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 September 30, 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 ̈










MORRIS
PUBLISHING GROUP, LLC


MORRIS
PUBLISHING FINANCE CO.




QUARTERLY
REPORT


FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009




TABLE
OF CONTENTS




PageFORWARD-LOOKING
      STATEMENTS
            
            iiiPART
      I.Item
      1. Financial Statements:Unaudited
      condensed consolidated balance sheets as of September 30, 2009 and
      December 31, 2008.
            
            1Unaudited
      condensed consolidated statements of income (loss) for the three and
      nine-month periods ended September 30, 2009 and 2008.
            
            2Unaudited
      condensed consolidated statements of cash flows for the nine-month periods
      ended September 30, 2009 and 2008.
            
            3Notes
      to the unaudited condensed consolidated financial
    statements.
            
            4Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
            
            22Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk.
            
            45Item
      4. Controls and Procedures.
            
            45PART
      II.Item
      1. Legal Proceedings.
            
            46Item
      1A. Risk Factors.
            
            46Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
            
            48Item
      3. Defaults Upon Senior Securities.
            
            48Item
      4. Submission of Matters to a Vote of Security Holders.
            
            48Item
      5. Other Information.
            
            48Item
      6. Exhibits.
            
            49




Throughout
the year 2008, Morris Publishing Group, LLC (“Morris Publishing”) 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 and Morris Communications to the administrative
agent for the lenders under the Credit Agreement, dated as of December 14, 2005
(the “Original Credit Agreement”). Subsequent to the reorganization, (i) Morris
Publishing remains an indirect subsidiary of Shivers, and (ii) Morris
Communications remains an affiliate of Morris Publishing, but is no longer its
parent.




In this
report, Morris Publishing is considered as and will be referred to as a wholly
owned subsidiary of MPG Holdings, a subsidiary of Shivers. “We,” “us” “Company”
and “our” also refer to Morris Publishing and its subsidiaries and “parent”
refers to Shivers. Morris Communications and its subsidiaries are considered
affiliates and guarantors of the senior debt under the both the Original Credit
Agreement and the Amended and Restated Credit Agreement, dated as of October 15,
2009 (the “Amended 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 (the “Existing
Notes”), in order to facilitate the offering. Morris Publishing Finance Co. does
not have any operations or assets of any kind and will not have any
revenues.


-ii-







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 this filing and 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.




Some of
the factors that could cause our actual results to be materially different from
our forward-looking statements are as follows:




·
            our
      ability to service our debt;·
            our
      ability to obtain financing to fund our operational needs and re-finance
      our existing debt on satisfactory terms, if at all;·
            the
      impact of an in-court financial restructuring on our operations,
      credibility and valued relationships;·
            our
      ability to comply with the financial tests and other covenants in our
      existing and future debt obligations;·
            further
      deterioration of economic conditions in the markets we serve;·
            risks
      from increased competition from alternative forms of media;·
            our
      ability to contain the costs of labor and employee benefits;·
            our
      ability to maintain or grow advertising and circulation
      revenues;·
            our
      ability to successfully implement our business strategy;·
            our
      ability to retain employees;·
            industry
      cyclicality and seasonality;·
            interest
      rate fluctuations; and·
            fluctuations
      in the cost of our supplies, including newsprint.





-iii-







Part
I





Morris
      Publishing Group, LLCUnaudited
      condensed consolidated balance sheets(Dollars
      in thousands)
            
            September
      30, 2009
            
            
            December
      31, 2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            26,738
            
            
            $
            4,782Accounts
      receivable, net of allowance for doubtful accounts of $1,727 and
      $1,823 at September 30, 2009 and December 31, 2008,
      respectively
            
            
            25,540
            
            
            
            36,975Note
      receivable
            
            
            -
            
            
            
            11,538Inventories
            
            
            2,157
            
            
            
            2,706Assets
      held for sale
            
            
            2,025
            
            
            
            2,025Current
      portion of deferred income taxes
            
            
            715
            
            
            
            -Income
      taxes receivable
            
            
            5,295
            
            
            
            -Prepaid
      and other current assets
            
            
            2,459
            
            
            
            903Total
      current assets
            
            
            64,929
            
            
            
            58,929NET
      PROPERTY AND EQUIPMENT
            
            
            97,388
            
            
            
            105,623OTHER
      ASSETS:Intangible
      assets, net of accumulated amortization of $7,071 and $6,453 at September
      30, 2009 and December 31, 2008, respectively
            
            
            7,474
            
            
            
            7,956Deferred
      loan costs and other assets, net of accumulated amortization of loan costs
      of $3,484 and $6,822 at September 30, 2009 and December 31, 2008,
      respectively
            
            
            5,673
            
            
            
            7,184Total
      other assets
            
            
            13,147
            
            
            
            15,140Total
      assets
            
            $
            175,464
            
            
            $
            179,692LIABILITIES
      AND MEMBER'S DEFICIENCY IN ASSETSCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            5,275
            
            
            $
            5,496Long-term
      debt-current (Note 5)
            
            
            414,978
            
            
            
            411,728Accrued
      interest
            
            
            22,955
            
            
            
            8,297Current
      portion of deferred income taxes
            
            
            -
            
            
            
            1,326Due
      to Morris Communications
            
            
            3,426
            
            
            
            1,772Deferred
      revenues
            
            
            12,622
            
            
            
            13,133Accrued
      employee costs
            
            
            4,798
            
            
            
            8,252Other
      accrued liabilities
            
            
            2,469
            
            
            
            1,153Total
      current liabilities
            
            
            466,523
            
            
            
            451,157DEFERRED
      INCOME TAXES, long-term portion
            
            
            13,024
            
            
            
            13,568OTHER
      LONG-TERM LIABILITIES
            
            
            2,803
            
            
            
            2,882Total
      liabilities
            
            
            482,350
            
            
            
            467,607COMMITMENTS
      AND CONTINGENCIES (Note 7)MEMBER'S
      DEFICIENCY IN ASSETSMember's
      deficit
            
            
            (288,869
            )
            
            
            (275,705
            )Loan
      receivable from Morris Communications, net
            
            
            (18,017
            )
            
            
            (12,210
            )Total
      member's deficiency in assets
            
            
            (306,886
            )
            
            
            (287,915
            )Total
      liabilities and member's deficiency in assets
            
            $
            175,464
            
            
            $
            179,692See
      notes to unaudited condensed consolidated financial
      statements.





-1-





Morris
      Publishing Group, LLCUnaudited
      condensed consolidated statements of income (loss)Three
      months ended September 30,
              
              
              Nine
      months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008(Dollars
      in thousands)NET
      OPERATING REVENUES:Advertising
              
              $
              44,544
              
              
              $
              60,915
              
              
              $
              136,600
              
              
              $
              191,424Circulation
              
              
              15,740
              
              
              
              15,293
              
              
              
              47,253
              
              
              
              44,757Other
              
              
              2,013
              
              
              
              2,038
              
              
              
              6,151
              
              
              
              6,944Total
      net operating revenues
              
              
              62,297
              
              
              
              78,246
              
              
              
              190,004
              
              
              
              243,125OPERATING
      EXPENSES:Labor
      and employee benefits
              
              
              25,550
              
              
              
              31,936
              
              
              
              77,307
              
              
              
              99,933Newsprint,
      ink and supplements
              
              
              4,560
              
              
              
              9,191
              
              
              
              17,327
              
              
              
              27,991Other
      operating costs (excluding depreciation and amortization)
              
              
              23,571
              
              
              
              26,795
              
              
              
              71,848
              
              
              
              81,651Debt
      restructuring costs
              
              
              2,508
              
              
              
              -
              
              
              
              7,994
              
              
              
              -Impairment
      of goodwill
              
              
              -
              
              
              
              170,685
              
              
              
              -
              
              
              
              170,685Depreciation
      and amortization expense
              
              
              2,932
              
              
              
              3,472
              
              
              
              9,076
              
              
              
              10,497Total
      operating expenses
              
              
              59,121
              
              
              
              242,079
              
              
              
              183,552
              
              
              
              390,757OPERATING
      INCOME (LOSS)
              
              
              3,176
              
              
              
              (163,833
              )
              
              
              6,452
              
              
              
              (147,632
              )OTHER
      EXPENSES (INCOME):Interest
      expense, including amortization of debt issuance costs
              
              
              6,272
              
              
              
              6,776
              
              
              
              20,714
              
              
              
              21,654Gains
      on repurchases of debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (9,271
              )(Recovery
      in reserve) net write-off of note receivable
              
              
              (4,000
              )
              
              
              -
              
              
              
              7,538
              
              
              
              -Interest
      income
              
              
              (193
              )
              
              
              (201
              )
              
              
              (652
              )
              
              
              (671
              )Other,
      net
              
              
              (49
              )
              
              
              (53
              )
              
              
              (113
              )
              
              
              (125
              )Total
      other expense, net
              
              
              2,030
              
              
              
              6,522
              
              
              
              27,487
              
              
              
              11,587INCOME
      (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
              
              
              1,146
              
              
              
              (170,355
              )
              
              
              (21,035
              )
              
              
              (159,219
              )PROVISION
      (BENEFIT) FOR INCOME TAXES
              
              
              435
              
              
              
              (7,154
              )
              
              
              (7,871
              )
              
              
              (3,650
              )NET
      INCOME (LOSS)
              
              $
              711
              
              
              $
              (163,201
              )
              
              $
              (13,164
              )
              
              $
              (155,569
              )See
      notes to unaudited condensed consolidated financial
      statements.





