (but not later than May 30,
2009). Waiver No. 4 also required Morris Communications to provide certain
additional financial and company information to the lenders.


-13-
 Table of Contents





On April
23, 2009, Waiver
No. 5 waived any default that arose from the failure to make the interest
payment due on the Notes until 5:00 p.m. New York City time on May 28, 2009,
however, the waiver will terminate earlier if Amendment No. 2 to the Forbearance
Agreement (as described below) is terminated or amended prior to such time or
upon other defaults.





Waiver
No. 5 also waives any event of default that consists solely of Morris
Communications and the Company failing to deliver by April 16, 2009 consolidated
audited financial statements, together with the opinion of independent certified
public accountants, with respect to the fiscal year of Morris Communications
ending December 31, 2008, provided that such audited financial statements and
opinion are delivered prior to 5:00 p.m., New York City time, on April 24, 2009.
Morris Communications delivered its audited financial statements and the
auditors' opinion to the lenders on April 21, 2009.




Senior
Subordinated Notes—
On April 6, 2009, the Company entered into an amendment to the Forbearance
Agreement (the “Amended
Forbearance Agreement”). Under the Amended Forbearance Agreement, the
Forbearance Period was extended to April 24, 2009.





During
the Forbearance Period, and for up to seven business days thereafter, the
Amended Forbearance Agreement restricts the Company’s ability to enter into any
transaction which would refinance any of its existing senior debt under the
Credit Agreement where any affiliate of the Company would become a holder of
senior debt and limits new liens on its properties, without prior written
consent of holders of more than 66 2/3% of the outstanding Notes. The
Amended Forbearance Agreement also provided that the Company submit a
restructuring proposal to the Holders’ advisors on or before April 7, 2009 and
required delivery to the advisors of detailed information regarding the finances
and businesses of Morris Communications, the Company, and their subsidiaries,
including disclosure of information pertaining to the potential sale of certain
assets, annual financial information, and agreements such as mortgages related
to the Credit Agreement and requires access for discussions with management and
advisors. The Company submitted a restructuring proposal to the Holders’
advisors on April 7, 2009.





On April
23, 2009, the Company entered into Amendment
No. 2 to the Forbearance Agreementextending the Forbearance Period to 5:00
p.m., New York City time, on May 28, 2009.


GateHouse Note
Receivable— On
May 1, 2009, the Company entered into a second amendment to the note, with
GateHouse agreeing to monthly payments of interest (8.0% per annum) in arrears
on the principal amount then outstanding on the note beginning in January 2009
and continuing through December 2009 while any part of the note remains unpaid.
A principal payment of $1.5 million (the remainder of the net working capital
adjustment) will be due and payable on December 31, 2009. Commencing in January
2010, monthly interest payments of interest in arrears on the principal amount
then outstanding under the note, along with one-tenth of the principal amount of
the note shall be payable on the 15th of each month. The note shall be due and
payable in full on October 15, 2010.


-14-
 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, 2009 and 2008
and with ourconsolidated financial
statements as of December 31, 2008 and 2007 and for each of three years in the
period ended December 31, 2008, filedon Form 10-K.





During
2008 and the first three months of 2009, our financial position and liquidity
have deteriorated due to the significant declines in advertising revenue. The
reader should evaluate any information provided herein in this
context.





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 Group, LLC
(“Morris Publishing”) 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.





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.





We
believe there have been no significant changes during the quarter ended March
31, 2009 to the items that we disclosed as our critical accounting policies and
estimates herein and in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our annual report dated December 31, 2008
filed with the Securities and Exchange Commission on Form 10-K.





Cost
allocations— In this
report certain expenses, assets and liabilities of Morris Communications
Company, LLC (“Morris Communications”) have been allocated to us. These
allocations were based on estimates of the proportion of corporate expenses,
assets and liabilities related to us, utilizing such factors as revenues, number
of employees, salaries and wages expenses, and other applicable factors. In the
opinion of management, these allocations have been made on a reasonable basis.
The costs of these services charged to us may not reflect the actual costs we
would have incurred for similar services as a stand-alone company. Morris
Publishing and Morris Communications have executed various agreements with
respect to the allocation of assets, liabilities and costs.





Parent company
reorganization—
Throughout the year 2008, we were a wholly owned subsidiary of Morris
Communications, a privately held media company. On January 28, 2009, Morris
Communications and its subsidiaries (other than us) consummated a reorganization
of their company structure. In the reorganization, Morris Communications
distributed ownership of all membership interests in Morris Publishing to MPG
Newspaper Holding, LLC (“MPG Holdings”), subject to the existing pledge of the
membership interests to the administrative agent for the lenders under the
Credit Agreement dated December 14, 2005 (the “Credit Agreement”). At the time
of the distribution, MPG Holdings and Morris Communications were both
beneficially owned by Shivers Trading & Operating (“Shivers”), and the
transfer was completed without consideration, other than as distributions or
capital contributions among related companies.


-15-
 Table of Contents




In this
report, we are considered as and will be referred to as a wholly owned
subsidiary of MPG Holdings, a subsidiary of Shivers. Morris Communications and
its subsidiaries are considered affiliates and guarantors of the senior debt
under the Credit Agreement and Morris Communications will continue to provide
management and related services to us, as well as all of its operating
subsidiaries. A significant portion of Morris Communications’ time will continue
to be devoted to our affairs.





Income
taxes— On
January 28, 2009, we amended our Tax
Consolidation agreementwith Morris Communications and Shivers to include
Questo, Inc. ("Questo") as the new ultimate common parent of the group and to
include MPG Holdings as our new parent, for tax periods after the
reorganization. The Amendment does not change our financial rights or
obligations. We remain obligated to pay to our parent entities an amount equal
to the federal income tax liability that we would pay (taking into account net
operating loss carry forwards and carry backs) as if we were filing separate tax
returns as a C corporation. The parent entities remain obligated to indemnify us
for any tax liability of any other member of the consolidated
group.





We are a
single member limited liability company and are not subject to income taxes.
However, our results are included in the consolidated federal income tax return
of our ultimate parent. Tax provisions are settled through an intercompany
account and our parent makes income tax payments based on our results. Under the
terms of the agreement, we remit taxes for our current tax liability to our
parent entity. Accordingly, we recognize an allocation of income taxes in our
separate financial statements in accordance with the agreement as if we filed a
separate income tax return.





We
account for income taxes under the provisions of the liability method (SFAS No.
109, “Accounting for Income
Taxes”), which requires the recognition of deferred tax assets and
liabilities for future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and their
respective tax bases. The recognition of future tax benefits is required to the
extent that realization of such benefits is more likely than not.





Reserve on note
receivable—During
the fourth quarter of 2007, we completed the sale of fourteen daily newspapers,
three non-daily newspapers, a commercial printing operation and other related
publications to GateHouse.
The total purchase price was $115 million plus a working capital adjustment. The
gain on sale was $49.6 million, net of the $30.5 million provision for income
taxes. In accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets ”, the gain from the sale of the assets,
net of closing costs and the provision for income taxes, was recorded as
discontinued operations in the fourth quarter of 2007.





One
hundred five million dollars was received at closing in cash, with the remainder
payable in the form of a one-year $10 million promissory note bearing interest
at 8.0% per annum. The note receivable was unsecured and originally matured on
November 30, 2008. We received $2.5 million of the total working capital to be
reimbursed at closing with the remainder due prior to the promissory note’s
maturity date.





At the
end of 2008, we renegotiated the terms of the note receivable, with GateHouse
agreeing to pay the original $10.0 million note balance plus the $3.0 million
remaining working capital reimbursement over nine equal monthly installments,
together with interest at a rate of 8.0% per annum.





The first
$1.4 million monthly payment plus interest, along with the accrued interest on
the working capital receivable, was made in December of 2008. During January of
2009, the note was amended to postpone the remaining monthly principal payments
by three months, with the next principal payment becoming due on April 15, 2009
and the final payment due on November 15, 2009. However, GateHouse failed to pay
the principal due on April 15, 2009; making only the $78 interest
payment.


-16-
 Table of Contents







On May 1,
2009, we subsequently entered into a second amendment to the note, with
GateHouse agreeing to monthly payments of interest (8.0% per annum) in arrears
on the principal amount then outstanding on the note beginning in January 2009
and continuing through December 2009 while any part of the note remains unpaid.
A principal payment of $1.5 million (the remainder of the net working capital
adjustment) will be due and payable on December 31, 2009. Commencing in January
2010, monthly interest payments of interest in arrears on the principal amount
then outstanding under the note, along with one-tenth of the principal amount of
the note shall be payable on the 15th of each
month. The note shall be due and payable in full on October 15,
2010.





However,
given GateHouse’s reported losses in the last three years and its reported
liquidity problems, we are uncertain as to the timing of any future principal
payments. In accordance with SFAS No. 114 (as amended), “Accounting byCreditors for Impairment of a
Loan”, we have reserved the $11.5 million due on the note within
continuing operations during the first quarter of 2009.





Recently
issued accounting standards





In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. 140-4 and FIN No. 46(R)-8, “Disclosures about Transfers of
Financial Assets and Interests in Variable Interest Entities”, which will
increase disclosure requirements for public companies for reporting periods that
end after December 15, 2008. The purpose of this FSP is to promptly improve
disclosures by public entities and enterprises until the pending Amendments to
SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”, and FIN No. 46 (revised December 2003), “Consolidation of Variable Interest
Entities”, are finalized and approved by the Board. Effective at the end
of the first reporting period (interim and annual) after issuance of the FSP for
public entities, the FSP amends SFAS No. 140 to require public entities to
provide additional disclosures about transfers of financial assets and variable
interests in qualifying special-purpose entities. It also amends FIN No. 46(R)
to require public enterprises to provide additional disclosures about their
involvement with variable interest entities. The implementation of this standard
did not have an impact on our financial statements.





In
October 2008, the FASB issued FSP No. 157-3“Determining Fair Value of a
Financial Asset in a Market That Is Not Active” (“FSP No. 157-3”). FSP
No. 157-3 clarified the application of SFAS No. 157 in an inactive market. FSP
No. 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of this standard
did not have an impact on our financial statements.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. In February 2008, the FASB issued FSP No. 157-2, “Effective Date of SFAS No.
157”, which delayed the effective date of SFAS No. 157 for non-financial
assets and liabilities, except for those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until January 1,
2009. The implementation of this standard did not have an impact on our
financial statements.





Overview





Morris
Publishing owns and operates 13 daily newspapers as well as non-daily
newspapers, city magazines and free community publications in the Southeast,
Midwest, Southwest and Alaska. Morris Publishing-owned newspapers include, among
others,The Florida
Times-Union, Jacksonville,The Augusta (Ga.)Chronicle,Savannah (Ga.)Morning News,Lubbock (Texas)Avalanche-Journal,Amarillo (Texas)Globe-News,Athens (Ga.)Banner Herald, Topeka(Kans.) Capital-Journal, andThe St. Augustine
(Fla.)Record.


-17-
 Table of Contents





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.





During
the first quarter of 2009, advertising revenue represented 72.0% of our total
net operating revenue. Our advertising revenue consisted of 57.8% in retail,
34.1% in classified and 8.0% in national, compared to 51.9%, 40.4%, and 7.7%,
respectively, last year.





The
continued deterioration of advertising revenues due to the weak national and
local economic conditions have reduced advertising demand over the past several
quarters. We feel that this situation, coupled with increased competition from
on-line media, may continue for some time.





Classified
advertising has decreased as a percentage of total advertising revenue
particularly in the employment and real estate categories as a result of the
economic slowdown affecting classified advertising and the secular shift in
advertising demand to online. While revenues from retail advertising carried as
part of our newspapers (run-of-press) or in advertising inserts placed in
newspapers (inserts) has decreased period over period, retail advertising has
steadily increased as a percentage of total advertising. National advertising
revenue, which makes up a small percentage of our total advertising revenues,
has remained relatively similar period over period.





All
categories of the advertising revenues above have been growing online, with the
exception of employment classifieds which has been negatively affected by the
downturn in the economy.





In
addition, 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.





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.





Circulation
revenue represented 24.8% of our total net operating revenue during the first
quarter of 2009, compared to 17.8% during the same period last year, with part
of the increase due to the change in the way we sell home delivery subscriptions
in Florida.