-2-





Morris
      Publishing Group, LLCUnaudited
      condensed consolidated statements of cash flowsNine
      months ended September 30,(Dollars
      in thousands)
            
            2009
            
            
            2008OPERATING
      ACTIVITIES:Net
      loss
            
            $
            (13,164
            )
            
            $
            (155,569
            )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            9,076
            
            
            
            10,497Deferred
      income taxes
            
            
            (2,585
            )
            
            
            (11,489
            )Amortization
      of debt issuance costs
            
            
            2,431
            
            
            
            1,373Write-off
      of deferred loan costs
            
            
            199
            
            
            
            -Impairment
      of goodwill
            
            
            -
            
            
            
            170,685Write-off
      of note receivable, net
            
            
            7,538
            
            
            
            -Capital
      contribution by Morris Communications for services
rendered
            
            
            -
            
            
            
            8,678Loss
      (gain) on sale of fixed assets, net
            
            
            133
            
            
            
            (112
            )Pre-tax
      gains on repurchases of debt
            
            
            -
            
            
            
            (9,271
            )Changes
      in assets and liabilitiesAccounts
      receivable
            
            
            11,435
            
            
            
            11,205Note
      receivable
            
            
            4,000
            
            
            
            -Inventories
            
            
            549
            
            
            
            18Prepaids
      and other current assets
            
            
            (1,555
            )
            
            
            179Other
      assets
            
            
            (416
            )
            
            
            (221
            )Accounts
      payable
            
            
            (221
            )
            
            
            (1,307
            )Income
      taxes receivable
            
            
            (5,295
            )
            
            
            -Accrued
      employee costs
            
            
            (3,454
            )
            
            
            (2,817
            )Accrued
      interest expense
            
            
            14,658
            
            
            
            (5,822
            )Due
      to Morris Communications
            
            
            1,654
            
            
            
            10,426Deferred
      revenues and other liabilities
            
            
            805
            
            
            
            687Postretirement
      obligations due to Morris Communications
            
            
            -
            
            
            
            1,049Other
      long-term liabilities
            
            
            (80
            )
            
            
            65Net
      cash provided by operating activities
            
            
            25,708
            
            
            
            28,254INVESTING
      ACTIVITIES:Capital
      expenditures
            
            
            (713
            )
            
            
            (1,716
            )Restricted
      cash released from escrow
            
            
            -
            
            
            
            12,392Net
      proceeds from sale of property and equipment
            
            
            249
            
            
            
            714Net
      cash (used in) provided by investing activities
            
            
            (464
            )
            
            
            11,390FINANCING
      ACTIVITIES:Repurchase
      of senior subordinated debt
            
            
            -
            
            
            
            (12,251
            )Proceeds
      from revolving credit facility
            
            
            10,000
            
            
            
            74,000Repayments
      on revolving credit facility
            
            
            -
            
            
            
            (53,000
            )Repayment
      of Term Loan
            
            
            (6,750
            )
            
            
            (3,375
            )Payment
      of debt issuance costs
            
            
            (731
            )
            
            
            -Advances
      on loan receivable from Morris Communications
            
            
            (5,807
            )
            
            
            (40,416
            )Net
      cash used in financing activities
            
            
            (3,288
            )
            
            
            (35,042
            )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            21,956
            
            
            
            4,602CASH
      AND CASH EQUIVALENTS, beginning of period
            
            
            4,782
            
            
            
            4,135CASH
      AND CASH EQUIVALENTS, end of period
            
            $
            26,738
            
            
            $
            8,737SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
            
            $
            3,625
            
            
            $
            26,101Income
      taxes paid to Morris Communications*
            
            $
            -
            
            
            
            34,468See
      notes to unaudited condensed consolidated financial
      statements.* Includes $30,505
      in income taxes paid to Morris Communications during the nine-month period
      ending September 30, 2008 on the gain on sale of publications and
      commercial printing operations to GateHouse Media, LLC during the fourth
      quarter of 2007.





-3-







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 Morris Publishing Group, LLC’s (“Morris Publishing”,
“Company”) financial position and results of operations. All such adjustments
are of a normal recurring nature. Results of operations for the three-month and
nine-month interim periods ending on September 30, 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 3, 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 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 as of December 14, 2005 (the “Original 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. 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 both the Original Credit Agreement and the Amended and
Restated Credit Agreement, dated as of October 15, 2009 (the “Amended Credit
Agreement”). See note 8.




Morris
Communications will continue to provide management and related services to the
Company, as well as all of its operating subsidiaries.




Fair
value of financial instruments—The Company estimated the fair
values presented below using appropriate valuation methodologies and market
information available as of September 30, 2009. Considerable judgment is
required to develop estimates of fair value, and the estimates presented are not
necessarily indicative of the amounts that the Company could realize
in a current market exchange. The use of different market assumptions or
estimation methodologies could have a material effect on the estimated fair
values. Additionally, the fair values were estimated at September 30, 2009, and
current estimates of fair value may differ from the amounts
presented.


-4-





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:




Cash
and equivalents, accounts receivable, and accounts payable. The carrying
amount of these items approximates fair value.




Long
term debt. To estimate the fair value of the $278,478 outstanding
principal amount of 7 % Senior Subordinated Notes due 2013 (the “Existing
Notes”), the Company used the average price of the corporate bond trades reported
immediately following the announcement of the binding restructuring term sheet
on September 23, 2009 with an ad hoc committee of holders (the “Ad Hoc
Committee”) of over seventy-five percent of the aggregate principal amount
outstanding of the Existing Notes. At September 30, 2009, the fair value of the
Existing Notes was estimated at $69,620.




The fair
value of the Tranche A Term Loan and the revolving credit facility was valued at
par, given the acquisition on October 15, 2009 of the stated amount on the loans
outstanding under the Original Credit Agreement in the Senior Refinancing
Transaction. See note 8.




Inventories—
Inventories consist principally of newsprint, prepress costs and supplies, which
are stated at the lower of cost or market value. The cost of newsprint inventory
is determined by the last in, first out method. Costs for newsprint
inventory would have been $972 and $2,170 higher at September 30, 2009 and
December 31, 2008, respectively, had the first in, first out method been used
for all inventories.




Going
concern—Several factors relating to the Company’s outstanding debt raise
substantial doubt about its liquidity and ability to continue as a going
concern. Specifically, the Company’s debt exceeds its assets, and the Company’s
creditors may have the right to accelerate the debt before its
maturity.




In
addition, during 2008 and the first nine months of 2009, the Company’s 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.




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. See note 9.





2.
            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.




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 originally 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.


-5-





During of
the first quarter 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 interest payment.




During
the second quarter of 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 $1,500 (the remainder of the net working
capital adjustment) had been 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 had been payable on the 15th of each month. The note had been
due and payable in full on October 15, 2010.




In
accordance with the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 310-10-35-2 regarding the accounting by creditors
for impairment of a loan, the Company reserved the $11,538 due on the note
during the first quarter of 2009, given GateHouse’s reported losses in the last
three years and its reported liquidity problems at that time. During the third
quarter of 2009, the Company received a one time principal payment in the amount
of $4,000 from GateHouse to settle the total outstanding obligation, with $1,538
being applied to the outstanding working capital balance. The remaining $7,538,
previously reserved, was written off.




3.
            Transactions
      with Parent and 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.




·
            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.




On May
16, 2008, the Company entered into a Second Amendment to Management and Services
Agreement, which was designed to eliminate the fees payable by Company for
management, technology and shared services to its parent for the period from May
1, 2008 through December 31, 2008. On October 1, 2008, the Company entered into
a Third Amendment to Management and Services Agreement, which reinstated the
payment of the management fee and the technology and shared services fee
beginning October 1, 2008.




Per the
Securities and Exchange Commission’s Staff Accounting Bulletins Official Text
Topic 1B1, “Costs
Reflected in Historical Financial Statements”, the historical income
statements of a registrant should reflect all of its costs of doing business.
Therefore, the Company has recorded the costs of these services based on the
percentages above for the period May 1, 2008 through September 30, 2008 within
its other operating costs, with the cost of these services treated as a capital
contribution by its parent. The total cost of the services contributed by its
parent was $5,086 and $8,678 for the three and nine-month periods ended
September 30, 2008, respectively.


-6-





These
management fees expensed totaled $2,492 and $3,130 for the three-month periods
ended September 30, 2009 and 2008, respectively, and $7,600 and $9,725 for the
nine-month periods ended September 30, 2009 and 2008, respectively.




The
technology and shared services fees expensed totaled $1,557 and $1,956 for the
three-month periods ended September 30, 2009 and 2008, respectively, and $4,750
and $6,078 for the nine-month periods ended September 30, 2009 and 2008,
respectively.




The
Company believes that these fee allocations were made on a reasonable
basis.




Due
to Morris Communications — Due to Morris Communications represents a net
short-term payable that resulted from operating activities between the
Company and its affiliate or parent.




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 $143 and $1,778 for the three and nine-month periods ended
September 30, 2008, respectively.




Retiree
Health Care Benefits— 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 and $1,049 for the three and nine-month periods ended
September 30, 2008.




Health
and Disability Plan— The Company participates 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 $3,143 and $1,731 for the three-month periods ended September 30, 2009 and
2008, respectively, and $6,953 and $7,002 for the nine-month periods ended
September 30, 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 $1,880 and $1,974 as of September 30, 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 participates in Morris Communications’
workers’ compensation self-insurance plan, which is guaranteed and secured by
Morris Communications’ parent, Pesto, Inc., through a letter of credit.
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 $438 and $181 for the three-month
periods ended September 30, 2009 and 2008, respectively, and $1,416 and $1,193
for the nine-month periods ended September 30, 2009 and 2008,
respectively.


-7-





Loan
Receivable from Morris Communications— Under its debt arrangements
existing at the end of the third quarter 2009, the Company was 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 was 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 Indenture to the Existing Notes (the “ Original
Indenture”).




The
interest-bearing portion of all loans from the Company to Morris Communications
bore the same rate as the borrowings under the Original Credit Agreement (for
the three-month period ended September 30, 2009, this rate was LIBOR (adjusted
to the nearest 1/16th) + 3.00%). The Company distinguished 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 was accrued on the average
outstanding long-term balance each month.




The
Company accounted for this arrangement as a capital distribution transaction and
classified 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 and nine-month periods ended September 30, 2009 and
2008.




During
the three-month periods ended September 30, 2009 and 2008, the Company reported
$205 and $171, respectively, in interest accrued on the intercompany loan
receivable as contra-equity. The average interest rate for the three-month
periods ended September 30, 2009 and 2008 was 3.29% and 3.75%, respectively, on
average loan receivable balances of $24,359 and $17,872 (excluding the income
taxes payable on the GateHouse sale), respectively.




During
the nine-month periods ended September 30, 2009 and 2008, the Company reported
$622 and $512, respectively, in interest accrued on the intercompany loan
receivable as contra-equity. The average interest rate for the nine-month
periods ended September 30, 2009 and 2008 was 3.35% and 4.18%, respectively, on
average loan receivable balances of $24,418 and $16,119 (excluding the income
taxes payable on the GateHouse sale), respectively.




At
September 30, 2009, the amount outstanding on the intercompany loan due from
Morris Communications was $24,500, and the accumulated interest accrued on the
intercompany loan receivable was $6,483, resulting in a net intercompany
receivable of $18,017. The amount outstanding on the intercompany loan due from
Morris Communications was $12,210 as of December 31, 2008.




Restricted
payments— The Company was permitted under its existing debt arrangement
to make restricted payments, which included 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 Original Indenture)
earned subsequent to the Existing Notes’ August 2003 issue date less (2) 140% of
the consolidated interest expense of the Company for such
period.




No
dividends were declared or recorded during the first nine months of 2008 or 2009
and the Company is currently prohibited under the Original Indenture’s 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.


-8-





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.




Accounting
standards require the Company to account for income taxes under the provisions
of the liability method, 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.




4.
            Accounting
      Pronouncements




Accounting
Standards Codification




In June
2009, the FASB issued the Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied in the
preparation of financial statements in conformity with GAAP. The standard
explicitly recognizes rules and interpretive releases of the SEC under federal
securities laws as authoritative GAAP for SEC registrants. This pronouncement is
effective for financial statements issued for fiscal years and interim periods
ending after September 15, 2009. The Company has adopted the provisions of this
pronouncement for the quarter ending September 30, 2009. There was no impact to
the consolidated financial results as this change is disclosure-only in
nature.




Recently
adopted standards




In May
2009, the FASB issued a pronouncement establishing general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
It also requires the disclosure of the date through which subsequent events are
evaluated and the basis for that date, that is, whether that date represents the
date the financial statements are issued or are available to be issued. The
effective date for the pronouncement is for interim or annual periods ending on
or after June 15, 2009. The Company adopted the provisions of the pronouncement
as of April 1, 2009, which did not have a material impact on its financial
position, cash flows or results of operations.




In April
2009, the FASB and Accounting Principles Board ("APB") issued pronouncements
requiring an entity to provide disclosures about fair value of financial
instruments in interim financial information. This pronouncement is to be
applied prospectively and is effective for interim and annual periods ending
after June 15, 2009. The Company adopted the provisions of these
pronouncements in the quarter ended June 30, 2009. There was no impact on the
unaudited condensed consolidated financial statements as it relates only to
additional disclosures which are included inthe
notes to these financial statements.


-9-


In April
2009, the FASB issued a pronouncement providing additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This pronouncement also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. This pronouncement is effective for interim and annual reporting
periods ending after June 15, 2009, and is applied prospectively. The Company
concluded that the adoption of this pronouncement as of April 1, 2009 did not
have a material impact on its results of operations, financial position or cash
flows.




In April
2008, the FASB issued a pronouncement amending the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under a prior pronouncement. More
specifically, the pronouncement removed the requirement under the previous
pronouncement to consider whether an intangible asset can be renewed without
substantial cost or material modifications to the existing terms and conditions
and instead, requires an entity to consider its own historical experience in
renewing similar arrangements. The pronouncement also required expanded
disclosure related to the determination of intangible asset useful lives. The
pronouncement is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and may impact any intangible assets the
Company acquires in future transactions.




In
February 2007, the FASB issued a pronouncement permitting entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value, and establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. The pronouncement is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company adopted the provisions of the pronouncement on January 1, 2008, and has
elected not to measure any of its current eligible financial assets or
liabilities at fair value.




In
September 2006, the FASB issued a pronouncement on fair value measurement,
and during February 2008, it subsequently amended the pronouncement to address
the fair value measurements for purposes of lease classification or measurement.
The pronouncement, as amended, defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. The
pronouncement is applicable to other accounting pronouncements that require or
permit fair value measurements, except those relating to lease accounting, and
accordingly does not require any new fair value measurements. The pronouncement
is effective for financial assets and liabilities in fiscal years beginning
after November 15, 2007, and for non-financial assets and liabilities in fiscal
years beginning after November 15, 2008 except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company’s adoption of the provisions of the pronouncement on January 1, 2008,
with respect to financial assets and liabilities measured at fair value, did not
have a material impact on its fair value measurements or our financial
statements for the year ended December 31, 2008.




5.
            Long-Term
      Debt




Period
Summary




The
following table summarizes the debt outstanding as of September 30, 2009 and
December 31, 2008:


September
      30,
              
              
              December
      31,2009
              
              
              2008Original
      Credit AgreementTranche
      A
              
              $
              76,500
              
              
              $
              83,250Revolving
      credit facility
              
              
              60,000
              
              
              
              50,000136,500
              
              
              
              133,250Original
      Indenture
              
              
              278,478
              
              
              
              278,478Current
      portion of long-term debt
              
              $
              414,978
              
              
              $
              411,728
  -10-
  
  During
the first nine months of 2009, the Company failed to pay the $9,747 interest
payments which were due on February 1, 2009 and August 3, 2009 on the Existing
Notes. In addition, the Company failed to meet the consolidated cash flow ratio
and the consolidated interest coverage ratio under the Original Credit Agreement
as of the end of the third quarter of 2009. As a result, the Company classified
all of the debt outstanding under the Original Indenture and the Original Credit
Agreement, as of September 30, 2009 and December 31, 2008, as the current
portion of long-term debt within current liabilities on the condensed
consolidated balance sheets.
 
 The
weighted average interest rate on the Company’s total debt outstanding was 5.77%
at September 30, 2009 and 5.78% at December 31, 2008. At September 30, 2008, the
weighted average interest rate on the $423,978 total debt outstanding was
6.26%.
 
 At
September 30, 2009, the Company had the maximum principal amount outstanding on
its $60,000 revolving line of credit, up $10,000 from $50,000 at December 31,
2008. The commitment fee on the unborrowed funds available under the revolving
line of credit was 0.50% at September 30, 2009 and December 31,
2008.
 
 At
September 30, 2009, the interest rate was 3.25% on the $76,500 Tranche A Term
Loan and was 3.27% on the revolving line of credit. During the three and
nine-month periods ended September 30, 2009, the Company paid $2,250 and $6,750,
respectively, in principal due on the Term Loan.
 
 At
September 30, 2008, the interest rate on the $85,500 Tranche A Term Loan
outstanding was 6.31% and the weighted average interest rate on the $60,000
outstanding on the $100,000 revolving line of credit was 5.78%. The commitment
fee on the unborrowed funds available under the revolving line of credit was
0.50%.


During
the three and nine months ended September 30, 2008, the Company paid $1,125 and
$3,375, respectively, in principal due on the Term Loan.




During the first six
months of 2008, the Company repurchased a total of $21,522 of the $300,000
outstanding on the Existing Notes for a total purchase price, including accrued
interest, of $12,471. The pre-tax gain on these transactions was $9,271. In
addition, the Company wrote off $375 in unamortized loan fees related to
these extinguished bonds. At September 30, 2009 and December 31, 2008, the
principal amount outstanding on the Existing Notes was $278,478. At
September 30, 2009, the interest expense accrued on the Existing Notes,
including the past due interest payments, totaled
$22,742.




Original
Credit Agreement




During
the first nine months of 2009, the Company entered into the following agreements
with the lenders under the Original Credit Agreement:




Amendments
and Waivers to the Original Credit Agreement—
On January 28, 2009, the Company, as borrower, entered into Amendment No. 4 and
Waiver No. 2 to the Original Credit Agreement (“Amendment No. 4”), which
ultimately waived until October 16, 2009 (by Waiver No. 18 to the Original
Credit Agreement (“Waiver No. 18”), as described in note 8) any default that
arose from the Company’s failure to pay the interest payment due on the
Existing Notes. The Original Credit Agreement included 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).