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.


-18-
 Table of Contents





Financial
summary for the three months ended March 31, 2009 compared to March 31,
2008





Financial
Summary.The following table summarizes our consolidated financial
results for the three months ended March 31, 2009 and 2008:





Three
      months ended March 31,(Dollars in millions)
                  
                  2009
                  
                  
                  2008Total
      net operating revenues
                  
                  $
                  64.2
                  
                  
                  $
                  82.7Total
      operating expenses
                  
                  
                  65.7
                  
                  
                  
                  75.1Operating
      (loss) income
                  
                  
                  (1.5
                  )
                  
                  
                  7.6Interest
      expense and loan amortization cost
                  
                  
                  7.4
                  
                  
                  
                  8.0Reserve
      on note receivable
                  
                  
                  11.5
                  
                  
                  
                  -Gains
      on repurchases of debt
                  
                  
                  -
                  
                  
                  
                  (8.4
                  )Other
                  
                  
                  (0.2
                  )
                  
                  
                  (0.2
                  )Other
      expenses (income), net
                  
                  
                  18.7
                  
                  
                  
                  (0.6
                  )(Loss)
      income before taxes
                  
                  
                  (20.2
                  )
                  
                  
                  8.2(Benefit)
      provision for income taxes
                  
                  
                  (7.6
                  )
                  
                  
                  2.6Net
      (loss) income
                  
                  $
                  (12.6
                  )
                  
                  $
                  5.6




Compared
to the first quarter of 2008, total net operating revenues were $64.2 million,
down $18.5 million, or 22.4%, and total operating expenses were $65.7 million,
down $9.4 million, or 12.6%. Included in our 2009 operating expenses were $2.9
million in legal and consultant costs directly related to the restructuring of
our debt.





Our
operating loss was $1.5 million for the first three months of 2009 compared to
operating income of $7.6 million for the same period last year.





Interest
and loan amortization expense totaled $7.4 million, down $0.6 million from $8.0
million last year primarily due to the reduction in our outstanding
debt.





During
the first quarter of 2009, we reserved the $11.5 million due on the unsecured
promissory note receivable from GateHousedue to our
uncertainty as to the timing of any future principal payments.





During
the first quarter 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 $0.4 million in
unamortized loan fees related to the extinguishment of these bonds. The gain on
these transactions was $8.4 million.





Our loss
before taxes was $20.2 million, compared to income of $8.2 million last
year





Our
income tax benefit was $7.6 million in 2009, compared to an income tax provision
of $2.6 million last year. Our effective tax rate increased from 31.3% to 37.6%
in 2009.





Our net
loss was $12.6 million compared to net income of $5.6 million during the first
quarter last year.


-19-
 Table of Contents





Results
of operations for the three months ended March 31, 2009 compared to March 31,
2008





Net operating
revenue. The table below presents the total net operating revenue and
related statistics for the three months ended March 31, 2009 compared to March
31, 2008:





(Dollars in millions)
                            
                            Three
      months ended March 31,
                            
                            
                            Percentage
      change2009
                            
                            
                            2008
                            
                            
                            2009
      vs. 2008Net
      operating revenuesAdvertisingRetail
                            
                            $
                            26.7
                            
                            
                            $
                            33.9
                            
                            
                            
                            (21.1
                            %)Classified
                            
                            
                            15.8
                            
                            
                            
                            26.4
                            
                            
                            
                            (40.2
                            %)National
                            
                            
                            3.7
                            
                            
                            
                            5.0
                            
                            
                            
                            (26.3
                            %)Total
      advertising revenues
                            
                            
                            46.2
                            
                            
                            
                            65.3
                            
                            
                            
                            (29.2
                            %)Circulation
                            
                            
                            15.9
                            
                            
                            
                            14.7
                            
                            
                            
                            8.2
                            %Other
                            
                            
                            2.1
                            
                            
                            
                            2.7
                            
                            
                            
                            (23.4
                            %)Total
      net operating revenues
                            
                            $
                            64.2
                            
                            
                            $
                            82.7
                            
                            
                            
                            (22.4
                            %)





Advertising revenue.Advertising revenue was $46.2 million, a decrease of $19.1 million, or
29.2%, from last year, with this year’s quarter over quarter comparisons being
unfavorably impacted by Easter Sunday occurring during April compared to March
last year.





Retail,
national and classified advertising categories were down 21.1%, 26.3% and 40.2%,
respectively.





Compared
to last year, run of press advertising revenue was $27.0 million, down $13.5
million, or 33.4%, and insert advertising revenue was $10.5 million, down $1.9
million, or 15.7%. Advertising revenue from specialty products printed by us,
but not a part of main newspaper product, was $2.5 million, down $1.1 million,
or 31.8%.





Online
advertising revenue, summarized in the table below, was $6.4 million, down $2.5
million, or 27.9%, from last year. Compared to last year, total page-views were
154.4 million, down 16.5 million, or 9.7% while unique page-views were 13.3
million, up 1.7 million, or 14.9%.





(Dollars in millions)
                                                      
                                                      Three
      months ended March 31,
                                                      
                                                      
                                                      Percentage
      Change2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009
      vs. 2008Online
      advertising revenuesRetail
                                                      
                                                      $
                                                      2.5
                                                      
                                                      
                                                      $
                                                      2.7
                                                      
                                                      
                                                      
                                                      (9.3
                                                      %)National
                                                      
                                                      
                                                      0.3
                                                      
                                                      
                                                      
                                                      0.4
                                                      
                                                      
                                                      
                                                      (23.7
                                                      %)ClassifiedAuto
                                                      
                                                      
                                                      0.4
                                                      
                                                      
                                                      
                                                      0.6
                                                      
                                                      
                                                      
                                                      (26.1
                                                      %)Employment
                                                      
                                                      
                                                      1.7
                                                      
                                                      
                                                      
                                                      3.4
                                                      
                                                      
                                                      
                                                      (49.8
                                                      %)Real
      Estate
                                                      
                                                      
                                                      0.7
                                                      
                                                      
                                                      
                                                      0.9
                                                      
                                                      
                                                      
                                                      (19.7
                                                      %)Other
                                                      
                                                      
                                                      0.8
                                                      
                                                      
                                                      
                                                      0.9
                                                      
                                                      
                                                      
                                                      (10.3
                                                      %)Total classified
                                                      
                                                      
                                                      3.6
                                                      
                                                      
                                                      
                                                      5.8
                                                      
                                                      
                                                      
                                                      (36.7
                                                      %)Total online advertising revenues
                                                      
                                                      $
                                                      6.4
                                                      
                                                      
                                                      $
                                                      8.9
                                                      
                                                      
                                                      
                                                      (27.9
                                                      %)




Our
existing Florida newspapers and publications, which accounted for 35.2% of our
total advertising revenues, contributed 37.1% of our entire net decline in
advertising revenue. Advertising revenue in Jacksonville was down $5.8 million,
or 29.7%, and St. Augustine was down $0.6 million, or 27.3%.


-20-
 Table of Contents





As for
our other larger daily newspapers, Augusta was down $2.9 million, or 36.0%,
Savannah was down $1.8 million, or 30.0%, Lubbock was down $1.8 million, or
30.2%, Amarillo was down $1.1 million, or 21.6%, Topeka was down $1.2 million,
or 27.8% and Athens was down $1.0 million, or 33.6%.





Our other
daily newspapers were, together, down $1.1 million, or 22.2%, and our non-daily
publications were down $1.4 million, or 25.3%.





Retail advertising
revenue:





Retail
advertising revenue was $26.7 million, down $12.2 million, or 21.1%, from the
prior year.





Insert
retail revenue was $9.3 million, down $1.7 million, or 15.6%, while print retail
advertising revenue was $12.7 million, down $4.1 million, or 24.5%, from last
year. Retail advertising revenue from specialty products printed by us, but not
a part of main newspaper product, was $2.4 million, down $1.1 million, or 30.9%,
from last year. Retail online revenue was $2.5 million, down $0.2 million, or
9.3%, from last year.





Jacksonville
was down $1.0 million, or 11.9%, Augusta was down $1.4 million, or 31.0%,
Savannah was down $0.8 million, or 26.3%, Lubbock was down $0.8 million, or
28.0%, Amarillo was down $0.3 million, or 13.7%, Topeka was down $0.4 million,
or 17.5%, and Athens was down $0.4 million, or 26.6%.





Our other
daily newspapers were, together, down $0.6 million, or 14.8%, with significant
declines in St. Augustine, Brainerd and Bluffton.





Our
non-daily publications were down $1.3 million, or 27.6%, with significant
declines at Skirt! and
our Savannah and Waters Edge city magazines.





Classified advertising
revenue:





Total
classified advertising revenue was $15.8 million, down $10.6 million, or 40.2%,
from 2008.





Print
classified advertising revenue was $12.0 million, down $8.3 million, or 40.8%,
and online classified advertising revenue was $3.6 million, down $2.1 million,
or 36.7%, from last year. Excluding the employment category, online classified
advertising revenue was down 17.9% from last year.





Our
Jacksonville newspaper’s classified advertising revenue was down $4.0 million,
or 47.5%, contributing 37.4% of our total net decline.





Augusta
was down $1.4 million, or 44.8%, Savannah was down $0.9 million, or 34.8%,
Lubbock was down $0.9 million, or 36.7%, Amarillo was down $0.8 million, or
33.1%, Topeka was down $0.8 million, or 39.2%, and Athens was down $0.5 million,
or 45.8%.





Our other
daily newspapers were, together, down $0.5 million, or 25.1%, with a significant
decline in St. Augustine.





Our
non-daily publications were down $0.4 million, or 30.4%, with a significant
decline in Jacksonville’s Sun non-daily publications.





National advertising
revenue:





Total
national advertising revenue was $3.7 million, down $1.3 million, or 26.3%, from
last year, with Jacksonville contributing 65.4% of the net
decrease. Jacksonville was down $0.9 million, or 28.5%.


-21-
 Table of Contents





Circulation revenue.Circulation revenue was $15.9 million, up $1.2 million, or 8.2%, from
last year, with $0.9 million of the increase due to price increases in
Jacksonville and the change in the way we sell home delivery subscriptions in
Jacksonville.





During
2008, daily single copy prices in Jacksonville, as well as in most of our other
newspaper markets, were raised from 50 cents to 75 cents and Jacksonville’s
Sunday single copy prices were raised from $1.00 to $1.50. In addition,
significant home delivery price increases (both daily and Sunday) were
implemented in Jacksonville and at many of our newspapers last
year.





During the
middle of February last year, our Jacksonville and St. Augustine newspapers
began selling copies at the retail rate directly to the subscribers (instead of
to our carriers at the wholesale rate) and paying our carriers a delivery fee
(“pay per throw”), in effect, favorably impacting our circulation revenue while
increasing our other operating costs.





Bluffton
converted from a free to a paid distribution newspaper as of December 1, 2008
and reported total circulation revenue of $0.1 million for the first quarter of
2009.





Average
daily and Sunday circulation volume was down 9.8% and 8.3%, respectively, with
Jacksonville contributing approximately 47% of each category’s
decline.





Other
revenue:





Other
revenue was $2.1 million, down $0.6 million, or 23.4%, from $2.7 million in
2008, with $0.5 million of the net decline due to the reduction in Skirt! third party licensing
fees.





Net operating
expense.The table below presents the total operating expenses and
related statistics for the newspaper operations for three months ended March 31,
2009 compared to March 31, 2008:





(Dollars in millions)
                    
                    Three
      months ended March 31,
                    
                    
                    Percentage
      change2009
                    
                    
                    2008
                    
                    
                    2009
      vs. 2008Operating
      expensesLabor
      and employee benefits
                    
                    $
                    27.2
                    
                    
                    $
                    34.4
                    
                    
                    
                    (20.8
                    %)Newsprint,
      ink and supplements
                    
                    
                    7.5
                    
                    
                    
                    9.1
                    
                    
                    
                    (18.5
                    %)Other
      operating costs
                    
                    
                    25.0
                    
                    
                    
                    28.1
                    
                    
                    
                    (10.8
                    %)Debt
      restructuring costs
                    
                    
                    2.9
                    
                    
                    
                    -
                    
                    
                    
                    100.0
                    %Depreciation
      and amortization
                    
                    
                    3.1
                    
                    
                    
                    3.5
                    
                    
                    
                    (11.5
                    %)Total
      operating expenses
                    
                    $
                    65.7
                    
                    
                    $
                    75.1
                    
                    
                    
                    (12.6
                    %)


Labor and employee
benefits:





Total
labor and employee benefit costs were $27.2 million, down $7.2 million, or
20.8%, being favorably impacted by reductions in head count, the suspension of
employer 401(k) contributions during the second quarter of last year and the
termination of the post retirement plan at the end of 2008.