Prior to
Amendment No. 4, the Original Credit Agreement provided for revolving
credit commitments of $100,000, in addition to the amount 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 Original Credit Agreement. Amendment No. 6 to
the Original Credit Agreement permanently reduced the revolving credit
commitment to $60,000.


-11-





In
addition, Amendment No. 4 provided for an immediate increase of the variable
interest rate under the Original Credit Agreement (previously scheduled for
April 1, 2009) of 0.50%.




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
Original Credit Agreement. See note 1.




After the
reorganization, the lenders under the Original Credit Agreement maintained 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 Original 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 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 3.




The $731
in debt issuance costs associated with Amendment No. 4 were deferred and
amortized ratably, along with all the other unamortized loan costs associated
with the Original Credit Agreement, through May, 2009, the date when, pursuant
to the Mandatory Transaction provision of Amendment No. 3 to the Original Credit
Agreement, the credit facility was originally required to be repaid. In
addition, the Company wrote off $199 in deferred loan costs during January of
2009.




Amendment
No. 5 to the Original Credit Agreement deleted the Mandatory Transaction
requirement added by Amendment No. 3 to the Original 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 Original 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. 5 to the Original Credit Agreement waived any event of default that consists
solely of Morris Communications 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 ending
December 31, 2008, provided that such audited financial statements and opinion
were delivered on April 24, 2009. Morris Communications delivered its
consolidated audited financial statements and the auditors' opinion to the
lenders on April 21, 2009.




Waiver
No. 13 to the Original Credit Agreement included an additional fee in the amount
of two percent of the commitments of the consenting lenders that would have been
ultimately payable on October 16, 2009 (by Waiver No. 18),
or earlier, upon the termination of the lender's waiver
(the "Fee Payment Date"). The amount of this fee would have been
approximately $ 2.8 million. However, such fee was not payable if before
the Fee Payment Date the lenders' loans were paid in full, the loans and
commitments of the lenders were purchased at par, or a majority of the
consenting lenders agreed to waive the fee.




Waiver
No. 18 ultimately waived until October 16, 2009 any event of default that may
have occurred when the Company failed to meet the consolidated cash flow ratio
or the consolidated interest coverage ratio under the Original Credit Agreement
when Morris Publishing and Morris Communications delivered their combined
consolidated financial statements for the second of 2009 or failing to meet such
ratios at September 30, 2009.




All
existing defaults under the Original Credit Agreement were eliminated upon the
consummation of the Senior Refinancing Transaction. See note 8.


-12-





Existing
Notes




During
the first nine months of 2009, the Company entered into the following agreements
with either the holders, or investment advisors, or managers (the “Holders”)
representing holders of over seventy-five percent of the aggregate principal
amount outstanding of the Existing Notes or the Ad Hoc Committee:





Forbearance
Agreement— On February 26, 2009, the Company entered into a forbearance
agreement (the “Forbearance Agreement”) with the Holders of the Existing Notes,
with the Holders agreeing not to take any action to enforce any of the rights
and remedies available to them under the Original Indenture as a result of the
default on the February 2009 interest payment. The forbearance was eventually
expanded to cover the default on the August 2009 interest payment and extended
for a period ultimately ending on December 11, 2009 (by Amendment No. 16 to the
Forbearance Agreement (“Amendment No. 16”), as described in note 8) (the
“Forbearance Period”).
  Under
the Forbearance Agreement, the Forbearance Period could be terminated earlier
for various reasons, which include the lenders under the Original Credit
Agreement accelerating the maturity of the obligations under the Original Credit
Agreement or terminating any Waiver, the occurrence of any other default under
the Original Indenture, or the Company’s filing for bankruptcy protection or
breaching the covenants under the Forbearance Agreement.
  During
the Forbearance Period, and for up to seven business days thereafter, the
Forbearance Agreement restricted the Company’s ability to enter into any
transaction which would refinance any of its existing senior debt under the
Original Credit Agreement where any affiliate of the Company would become a
holder of senior debt and limited new liens on its properties, without prior
written consent of holders of more than 66 2/3% of the outstanding Existing
Notes.
  Restructuring
Transaction— On September 23, 2009, the Company entered into the Term
Sheet with the Ad Hoc Committee of holders of the Existing Notes subject to the
final negotiation and execution of the definitive legal documentation and other
closing conditions for the transactions contemplated thereby, including the
execution of a “Restructuring Support Agreement” on reasonable and customary
terms. The Term Sheet provides, among other things, for the restructuring of the
Existing Notes through an out-of-court exchange offer (the “Exchange Offer”) or
a chapter 11 filing under title 11 of the United States Code (the “Bankruptcy
Code”) and a plan of reorganization confirmed under the Bankruptcy Code (the
“Prepackaged Plan”). The financial restructuring, whether accomplished through
the Exchange Offer or the Prepackaged Plan, is referred to as the
“Restructuring”.
  In
addition, the execution of Amended Credit Agreement as described in note 8 was
part of the “Senior Refinancing Transaction” contemplated by the Term Sheet,
which was a condition precedent to the Restructuring. The Ad Hoc Committee
provided approvals for the consummation of the “Senior Refinancing Transaction”
under the Original Indenture between the issuers, the subsidiary guarantors and
Wilmington Trust, FSB (as successor trustee), as Indenture Trustee, the Term
Sheet and the Forbearance Agreement.
  The
Exchange Offer consists of (a) the exchange offer to acquire all of the
Company’s $278,478 principal amount outstanding of the Existing Notes plus any
accrued and unpaid interest thereon, for $100,000 in principal amount of newly
issued Floating Rate Secured Notes due 2014 (the “New Notes”) immediately upon
the effective date of the Exchange Offer, and (b) the cancellation of
approximately $110,000 of intercompany indebtedness, which will eliminate the
Company’s Tranche C Term Loan under the Amended Credit Agreement.
  The
terms of the Exchange Offer will require tender of at least 99% of the Existing
Notes. If the Exchange Offer is successful, the Company does not intend to
retire any remaining Existing Notes outstanding after the consummation of the
exchange and such Existing Notes will remain outstanding. The remaining Existing
Notes will be entitled to all of the rights under the Original Indenture as
amended to remove covenants in connection with the exchange. The New Notes will
be secured on a second lien basis by all of the Company’s assets, but the
remaining Existing Notes will remain unsecured.


-13-





If the
Company does not acquire at least ninety-nine percent of the aggregate principal
amount outstanding of the Existing Notes, the Company would seek to accomplish
the same results contemplated by the Exchange Offer through the effectiveness of
the Prepackaged Plan of reorganization, acceptances for which the
Company will solicit in compliance with the Bankruptcy Code. Approval
of the Prepackaged Plan requires holders of the Existing Notes representing at
least two-thirds in aggregate principal amount of the Existing Notes and more
than one-half in number of those who vote to vote in favor of the Prepackaged
Plan. Only those parties who actually vote are counted for these purposes. Under
the Prepackaged Plan, all outstanding Existing Notes will be cancelled. Under
this plan, all holders will receive their pro rata share of the New
Notes.




Under the
Restructuring, the New Notes will mature four and one half years from the
effective date of either the Exchange Offer or the Prepackaged Plan (the
“Effective Date”), and will bear interest of at least 10%, but could bear
interest up to 15%, some of which may be paid-in-kind (PIK), until the Company
repays its remaining senior debt. The Indenture for the New Notes (the “New
Indenture”) will require that the Company continue to file annual, quarterly and
current reports with the Securities and Exchange Commission and will require
that the holders of the New Notes have the right to appoint an observer to the
Board of Directors of the Company and each of its subsidiaries. The New
Indenture will include the customary terms and covenants and will contain total
leverage covenants and cash interest coverage covenants.




If the
Company does not complete the Restructuring under either plan, the Company would
likely file for bankruptcy protection pursuant to the Bankruptcy Code on terms
possibly different from the terms contemplated by the Prepackaged
Plan.




Restructuring
Fees— As a result of its efforts to refinance the senior debt under the
Original Credit Agreement and to restructure the Existing Notes, the Company
has incurred $2,508 and $7,994 in legal, investment banking and consulting
fees during the third quarter and the first nine months of 2009,
respectively.




6.
            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 accounting standards
regarding 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).




At the
end of the third quarter of 2008, the facts and circumstances indicating
possible impairment of goodwill existed, therefore the Company tested goodwill
for impairment between the annual testing dates. As a result of this test, the
carrying amount of newspaper reporting unit goodwill exceeded the implied fair
value of that goodwill and an impairment loss was recognized in an amount equal
to that excess. As a result of this analysis, the Company recorded a non-cash
pre-tax impairment charge to goodwill totaling $170,685 during the third quarter
of 2008, resulting in the full write-off of this reporting unit’s goodwill. At
September 30, 2009 and December 31, 2008, the Company had no recorded goodwill
assets.




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


-14-





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.




Subsequent
to December 31, 2008, there have been no facts and circumstances indicating the
possible impairment of the remaining intangible assets.




Amortization
expense of other intangible assets was $162 and $175 for the three-month periods
ended September 30, 2009 and 2008, respectively, and $510 and $525 for the
nine-month periods ended September 30, 2009 and 2008, respectively.




Changes
in the carrying amounts of intangible assets of the Company during the nine
months ended September 30, 2009 were as follows:





Other
      intangible assetsBalance
      at December 31, 2008
              
              $
              7,956Additions-domain
      names
              
              
              28Amortization
      expense
              
              
              (510
              )Balance
      at September 30, 2009
              
              $
              7,474






Other
finite-lived and indefinite-lived intangible assets at September 30, 2009 and
December 31, 2008 were as follows:




Cost
              
              
              Accumulated
      amortization
              
              
              Net
      costSeptember
      30, 2009:Finite-lived
      intangible assetsSubscriber
      lists
              
              $
              9,196
              
              
              $
              6,106
              
              
              $
              3,090Total
      finite-lived intangible assets
              
              
              9,196
              
              
              
              6,106
              
              
              
              3,090Indefinite-lived
      intangible assetsNewspaper
      mastheads
              
              
              5,031
              
              
              
              792
              
              
              
              4,239Domain
      names
              
              
              160
              
              
              
              15
              
              
              
              145Total
      indefinite-lived intangible assets
              
              
              5,191
              
              
              
              807
              
              
              
              4,384Total
      other intangible assets
              
              $
              14,387
              
              
              $
              6,913
              
              
              $
              7,474


-15-





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 three months of 2009 and for the five succeeding
years for the existing finite-lived intangible assets is as
follows:





Remainder
      of 2009
              
              $
              1702010
              
              
              6652011
              
              
              5362012
              
              
              4192013
              
              
              3552014
              
              
              176




7.
            Commitments
      and Contingencies




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




8.
            Subsequent
      Events




The
Company evaluated subsequent events through November 13, 2009, which is the date
that the condensed consolidated financial statements were available to be
issued.




Waivers
to Original Credit Agreement— Subsequent to September 30, 2009, the
Company entered into Waivers No. 17 and No. 18 to the Original Credit Agreement
which ultimately extended the waiver of cross default that arose from the
failure to make the February 1, 2009 and August 3, 2009 interest payments due on
the Notes until October 16, 2009, or earlier, if upon termination of the
Forbearance Agreement.




Waiver
No. 18 ultimately waived until October 16, 2009 any event of default that may
have occurred when Morris Publishing failed to meet the consolidated cash flow
ratio or the consolidated interest coverage ratio under the Credit Agreement for
the four (4) quarters ending on June 30, 2009 and September 30,
2009.


-16-




In
addition, Waiver No. 18 ultimately deferred the additional fee (added in Waiver
No. 13) in the amount of two percent of the commitments of the consenting
lenders until October 16, 2009, or earlier if the waiver is terminated. The
amount of this fee would have been approximately $ 2.8 million, but was never
required to be paid because the Senior Refinancing Transaction, as discussed
below, was consummated on October 15, 2009.




All
existing defaults under the Original Credit Agreement were eliminated upon the
consummation of the Senior Refinancing Transaction described below.




Senior
Refinancing Transaction— On October 15, 2009, the Company as borrower,
entered into the “Amended Credit Agreement” to amend and restate its Original
Credit Agreement. The amendment immediately followed the acquisition by Tranche
Holdings of all $136,500 in outstanding loans under the Original Credit
Agreement. The Amended Credit Agreement converted all existing loans under the
Original Credit Agreement into the following three tranches of Term Loans:
$19,700 in Tranche A Term Loans, $6,800 in Tranche B Term Loans, and $110,000 in
Tranche C Term Loans. All $6,800 of the Tranche B Term Loans and all $110,000 of
the Tranche C Term Loans were acquired by two of Morris Publishing’s affiliates,
MPG Revolver and Morris Communications.




The
parties to the Amended Credit Agreement are the Company as borrower, all of its
subsidiaries as subsidiary guarantors, Morris Communications, and its wholly
owned domestic subsidiaries as affiliate guarantors, Tranche Manager, LLC
(“Tranche Manager”) as the new Administrative Agent, and Tranche Holdings, MPG
Revolver, and Morris Communications as lenders. Tranche Manager, an affiliate of
Tranche Holdings, replaced JPMorgan Chase Bank, N.A., as Administrative Agent.
The lenders party to the Original Credit Agreement were JPMorgan Chase Bank,
N.A., The Bank of New York, SunTrust Bank, Wachovia Bank, N.A., Bank of America,
N.A., General Electric Capital Corporation, Allied Irish Banks, P.L.C., RBS
Citizens, N.A., Comerica Bank, US Bank, National Association, First Tennessee
Bank, National Association, Webster Bank, National Association, Keybank National
Association, Sumitomo Mitsui Banking Corporation, and Mizuho Corporate Bank,
Ltd.




Under the
Amended Credit Agreement, the Tranche A Term Loans bear cash interest at the
rate of 15% per annum. The 5% interest rate on the Tranche B Term Loans and the
15% interest rate on the Tranche C Term Loans are required to be paid-in-kind
(PIK) as an addition to the principal amount rather than cash. All tranches of
loans under the Amended Credit Agreement mature in two years, with two six-month
extension options during which extensions the interest rate on the Tranche A
Term Loans would increase to 17.5% and 20%, respectively. However, after the
consummation of a successful subordinated debt restructuring transaction as
described below, the Tranche A Term Loans will mature earlier on the deadline
for the required refinancing of the Tranche A Term Loans (150 days after the
consummation of the subordinated debt restructuring transaction).




All
principal payments on the senior debt will be applied first to the Tranche A
Term Loans until paid in full. Quarterly principal payments are required from
Morris Publishing’s net cash flow to reduce the Tranche A Term Loans. All three
tranches of senior debt remain senior to the $278,478 outstanding principal
amount of Existing Notes, however, MPG Revolver and Morris Communications have
deposited all $110,000 of Tranche C Term Loans into an escrow account for
eventual cancellation upon successful consummation of a proposed restructuring
transaction supported by the Holders of over seventy-five percent of the
aggregate principal amount outstanding of the Existing Notes.




The
execution of the Amended Credit Agreement is part of the Senior Refinancing
Transaction contemplated by the Term Sheet, which was a condition precedent to
the Restructuring. See note 5. Upon the exchange of the Existing Notes either
through the Exchange Offer or the Prepackaged Plan, the Morris Publishing
affiliates have agreed to cancel the Tranche C Term Loans in repayment of
approximately $25,000 of intercompany indebtedness to Morris Publishing and as a
contribution to capital of approximately $85,000.


-17-





The loans
under the Amended Credit Agreement continue to be guaranteed by all subsidiaries
of the Company, as well as Morris Communications and all of its wholly-owned,
domestic subsidiaries, and secured by substantially all of the assets of such
guarantors and the Company. In the case of the security interests granted by
Morris Communications and its subsidiaries, the lenders are generally not
permitted to exercise collateral foreclosure remedies prior to May 15, 2010 so
long as all interest on the Tranche A Term Loans has been paid and certain
bankruptcy events have not occurred.




In
connection with the Senior Refinancing Transaction, the equity of MCC Outdoor,
LLC (“MCC Outdoor”, a former subsidiary of Morris Communications engaged in the
outdoor advertising business) was transferred to FMO Holdings, LLC (“FMO
Holdings”), and MCC Outdoor was released from its guaranty, and its equity and
assets no longer serve as security for the obligations under the Amended Credit
Agreement. Magic Media, Inc., an affiliate of Tranche Holdings, is the
controlling member of FMO Holdings, and a subsidiary of Morris Communications
has a non-controlling equity interest in FMO Holdings. Other than the
relationships relating to FMO Holdings and with respect to the Amended Credit
Agreement, the Company and its affiliates have no material relationship with
Tranche Holdings.




The Amended Credit
Agreement contains various representations, warranties and covenants generally
consistent with the Original Credit Agreement, but with certain additional
limitations applicable prior to the repayment in full of the Tranche A Term
Loans. Financial covenants in the Amended Credit Agreement require the
Company to meet certain financial tests on an on-going basis, including minimum
interest coverage ratio, minimum fixed charge coverage ratio, and maximum cash
flow ratios, based upon the combined consolidated financial results of Morris
Publishing and Morris Communications. However, until May 15, 2010, the financial
covenants will be calculated as if the Restructuring had been
completed.




An event
of default will occur under the Amended Credit Agreement if the Restructuring
has not been completed by May 15, 2010. Other new events of default include the
Tranche A Term Loans lender’s determination that there has been a diminution of
value in the collateral, or that the Company is not making adequate progress to
consummate the Restructuring.




Unless
refinanced prior to the Restructuring, the Tranche B Term Loans remaining after
the Restructuring will rank pari passu with the New Notes and shall cease to be
secured by the liens securing the Amended Credit Agreement, and shall share in
the same collateral securing the New Notes on a second priority basis. On or
prior to 150 days from the date of the Restructuring, Morris Publishing must
refinance all of the remaining Tranche A and Tranche B Term Loans with an
unaffiliated commercial bank at an annual interest rate no greater than LIBOR
plus 970 basis points. The refinanced debt, including the refinanced debt
attributable to the refinancing of the Tranche B Term Loans, will be senior to
the New Notes and will be secured by a first lien in substantially all of the
Company’s assets.