Our
salaries and wages totaled $20.2 million, down $4.1 million, or 17.1%. Average
full time employee equivalents (“FTE’s”) were down 523, or 19.1%, and average
pay rate, excluding $0.2 million in severance payments during the first three
months of 2009 was up 1.6%.


-22-
 Table of Contents


Effective
April 1, 2009, we reduced employee wages by 5 to 10 percent, with the pay cuts
designed to preserve jobs in a difficult economic environment. Wage reductions
will be 10 percent for those earning $50,000 or more (which includes all Morris
Publishing's senior executives).




Commissions
and bonuses were $3.0 million, down $1.1 million, or 27.7%, from last
year.





Employee
medical insurance cost was $2.0 million, down $0.4 million, or 17.5%, primarily
due to the reduction in plan participants.





Post
retirement benefit costs and employer matching contributions to the 401(k) plan
were $0.4 million and $0.8 million during the first quarter of
2008.





Payroll
tax expense was $2.0 million, down $0.4 million, or 18.3%, due to the reduction
in FTE’s.





Newsprint, ink and
supplements cost:





Newsprint,
ink and supplements costs were $7.5 million, down $1.7 million, or 18.5%; with
the increase in average cost per ton of newsprint being more than offset by the
savings from decreased consumption of newsprint.





Compared
to last year, total newsprint expense was $6.5 million, down $1.5 million, or
18.2%, due to a 35.3% decrease in newsprint consumption offset somewhat by a
26.4% increase in the average cost per ton of newsprint.





Supplements
expense decreased $0.1 million, or 10.7%, to $0.6 million, and ink expense
decreased $0.2 million, or 31.3%, to $0.4 million.





Other operating
costs:





Other
operating costs were $25.0 million, down $3.0 million, or 10.8%.





The
combined technology and shared services fee from Morris Communications and
management fee charged to continuing operations by Morris Communications under
the management agreement totaled $4.2 million, down $1.2 million, or 22.4%, from
$5.4 million in the first quarter last year.





Depreciation
and amortization expense was $3.1 million, down $0.4 million, or
11.5%.





Debt restructuring
costs:





We are
currently pursuing alternative sources of funds or means of financing to repay
or refinance the amounts outstanding on the Credit Agreement and are attempting
to refinance or restructure the amounts outstanding on the Notes. As a result of
our efforts, we have spent a total of $2.9 million in legal, investment banking
and consulting fees during the first quarter of 2009, including fees paid to
advisors and consultants of our senior creditors and certain of our note
holders.


-23-
 Table of Contents





Liquidity
and capital resources





Unrestricted
cash was $14.1 million at March 31, 2008, compared with $4.8 million at December
31, 2008.





Historically,
our primary source of liquidity, has been the cash flow generated from
operations and 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, and working
capital. However, several factors (as described below) relating to our
outstanding debt raise significant uncertainty about our liquidity and ability
to continue as a going concern. Specifically, our debt far exceeds the
current value of our assets, and our creditors may have the right to
accelerate the maturity of the debt before the end of May 2009.





The
Credit Agreement includes an event of default if we, as borrower, default in the
payment when due of any principal or interest due on any other indebtedness
having an aggregate principal amount of $5.0 million or more (such as our not
making the February 1, 2009 interest payment of $9.7 million due on the $278.5
million of 7% Senior Subordinated Notes due 2013 (the “Notes”)). Waiver
No. 5 (as described below) to the Credit Agreement has waived until 5 p.m.
New York time on May 28, 2009 (the "Expiration Time”) any default that arose
from our failure to make the interest payment.





In
addition, the holders (the “Holders”) of over 80% of the Notes have also granted
forbearance until the Expiration Time for any default under the Notes’ indenture
(the “Indenture”) that arose from the non-payment of the interest. Morris
Communications along with its subsidiaries are not guarantors of the
Notes.





If we
have not paid the overdue interest (plus default interest), amended or
restructured the Notes, or obtained an extension of the Expiration Time, we
would be in default under both the Indenture and the Credit Agreement. As a
result, we may be required to prepay the entire principal due on the senior debt
and the Notes and Morris Communications may be required to pay on its guaranty
of the senior debt under the Credit Agreement.





In view
of the current volatility in the credit markets and the market conditions in the
newspaper industry, it is likely that we will be dependent on the ability of
Morris Communications or its guarantor subsidiaries to a) enter into a
transaction that would induce a lender to refinance the senior debt, b) raise
sufficient funds to purchase the loans and commitments from the existing senior
creditors, or c) raise sufficient funds to refinance the senior debt with a new
loan from the guarantor. The failure of Morris Communications or its guarantor
subsidiaries to consummate any of the transactions noted above would likely
require us to refinance the existing bank debt or seek an amendment of the terms
of the Credit Agreement, either of which could increase our cost of borrowing,
or if such efforts are unsuccessful, the senior creditors could accelerate the
senior debt and foreclose on their security interests in substantially all of
our assets.




Even if
we have paid the overdue interest (plus default interest), or amended or
restructured the Notes by the Expiration Time, it is possible that we might
not be in compliance with the financial covenants under the Credit
Agreement, which may not be determined until Morris Publishing and Morris
Communications complete their consolidated financial statements for the
first quarter of 2009. Such consolidated financial statements must be
delivered to the senior creditors no later than May 30, 2009, two days
after the Expiration Time. In addition, we will be unlikely to meet the
financial covenants under the Credit Agreement when Morris Publishing and Morris
Communications deliver their consolidated financial statements for the second
quarter of 2009 no later than August 29, 2009 (when the relaxed financial
covenants under Amendment
No. 3 to the Credit Agreementterminate). A failure to amend or refinance
before the relaxed covenants terminate would prevent us from borrowing on the
revolver and it may be required to prepay the entire principal due under the
Credit Agreement.