In the
event of any prepayment of the Tranche A Term Loans prior to the second
anniversary of the closing date of October 15, 2009 (the “Closing Date”), a
prepayment fee shall become due in the amounts set forth below (the “Prepayment
Fee”):




(1)
during the first year of the loan, a fee equal to 7.5% of such prepayment amount
less the aggregate amount of interest paid in cash on such amount during the
period between the Closing Date and the date of such payment, and




(2)
during the second year of the loan, a fee equal to (a) the amount of interest
which would have accrued in respect of such prepayment amount as if such amount
had remained outstanding at all times during the second year of the loan less
(b) the aggregate amount of interest paid in cash on such principal prepayment
amount during the period between the first anniversary of the Closing Date and
the date of such prepayment.




With
respect to the Prepayment Fee, the obligation of the Company is limited to an
aggregate amount of not more than $300, with any excess Prepayment Fee
obligations being liabilities of Morris Communications.


-18-





Restructuring
Support Agreement— On October 30, 2009, the Company entered into a
Restructuring Support Agreement with holders representing approximately
seventy-two percent of the aggregate principal amount outstanding of the
Existing Notes (the “Consenting Holders”). The Restructuring Support Agreement
incorporates and supplements the Term Sheet, as amended on October 15, 2009,
October 23, 2009 and October 27, 2009.




Pursuant
to the agreement, the Consenting Holders have agreed, among other things, to
tender their Existing Notes for their pro rata share of New Notes, to timely
vote to accept the Prepackaged Plan and to consent to an amendment to the
indenture governing the Existing Notes.




If the
minimum tender condition of the Exchange Offer, which requires the tendering of
at least ninety-nine percent of the aggregate principal amount of the
outstanding Existing Notes, has been satisfied, the Company must consummate the
Exchange Offer within three (3) business days after the expiration date of the
Exchange Offer.




If the
minimum tender condition has not been satisfied by the Exchange Offer’s
expiration date, the Company, among other things, must commence the chapter 11
cases within seven (7) calendar days after the conclusion of the solicitation of
acceptances of the Prepackaged Plan. In addition, the Company must obtain the
approval of a disclosure statement and the confirmation of the Prepackaged Plan
from the Bankruptcy Court not later than 5:00 pm Eastern time on the date that
is thirty (30) calendar days after the commencement of the chapter 11 cases,
subject to the schedule of the Bankruptcy Court and must consummate the
Prepackaged Plan not later than 5:00 pm Eastern time on the date that is eleven
(11) calendar days after the date on which the Prepackaged Plan is confirmed by
the Bankruptcy Court.




In
addition, the Company must limit its ability to take certain actions, including
issuing securities, hiring additional employees, making capital expenditures and
incurring indebtedness prior to the consummation of the Restructuring and it
must have certain amounts of cash on hand when the Restructuring is
consummated.




With
respect to the Amended Credit Agreement:




·
            The
      aggregate outstanding balance on the Tranche A Term Loan shall not exceed
      $19.7 million at any time, nor shall it be held by any of its affiliates
      at any time. In addition, the aggregate outstanding balance of the Tranche
      B Term Loan shall not exceed $6.8 million (plus accrued paid-in-kind
      interest) at any time;




·
            On
      or prior to one hundred fifty (150) days from the consummation of the
      Restructuring, the Company must refinance the Tranche A Term Loan, and the
      Company may, at its option, refinance the Tranche B Term Loan, in each
      case with a Term Loan and/or revolver that is provided by an unaffiliated
      commercial bank and not by any of its affiliates. If the Tranche B Term
      Loan is not refinanced on or prior to one hundred fifty (150) days from
      the consummation of the Restructuring, the Tranche B Term Loan will mature
      four and one half years from the date the New Notes are issued and will
      only be capable of amortization or repayment on a pro rata basis with the
      New Notes; and




·
            The
      Company must enter into deposit account control agreements to perfect the
      security interest granted under the New Notes with respect to each deposit
      account that is or will be in place for the benefit of its lenders under
      the Amended Credit Agreement on or prior to the consummation of the
      Restructuring.




With
respect to the New Indenture, the Company must:




·
            allow
      the holders of the New Notes to appoint a non-voting observer to each of
      its board of directors so long as any New Notes remain
      outstanding;




·
            make
      certain amendments to its tax consolidation agreement within fifteen (15)
      business days of commencing the Exchange Offer;
  and


·
              make
      certain amendments to its management and services agreement that will
      become effective upon the consummation of the Restructuring to limit the
      total fee to $22 million per annum.


-19-








In
addition, the Company may enter into a first-lien secured working capital
facility (the “Working Capital Facility”) with an aggregate maximum principal
amount not to exceed $10.0 million, provided that any Working Capital Facility
permits (1) the payment of interest on the New Notes at all times (other than
when an event of default under the Working Capital Facility shall have occurred
and be continuing), and (2) the amortization of the New Notes when there is no
outstanding balance on the Working Capital Facility. As a condition to obtaining
the Working Capital Facility, the Company is required to use available cash to
amortize the Tranche A Term Loan (or the refinanced debt, if
applicable).




Subject
to earlier termination, the Restructuring Support Agreement will automatically
terminate upon the earlier of the consummation of the Restructuring and
September 30, 2010.




Amendments
to Restructuring Term Sheet or Restructuring Support Agreement—
Subsequent to September 30, 2009, the Company entered into amendments to the
Term Sheet or Restructuring Support Agreement. Under the amendments to the Term
Sheet, the deadline to execute a Restructuring Support Agreement was ultimately
extended until 5:00 p.m. EDT on October 30, 2009. The Restructuring Support
Agreement was executed on October 30, 2009.




The
Amendment to the Restructuring Support Agreement extended the requirement to
commence the exchange offer solicitation until 5:00 p.m. EDT on November 17,
2009.




Amendments
to Forbearance Agreement— Subsequent to September 30, 2009, Amendment No.
16 ultimately extended the Forbearance Period to December 11, 2009. However, the
Forbearance Period would have terminated earlier on October 30, 2009 if the
Company had not entered into a Restructuring Support Agreement with the Ad
Hoc Committee by that date, or on November 6, 2009 if the Company had not
commenced exchange offer solicitation by that date.




Amendment
No. 17 to the Forbearance Agreement amended the definition of
a Forbearance Termination Event as defined in the Forbearance Agreement to
eliminate the requirement that the Company commence the exchange offer
solicitation no later than November 6, 2009, to eliminate the termination
on December 11, 2009 and to include the termination of the Restructuring Support
Agreement as a Forbearance Termination Event. Other terminating events
include an acceleration of the maturity of the Company’s obligations under the
Amended Credit Agreement, the occurrence of any other default under the
Original Indenture, or if the Company files for bankruptcy protection or
breaches its covenants under the Forbearance Agreement.




Amendment
No. 14 to the Forbearance Agreement, dated as of October 15, 2009 amended the
Forbearance Agreement to permit the acquisition of the senior secured debt by
Tranche Holdings and the amendment and acquisition of such senior secured debt
by Morris Communications and MPG Revolver under the Senior Refinancing
Transaction.




9.
            Going
      Concern


There are
several risk factors relating to its outstanding debt that raise uncertainty
about the Company’s liquidity and ability to continue as a going concern.
Specifically, its debt exceeds its assets, and its creditors may have the right
to accelerate the debt before its maturity given the failure to pay the $9,747
interest payments due February 1, 2009 and August 3, 2009 on the Existing Notes.
Under the Forbearance Agreement, the Holders representing holders of over
seventy-five percent of aggregate principal outstanding of the Existing Notes
have agreed 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 Original Indenture
unless there is an occurrence of a Forbearance Termination
Event.




-20-





In
response to all the factors described above, the Company is attempting to
restructure the amounts outstanding on the Existing Notes through the Exchange
Offer or the Prepackaged Plan. However, the timing and ultimate outcome of such
efforts cannot be determined at this time. The holders of the Existing Notes may
terminate the Restructuring Support Agreement if the Company breaches the
agreement, if the Exchange Offer fails and the bankruptcy court does not approve
the plan of reorganization, if there is a material adverse change regarding the
Company, or for certain other reasons. If the Restructuring fails, the Company’s
ability to continue as a going concern would be in jeopardy.
  If
neither the Exchange Offer nor the Prepackaged Plan is consummated, the Company
likely would need to seek relief under the Bankruptcy Code without the benefit
of having a plan of reorganization pre-approved by its creditors. If the Company
seeks bankruptcy relief under these circumstances, there can be no assurance as
to the value, if any, that would be available to holders of the Existing Notes.
The Existing Notes are the Company’s unsecured obligations and rank junior to
the secured obligations under its amended credit facility. Accordingly, upon any
distribution to its creditors in any foreclosure, dissolution, winding-up,
liquidation or reorganization, or other insolvency proceeding relating to the
Company or its property other than in connection with the Prepackaged Plan, the
holders of the indebtedness under its Amended Credit Agreement will be entitled
to be paid in full before any payment may be made with respect to the Existing
Notes.
  If the
Restructuring Support Agreement is terminated prior to consummation of the
Restructuring, if the Forbearance Agreement is terminated, or if the
Restructuring is not consummated on or before May 15, 2010, an event of default
under its Amended Credit Agreement would occur. Upon an event of default under
the Amended Credit Agreement, the lenders under the agreement could immediately
terminate their commitments to continue the Company’s term loans and/or declare
the amounts that the Company owes under the Amended Credit Agreement to be
immediately due and payable. If this were to occur, the Company would face an
immediate liquidity crisis and would likely have to file for bankruptcy without
the benefit of an agreed Prepackaged Plan.
  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.


-21-





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 and nine-month periods ended
September 30, 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, filed on Form 10-K.




During
2008 and the first nine 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, self-insurance and casualty reserves, 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 first nine months
ended September 30, 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 as of December 14, 2005 (the “Original
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.


-22-






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 both the Original Credit Agreement and the Amended and Restated Credit
Agreement, dated as of October 15, 2009 (the “Amended 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.




Fair
value of financial instruments—We estimated the fair values presented
below using appropriate valuation methodologies and market information available
as of September 30, 2009. Considerable judgment is required to develop estimates
of fair value, and the estimates presented are not necessarily indicative of the
amounts that we could realize in a current market exchange. The use of
different market assumptions or estimation methodologies could have a material
effect on the estimated fair values. Additionally, the fair values were
estimated at September 30, 2009, and current estimates of fair value may differ
from the amounts presented.




The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:




Cash
and equivalents, accounts receivable, and accounts payable. The carrying
amount of these items approximates fair value.




Long
term debt. To estimate the fair value of the $278.5 million principal
amount of 7 % Senior Subordinated Notes due 2013 (the “Existing Notes”),
we used the average price of the corporate bond trades reported immediately
following the announcement of the binding restructuring term sheet (the “Term
Sheet”) on September 23, 2009 with an ad hoc committee of holders (the “Ad Hoc
Committee”) of over seventy-five percent of the aggregate principal amount
outstanding of the Existing Notes. At September 30, 2009, the fair value of the
Existing Notes was estimated at $69.6 million.




The fair
value of the Tranche A Term Loan and the revolving credit facility was valued at
par, given the acquisition on October 15, 2009 of the stated amount on the loans
outstanding under the Original Credit Agreement in the “Senior Refinancing
Transaction” as described below.




Income
taxes — On January 28, 2009, we amended our 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 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.




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 “GateHouse
sale”). 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.


-23-





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
the first quarter 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 $0.1 million interest payment.




During
the second quarter of 2009, we 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) had been 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 had been payable on the 15th of
each month. The note had been 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 reserved the $11.5 million due on the note during the
first quarter of 2009. During the third quarter of 2009, we received a one time
principal payment in the amount of $4.0 million from GateHouse to settle the
outstanding obligation, with $1.5 million being applied to the outstanding
working capital balance. The remaining $7.5 million, previously reserved, was
written off.




Inventories—
Inventories consist principally of newsprint, prepress costs and supplies, which
are stated at the lower of cost or market value. The cost of newsprint inventory
is determined by the last in, first out method. Costs for newsprint inventory
would have been $1.0 million and $2.2 million higher at September 30, 2009 and
December 31, 2008, respectively, had the first in, first out method been used
for all inventories.




DEBT
RESTRUCTURING




Original
Credit Agreement




During
the first nine months of 2009, we entered into the following agreements with the
lenders under the Original Credit Agreement:




Amendments
and Waivers to the Original Credit Agreement—
On January 28, 2009, we, as borrower, entered into Amendment No. 4 and Waiver
No. 2 to the Original Credit Agreement (“Amendment No. 4”), which ultimately
waived until October 16, 2009 (by Waiver No. 18 to the Original Credit Agreement
(“Waiver No. 18”), as described below) any default that arose from our failure
to pay the interest payment due on the Existing Notes. The Original Credit
Agreement included 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).


-24-





Prior to
Amendment No. 4, the Original Credit Agreement provided for revolving
credit commitments of $100.0 million, in addition to the amount outstanding on
the Term Loan. Amendment No. 4 reduced the limit on loans available under
the revolving facility from $100.0 million to $70.0 million, but further limited
the amount available to $60.0 million without the consent of lenders holding a
majority of the commitments under the Original Credit
Agreement. Amendment No. 6 to the Original Credit Agreement
permanently reduced the revolving credit commitment to $60.0
million.




In
addition, Amendment No. 4 provided for an immediate increase of the variable
interest rate under the Original Credit Agreement (previously scheduled for
April 1, 2009) of 0.50%.




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
Original Credit Agreement.




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




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




The $0.7
million in debt issuance costs associated with Amendment No. 4 were deferred and
amortized ratably, along with all the other unamortized loan costs associated
with the Original Credit Agreement, through May, 2009, the date when, pursuant
to the Mandatory Transaction provision of Amendment No. 3 to the Original Credit
Agreement, the credit facility was originally required to be repaid. In
addition, we wrote off $0.2 million in deferred loan costs during January of
2009.




Amendment
No. 5 to the Original Credit Agreement deleted the Mandatory Transaction
requirement added by Amendment No. 3 to the Original 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 Original 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. 5 to the Original Credit Agreement waived any event of default that consists
solely of Morris Communications 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 ending
December 31, 2008, provided that such audited financial statements and opinion
were delivered on April 24, 2009. Morris Communications delivered its
consolidated audited financial statements and the auditors' opinion to the
lenders on April 21, 2009.




Waiver
No. 13 to the Original Credit Agreement included an additional fee in the amount
of two percent of the commitments of the consenting lenders that would have been
ultimately payable on October 16, 2009 (by Waiver No. 18),
or earlier, upon the termination of the lender's waiver
(the "Fee Payment Date"). The amount of this fee would have been
approximately $ 2.8 million. However, such fee was not payable if before
the Fee Payment Date the lenders' loans were paid in full, the loans and
commitments of the lenders were purchased at par, or a majority of the
consenting lenders agreed to waive the fee. Since the loans and commitments of
the lenders were purchased or acquired on October 15, 2009 in connection with
the Senior Refinancing Transaction as discussed below, this additional fee was
not required to be paid.


-25-





Waiver
No. 18 ultimately waived until October 16, 2009 any event of default that may
have occurred when we failed to meet the consolidated cash flow ratio or the
consolidated interest coverage ratio under the Original Credit Agreement for the
second and third quarters of 2009.




All
existing defaults under the Original Credit Agreement were eliminated upon the
consummation of the Senior Refinancing Transaction on October 15,
2009.




Original
Indenture




During
the first nine months of 2009, we entered into the following agreements with
either the holders, or investment advisors, or managers (the “Holders”)
representing holders of over seventy-five percent of the aggregate principal
amount outstanding of the Existing Notes.




Forbearance
Agreement—
On
February 26, 2009, we entered into a forbearance agreement (the “Forbearance
Agreement”) with the Holders of the Existing Notes, with the Holders agreeing
not to take any action to enforce any of the rights and remedies available to
them under the Original Indenture as a result of the default on the February
2009 interest payment. The forbearance was eventually expanded to cover the
default on the August 2009 interest payment and extended for a period ultimately
ending on December 11, 2009 (by Amendment No. 16 to the Forbearance Agreement
(“Amendment No. 16”), as described below) (the “Forbearance
Period”). 
 Under the
agreement (and all amendments to the agreement) the Forbearance Period could be
terminated earlier for various reasons, which include the lenders under the
Original Credit Agreement accelerating the maturity of the obligations under the
Original Credit Agreement, the occurrence of any other default under the
Original Indenture, or our filing for bankruptcy protection or breaching the
covenants under the Forbearance Agreement.
  During
the Forbearance Period, and for up to seven business days thereafter, the
Forbearance Agreement restricted our ability to enter into any transaction which
would refinance any of its existing senior debt under the Original Credit
Agreement where any affiliate of ours would become a holder of senior debt and
limited new liens on its properties, without prior written consent of holders of
more than 66 2/3% of the outstanding Existing Notes.
  Restructuring
Transaction— On September 23, 2009, we entered into the Term Sheet with
the Ad Hoc Committee of holders of the Existing Notes subject to the final
negotiation and execution of the definitive legal documentation and other
closing conditions for the transactions contemplated thereby, including the
execution of a "Restructuring Support Agreement" on reasonable and customary
terms. The Term Sheet provides, among other things, for the restructuring of the
Existing Notes through an out-of-court exchange offer (the “Exchange Offer”) or
a chapter 11 filing under title 11 of the United States Code (the “Bankruptcy
Code”) and a plan of reorganization confirmed under the Bankruptcy Code (the
“Prepackaged Plan”). The financial restructuring, whether accomplished through
the Exchange Offer or the Prepackaged Plan, is referred to as the
“Restructuring”.
  In
addition, the execution of Amended Credit Agreement was part of the “Senior
Refinancing Transaction” contemplated by the Term Sheet, which was a condition
precedent to the Restructuring. The Ad Hoc Committee provided approvals for the
consummation of the “Senior Refinancing Transaction” under the Original
Indenture between the issuers, the subsidiary guarantors and Wilmington Trust,
FSB (as successor trustee), as Indenture Trustee, the Term Sheet and the
Forbearance Agreement.
  The
Exchange Offer consists of (a) the exchange offer to acquire all of our $278.5
million principal amount outstanding of the Existing Notes plus any accrued and
unpaid interest thereon, for $100 million in principal amount of newly issued
Floating Rate Secured Notes due 2014 (the “New Notes”) immediately upon the
effective date of the Exchange Offer, and (b) the cancellation ofapproximately
$110 million of intercompany indebtedness, which will eliminate our Tranche C
Term Loan under the Amended Credit Agreement.