If this
was to occur, it could lead to an event of default under the Indenture.
Specifically, there is an event of default under the Indenture if we fail to pay
other indebtedness (such as the senior debt) exceeding $5.0 million upon final
maturity or within 20 days of an acceleration. In such an event, we cannot
assure the Holders that we would have sufficient assets to pay any amounts due
on the Notes. As a result, the Holders may receive no payments or less than the
full amount they would be otherwise entitled to receive on the Notes and
Holdings’ equity interest in us may be worthless.




-24-
 Table of Contents






In
response to all the factors described above, we are pursuing alternative sources
of funds or means of financing to repay or refinance the amounts outstanding on
the Credit Agreement and we are attempting to refinance or restructure the
amounts outstanding on the Notes. However, the timing and ultimate outcome of
such efforts cannot be determined at this time.





As a
result of the aforementioned factors and related uncertainties, there is
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include all adjustments
relating to the recoverability or classification of recorded asset amounts or
the amounts or classification of liabilities should we be unable to continue as
a going concern.





As a
result of the aforementioned factors, we have classified all of the debt
outstanding under the Indenture and the Credit Agreement, as of March 31, 2009
and December 31, 2008, as current maturities of long-term debt within current
liabilities on the consolidated balance sheet.





Operating
activities. Net cash provided by operations was $8.4 million for the
first three months of 2009, up $1.4 million from $7.0 million for the same
period in 2008.





Current
assets were $48.7 million and current liabilities, excluding the current portion
of long-term debt, were $44.1 million as of March 31, 2009 as compared to
current assets of $58.9 million and current liabilities, excluding the current
portion of long-term debt, of $39.4 million as of December 31,
2008.





Investment
activities. Net cash used in investing activities was $0.2 million for
the first three months of 2009 compared to $11.8 million provided by investing
activities for the same period in 2008.





For the
first three months in 2009 and 2008, we spent $0.2 million and $0.6 million on
property, plant and equipment, respectively.





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 Morris Communications through a tax-deferred Section 1031
exchange.





At the
end of the first quarter of 2008, Morris Communications acquired qualified
replacement property using the $12.4 million in our escrow account. At the same
time, Morris Communications returned the escrow funds by using its cash to pay
down balances due on our revolving credit facility.





Financing
activities. Net cash provided by financing activities was $1.2 million
for the first three months of 2009 compared to $18.9 million used in financing
activities for the same period in 2008.





PeriodEndDebtSummary:





Total
debt was $419.5 million at March 31, 2009, up from $411.7 million at December
31, 2008. The average interest rate on our total debt outstanding was 5.84% and
5.78% at March 31, 2009 and December 31, 2008, respectively. At March 31, 2008,
the average interest rate on the $425.2 million total debt outstanding was
6.01%.





At March
31, 2009, we had $60.0 million outstanding on our revolving credit facility, up
$10.0 million from $50.0 million at December 31, 2008. The commitment fee
on the unborrowed funds available under the revolver was 0.50% at March 31, 2009
and December 31, 2008.





At March
31, 2009, the interest rate on both the $81.0 million Tranche A term loan
outstanding and the revolver was 3.5625%. During the first quarter of 2009, we
paid $2.3 million in principal due on the Tranche A term loan, with another $7.9
million of principal payments due by the end of 2009.


-25-
 Table of Contents








At
December 31, 2008, the interest rate on the term loan was 3.00% and the weighted
average interest rate on the revolver was 3.61%.




At March
31, 2008, the interest rate on the $87.7 million Tranche A term loan outstanding
was 4.0% and the weighted average interest rate on the $56.0 million outstanding
on the revolver was 4.173%. The commitment fee on the unborrowed funds
available under the revolver was 0.375% at March 31, 2008.





During
the first quarter of 2008, we paid $1.1 million in principal due on the Tranche
A term loan and borrowed $0.6 million against a bank swing line
loan.





During
the first and second quarter of 2008, we repurchased a total of $21.5 million of
our $300 million 7% Senior Subordinated Notes. The amount outstanding on the
Notes was $278.5 million at March 31, 2009 and December 31, 2008.





During
the first quarter of 2008, we repurchased $19.1 million of the Notes for a
total purchase price, including closing costs, of $10.7 million, plus accrued
interest. The pre-tax gains on these repurchases was $8.4 million. In addition,
we wrote off $0.3 million in unamortized loan fees related to these extinguished
notes. The amount outstanding on the Notes was $280.9 million at March 31,
2008.





Amendments and Waivers to
the Credit Agreement:





As a
result, we have entered into the following agreements with the lenders under the
Credit Agreement and the Holders:





Amendment No 4.
and Waiver No. 2 to the Credit Agreement—
On January 28, 2009, we entered into Amendment No. 4 and Waiver No. 2 to the
Credit Agreement (“Amendment No. 4), which waived until March 3, 2009 any
default that arose from our failure to pay the $9.7 million interest payment due
on the Notes. The Credit Agreement includes an event of default if we default in
the payment when due of any principal or interest due on any other indebtedness
having an aggregate principal amount of $5.0 million or more (such as its
outstanding notes or bank credit facilities).





Amendment
No. 4 also required us, by March 3, 2009, to enter into control agreements in
favor of the lenders to perfect the security interest of the lenders in all
deposit accounts, except for deposit accounts aggregating less than $500
thousand for Morris Publishing, Morris Communications and their subsidiaries.
Waiver No. 3 (as described below) extended this compliance deadline to April 6,
2009.





Prior to
Amendment No. 4, the Credit Agreement provided for revolving credit
commitments of $100 million, in addition to the $83.25 million then
outstanding on the term loan. Amendment No. 4 reduced the limit on loans
available under the revolving facility from $100 million to $70 million, but
further limited the amount available to $60 million without the consent of
lenders holding a majority of the commitments under the Credit
Agreement.





In
addition, Amendment No. 4 provided for an immediate increase of the variable
interest rate under the Credit Agreement (previously scheduled for April 1,
2009) of 0.500% and waived until April 11, 2009 any default that may exist from
our failure to cause to be filed continuation statements as may be necessary to
maintain perfection of security interests in assets of some of the subsidiary
guarantors.





Amendment
No. 4 also contained provisions which permitted Morris Communications, its
beneficial owners, and its subsidiaries (other than us) to consummate a
reorganization of their company structure, without causing a default under the
Credit Agreement. After the reorganization, the lenders under the Credit
Agreement maintain all of their existing security interests in the assets of our
company, Morris Communications and the subsidiary guarantors. Various
covenants, restrictions and other provisions of the Credit Agreement were
modified to reflect the reorganized corporate structure, without materially
changing the substantive effect of the provisions on either our company, Morris
Communications or the subsidiary guarantors. We did not transfer or receive any
assets or liabilities in the reorganization.


-26-
 Table of Contents


As a
result of the reorganization, we amended our Tax Consolidation Agreement with
Morris Communications and Shivers to include Questo, Inc. ("Questo") as the new
common parent of the group and to include MPG Holdings as its new parent, for
tax periods after the reorganization.





The $0.7
million in debt issuance costs associated with Amendment No. 4 were deferred and
are being amortized ratably through May, 2009, the date when, pursuant to the
Mandatory Transaction provision of Amendment
No. 3 to the Credit Agreement, the credit facility was originally required
to be repaid. Subsequently, Amendment No. 5 to the Credit Agreement eliminated
the Mandatory Transaction requirement .





In
addition, we wrote off $0.2 million in deferred loan costs during January of
2009 related to the reduction in the commitment on the revolver line of
credit.





Waiver No. 3 to the Credit
Agreement— On
February 26, 2009, we entered into Waiver No. 3 to the Credit Agreement (“Waiver
No. 3”) which extended the original waiver period from March 3, 2009 until April
6, 2009, or earlier, if upon termination of the Forbearance Agreement (as
described below).





We
expensed $0.2 million in debt issuance costs associated with Waiver No.
3.





Forbearance Agreement with
Holders of the Notes:





On
February 26, 2009, we entered into a Forbearance agreement (the “Forbearance
Agreement”) with holders of over $226.0 million of outstanding principal amount
of the notes, with the Holders agreeing not to take any action as a result of
the payment default to enforce any of the rights and remedies available to them
under the Indenture to the notes for a period ending on April 6, 2009 (the
“Forbearance Period”). Under the agreement, the Forbearance Period could be
terminated earlier for various reasons, which include the lenders under the
Credit Agreement accelerating the maturity of the obligations under the Credit
Agreement or terminating the Waiver (as described below), the occurrence of any
other default under the Indenture, or our filing for bankruptcy protection or
breaching the covenants under the Forbearance Agreement.





Intercompany loan receivable
permitted under the Indenture:





The
amount outstanding on the intercompany loan receivable due from Morris
Communications was $18.0 million and $12.8 million as of March 31, 2008 and
December 31, 2008, respectively.





During
the first three months of 2009 and 2008, we reported the $0.2 million and $0.2
million, respectively, in accrued loan receivable interest as contra equity. The
average annual interest rate in 2009 and 2008 was 3.333% and 4.875%,
respectively, on average loan balances of $24.1 million, and $18.4 million,
respectively. As of March 31, 2009, the total accumulated interest accrued on
the loan receivable was $6.1 million.





Dividends declared and
recorded under the Indenture:





No
dividends were declared or recorded in the first three months of 2008 or 2009
and we are currently prohibited under our debt covenants from making any
restricted payments.





Subsequent
events:





Subsequent
to March 31, 2009, we entered into the following agreements with the lenders
under the Credit Agreement and the Holders:





Credit
Agreement— On
April 6, 2009, Amendment
No. 5 and Waiver No. 4to the Credit Agreement (“Waiver No. 4”) waived any
default that arose from the failure to make the interest payment on the Notes
until April 24, 2009.


-27-
 Table of Contents





In
addition, Waiver No. 4 deleted the mandatory transaction requirement added by Amendment
No. 3 to the Credit Agreement. Prior to its deletion, the mandatory
transaction requirement would have required Morris Publishing, Morris
Communications or one or more of their subsidiaries to consummate a transaction
(or at least sign a binding letter of intent to do so) that would generate
sufficient funds to either prepay all loans under the Credit Agreement or
purchase an assignment of all loans and commitments of the lenders at par, no
later than the delivery date of Morris Communications’ financial statements for
the quarter ending March 31, 2009 (but not later than May 30, 2009). Waiver No.
4 also required Morris Communications to provide certain additional financial
and company information to the lenders.





On April
23, 2009, Waiver No. 5 to the Credit Agreement (“Waiver No. 5”) waived any
default that arose from the failure to make the interest payment due on the
Notes until 5:00 p.m. New York City time on May 28, 2009, however, the waiver
will terminate earlier if Amendment No. 2 to the Forbearance Agreement (as
described below) is terminated or amended prior to such time or upon other
defaults.





Waiver
No. 5 also waives any event of default that consists solely of Morris
Communications and Morris Publishing failing to deliver by April 16, 2009
consolidated audited financial statements, together with the opinion of
independent certified public accountants, with respect to the fiscal year of
Morris Communications ending December 31, 2008, provided that such audited
financial statements and opinion are delivered prior to 5:00 p.m., New York City
time, on April 24, 2009. Morris Communications delivered its audited financial
statements and the auditors' opinion to the lenders on April 21,
2009.




Indenture—
On April 6, 2009, we entered into an amendment to the Forbearance
Agreement(the “Amended Forbearance Agreement”). Under the Amended
Forbearance Agreement, the Forbearance Period was extended to April 24,
2009.





During
the Forbearance Period, and for up to seven business days thereafter, the
Amended Forbearance Agreement restricts our ability to enter into any
transaction which would refinance any of our existing senior debt under the
Credit Agreement where any affiliate of ours would become a holder of senior
debt and limits new liens on our properties, without prior written consent of
holders of more than 66 2/3% of the outstanding Notes. The Amended
Forbearance Agreement also provided that we submit a restructuring proposal to
the Holders’ advisors on or before April 7, 2009 and required delivery to the
advisors of detailed information regarding the finances and businesses of Morris
Communications, Morris Publishing, and their subsidiaries, including disclosure
of information pertaining to the potential sale of certain assets, annual
financial information, and agreements such as mortgages related to the Credit
Agreement and requires access for discussions with management and
advisors.





On April
23, 2009, we entered into Amendment
No. 2 to the Forbearance Agreement extending the Forbearance Period to 5:00
p.m., New York City time, on May 28, 2009.





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
will not have any revenue.


-28-
 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, 2008 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, 2009 regarding long-term debt).





Based on
our $141.0 million of variable rate debt at March 31, 2009, a 1.0% increase or
decrease in interest rates on this variable-rate debt would decrease or increase
annual interest expense by $1.4 million and net income by $0.9
million.





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, 2009. 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, 2009, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.


-29-
 Table of Contents





Part II





Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





Important
factors that could cause our actual results to differ materially from our
expectations include those described in Part I, Item 1A-Risk Factors included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as
well as other risks and factors identified from time to time in other SEC
filings.





Most
notably, there are currently several factors relating to our outstanding debt
that raise significant uncertainty about our liquidity and ability to continue
as a going concern. Specifically, our debt far exceeds the current value of
our assets, and our creditors may have the right to accelerate the maturity
of the debt before the end of May 2009.





The
Credit Agreement includes an event of default if we, as borrower, default in the
payment when due of any principal or interest due on any other indebtedness
having an aggregate principal amount of $5.0 million or more (such as our not
making the February 1, 2009 interest payment of $9.7 million due on the $278.5
million of 7% Senior Subordinated Notes due 2013 (the “Notes”)). Waiver No.
5 (as described below) to the Credit Agreement has waived until 5 p.m. New York
time on May 28, 2009 (the "Expiration Time”) any default that arose from our
failure to make the interest payment.





In
addition, the holders (the “Holders”) of over 80% of the Notes have also granted
forbearance until the Expiration Time for any default under the Notes’ indenture
(the “Indenture”) that arose from the non-payment of the interest.





If we
have not paid the overdue interest (plus default interest), amended or
restructured the Notes, or obtained an extension of the Expiration Time, we
would be in default under both the Indenture and the Credit Agreement. As a
result, we may be required to prepay the entire principal due on the senior debt
and the Notes and Morris Communications may be required to pay on its
guaranty of the senior debt under the Credit Agreement.





In view
of the current volatility in the credit markets and the market conditions in the
newspaper industry, it is likely that we will be dependent on the ability of
Morris Communications or its guarantor subsidiaries to a) enter into a
transaction that would induce a lender to refinance the senior debt, b) raise
sufficient funds to purchase the loans and commitments from the existing senior
creditors, or c) raise sufficient funds to refinance the senior debt with a new
loan from the guarantor. The failure of Morris Communications or its guarantor
subsidiaries to consummate any of the transactions noted above would likely
require us to refinance the existing bank debt or seek an amendment of the terms
of the Credit Agreement, either of which could increase our cost of borrowing,
or if such efforts are unsuccessful, the senior creditors could accelerate the
senior debt and foreclose on their security interests in substantially all of
our assets.




Even if
we have paid the overdue interest (plus default interest), or amended or
restructured the Notes by the Expiration Time, it is possible that we might
not be in compliance with the financial covenants under the Credit
Agreement, which may not be determined until Morris Publishing and Morris
Communications complete their consolidated financial statements for the
first quarter of 2009. Such consolidated financial statements must be
delivered to the senior creditors no later than May 30, 2009, two days
after the Expiration Time. In addition, we will be unlikely to meet the
financial covenants under the Credit Agreement when Morris Publishing and Morris
Communications deliver their consolidated financial statements for the second
quarter of 2009 no later than August 29, 2009 (when the relaxed financial
covenants under Amendment
No. 3 to the Credit Agreementterminate). A failure to amend or refinance
before the relaxed covenants terminate would prevent us from borrowing on the
revolver and it may be required to prepay the entire principal due under the
Credit Agreement.





-30-
 Table of Contents






If this
was to occur, it could lead to an event of default under the Indenture.
Specifically, there is an event of default under the Indenture if we fail to pay
other indebtedness (such as the senior debt) exceeding $5.0 million upon final
maturity or within 20 days of an acceleration. In such an event, we cannot
assure the holders of the Notes that we would have sufficient assets to pay any
amounts due on the Notes. As a result, the holders of the Notes may receive no
payments or less than the full amount they would be otherwise entitled to
receive on the Notes and Holdings’ equity interest in our company may be
worthless.




In
response to all the factors described above, we are pursuing alternative sources
of funds or means of financing to repay or refinance the amounts outstanding on
the Credit Agreement and we attempting to refinance or restructure the amounts
outstanding on the Notes. However, the timing and ultimate outcome of such
efforts cannot be determined at this time.





As a
result of the aforementioned factors and related uncertainties, there is
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include all adjustments
relating to the recoverability or classification of recorded asset amounts or
the amounts or classification of liabilities should we be unable to continue as
a going concern.





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.





10.1
                                Amendment No. 4 and Waiver No. 2,
      effective January 28, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement dated as of December 14,
      2005.10.2
                                Amended Tax Consolidation Agreement,
      effective January 28, 2009, with Morris Communications Company, LLC and
      Shivers Trading & Operating Company.10.3
                                Waiver No. 3, effective February 26,
      2009, with JPMorgan Chase Bank, N.A. as Administrative Agent under the
      Credit Agreement dated as of December 14, 2005.10.4
                                Forbearance Agreement, effective
      February 26, 2009, between Morris Publishing Group, LLC and Morris
      Publishing Finance Co., as issuers, and all other subsidiaries of Morris
      Publishing Group, LLC , as subsidiary guarantors, and US Bank Trust, N.A.
      (as successor to Wachovia Bank, N. A.), as Indenture Trustee, dated as of
      August 7, 2003.31.1
                                Rule 13a-14(a)
      Certifications31.2
                                Rule 13a-14(a)
      Certifications32.1
                                Section 1350
      Certifications


-31-
 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,
      2009
              
              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,
      2009
              
              By:
              
              /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
                and
      as its Principal Financial
Officer)


-32-