-26-







The terms
of the Exchange Offer will require tender of at least 99% of the Existing Notes.
If the Exchange Offer is successful, we do not intend to retire any remaining
Existing Notes outstanding after the consummation of the exchange and such
Existing Notes will remain outstanding. The remaining Existing Notes will be
entitled to the rights under the Original Indenture as amended to remove
covenants in connection with the exchange. The New Notes will be secured on a
second lien basis by all of our assets, but the remaining Existing Notes will
remain unsecured.
  If we do
not acquire at least ninety-nine percent of the aggregate principal amount
outstanding of the Existing Notes, we would seek to accomplish the same results
contemplated by the Exchange Offer through the effectiveness of the Prepackaged
Plan of reorganization, acceptances for which we will solicit in compliance with
the Bankruptcy Code. Approval of the Prepackaged Plan requires holders of the
Existing Notes representing at least two-thirds in aggregate principal amount of
the Existing Notes and more than one-half in number of those who vote to vote in
favor of the Prepackaged Plan. Only those parties who actually vote are counted
for these purposes. Under the Prepackaged Plan, all outstanding Existing Notes
will be cancelled. Under both plans, each holder will receive their pro rata
share of the New Notes.
 
 If we do
not complete the Restructuring under either plan, we would likely file for
bankruptcy protection pursuant to the Bankruptcy Code on terms other than
contemplated by the Prepackaged Plan. Under such bankruptcy filing, the holders
of all of the outstanding Existing Notes may receive consideration that is
substantially different than what is being offered by the Prepackaged
Plan.
 
 Under the
Restructuring, the New Notes will mature four and one half years from the
Effective Date, and will bear interest of at least 10%, but could bear interest
up to 15%, some of which may be paid-in-kind (PIK), until we repay our remaining
senior debt. The Indenture for the New Notes (the “New Indenture”) will require
that we continue to file annual, quarterly and current reports with the
Securities and Exchange Commission and will require that the holders of the New
Notes have the right to appoint an observer to the Board of Directors of the
Company and each of our subsidiaries. The New Indenture will include the
customary terms and covenants and will contain total leverage covenants and cash
interest coverage covenants.


Subsequent
events to debt restructuring




We
evaluated subsequent events through November 13, 2009, which is the date that
the condensed consolidated financial statements were available to be
issued.




Waivers
to Original Credit Agreement— Subsequent to September 30, 2009, we
entered into Waiver No. 17 and Waiver No. 18 to the Original Credit Agreement
which had ultimately extended the waiver of cross default that arose from the
failure to make the February 1, 2009 and August 3, 2009 interest payments due on
the Notes until October 16, 2009, or earlier, if upon termination of the
Forbearance Agreement.




All
existing defaults under the Original Credit Agreement were eliminated upon the
consummation of the Senior Refinancing Transaction on October 15,
2009.




Senior
Refinancing Transaction— On October 15, 2009, we as borrower, entered
into the Amended Credit Agreement to amend and restate our Original Credit
Agreement. The amendment immediately followed the acquisition by Tranche
Holdings of all $136.5 million in outstanding loans under the Original Credit
Agreement. The Amended Credit Agreement
converted all existing loans under the Original Credit Agreement into the
following three tranches of Term Loans: $19.7 million in Tranche A Term Loans,
$6.8 million in Tranche B Term Loans, and $110.0 million in Tranche C Term
Loans. All $6.8 million of the Tranche B Term Loans and all $110.0 million of
the Tranche C Term Loans were acquired by two of our affiliates, MPG Revolver
and Morris Communications.




The
parties to the Amended Credit Agreement are us as borrower, all of our
subsidiaries as subsidiary guarantors, Morris Communications, and its wholly
owned domestic subsidiaries as affiliate guarantors, Tranche Manager, LLC
(“Tranche Manager”) as the new Administrative Agent, and Tranche Holdings, MPG
Revolver, and Morris Communications as lenders. Tranche Manager, an affiliate of
Tranche Holdings, replaced JPMorgan Chase Bank, N.A., as Administrative Agent.


-27-








Under the
Amended Credit Agreement, the Tranche A Term Loans bear cash interest at the
rate of 15% per annum. The 5% interest rate on the Tranche B Term Loans and the
15% interest rate on the Tranche C Term Loans are required to be paid-in-kind
(PIK) as an addition to the principal amount rather than cash. All tranches of
loans under the Amended Credit Agreement mature in two years, with two six-month
extension options during which extensions the interest rate on the Tranche A
Term Loans would increase to 17.5% and 20%, respectively. However, after the
consummation of a successful subordinated debt restructuring transaction as
described below, the Tranche A Term Loans will mature earlier on the deadline
for the required refinancing of the Tranche A Term Loans (150 days after the
consummation of the subordinated debt restructuring transaction).




All
principal payments on the senior debt will be applied first to the Tranche A
Term Loans until paid in full. Quarterly principal payments are required from
Morris Publishing’s net cash flow to reduce the Tranche A Term Loans. All three
tranches of senior debt remain senior to the $278.5 million outstanding
principal amount of Existing Notes, however, MPG Revolver and Morris
Communications have deposited all $110.0 million of Tranche C Term Loans into an
escrow account for eventual cancellation upon successful consummation of a
proposed restructuring transaction supported by the Holders of over seventy-five
percent of the aggregate principal amount outstanding of the Existing
Notes.




The
execution of the Amended Credit Agreement is part of the “Senior Refinancing
Transaction” contemplated by the Term Sheet as described above, which was a
condition precedent to the Restructuring. Upon the exchange of the Existing
Notes, our affiliates have agreed to cancel the Tranche C Term Loans in
repayment of approximately $25.0 million of intercompany indebtedness to us and
as a contribution to capital of approximately $85.0 million.




The loans
under the Amended Credit Agreement continue to be guaranteed by all of our
subsidiaries, as well as Morris Communications and all of its wholly-owned,
domestic subsidiaries, and secured by substantially all of the assets of such
guarantors and Morris Publishing. In the case of the security interests granted
by Morris Communications and its subsidiaries, the lenders are generally not
permitted to exercise collateral foreclosure remedies prior to May 15, 2010 so
long as all interest on the Tranche A Term Loans has been paid and certain
bankruptcy events have not occurred.




In
connection with the Senior Refinancing Transaction, the equity of MCC Outdoor,
LLC (“MCC Outdoor”, a former subsidiary of Morris Communications engaged in the
outdoor advertising business) was transferred to FMO Holdings, LLC (“FMO
Holdings”), and MCC Outdoor was released from its guaranty, and its equity and
assets no longer serve as security for the obligations under the Amended Credit
Agreement. Magic Media, Inc., an affiliate of Tranche Holdings, is the
controlling member of FMO Holdings, and a subsidiary of Morris Communications
has a non-controlling equity interest in FMO Holdings. Other than the
relationships relating to FMO Holdings and with respect to the Amended Credit
Agreement, we have no material relationship with Tranche
Holdings.


The
Amended Credit Agreement contains various representations, warranties and
covenants generally consistent with the Original Credit Agreement, but with
certain additional limitations applicable prior to the repayment in full of the
Tranche A Term Loans. Financial covenants in the Amended Credit Agreement
require us to meet certain financial tests on an on-going basis, including
minimum interest coverage ratio, minimum fixed charge coverage ratio, and
maximum cash flow ratios, based upon the combined consolidated financial results
of Morris Publishing and Morris Communications. However, until May 15, 2010, the
financial covenants will be calculated as if the Restructuring had been
completed.




An event
of default will occur under the Amended Credit Agreement if the Restructuring
has not been completed by May 15, 2010. Other new events of default include the
Tranche A Term Loans lender’s determination that there has been a diminution of
value in the collateral, or that we are not making adequate progress to
consummate the Restructuring.




Unless
refinanced prior to the Restructuring, the Tranche B Term Loans remaining after
the Restructuring will rank pari passu with the New Notes and shall cease to be
secured by the liens securing the Amended Credit Agreement, and shall share in
the same collateral securing the New Notes on a second priority basis. On or
prior to 150 days from the date of the Restructuring, we must refinance all of
the remaining Tranche A and Tranche B Term Loans with an unaffiliated commercial
bank at an annual interest rate no greater than LIBOR plus 970 basis points. The
refinanced debt, including the refinanced debt attributable to the refinancing
of the Tranche B Term Loans, will be senior to the New Notes and will be secured
by a first lien in substantially all of our assets.


-28-








In the
event of any prepayment of the Tranche A Term Loans prior to the second
anniversary of the closing date of October 15, 2009 (the “Closing Date”), a
prepayment fee shall become due in the amounts set forth below (the “Prepayment
Fee”):




(1)
during the first year of the loan, a fee equal to 7.5% of such prepayment amount
less the aggregate amount of interest paid in cash on such amount during the
period between the Closing Date and the date of such payment, and




(2)
during the second year of the loan, a fee equal to (a) the amount of interest
which would have accrued in respect of such prepayment amount as if such amount
had remained outstanding at all times during the second year of the loan less
(b) the aggregate amount of interest paid in cash on such principal prepayment
amount during the period between the first anniversary of the Closing Date and
the date of such prepayment.




With
respect to the Prepayment Fee, the our obligation is limited to an aggregate
amount of not more than $0.3 million, with any excess Prepayment Fee obligations
being liabilities of Morris Communications.




Restructuring
Support Agreement— On October 30, 2009, we entered into a Restructuring
Support Agreement with holders representing approximately seventy-two percent of
the aggregate principal amount outstanding of the Existing Notes (the
“Consenting Holders”). The Restructuring Support Agreement incorporates and
supplements the Term Sheet, as amended on October 15, 2009, October 23, 2009 and
October 27, 2009.




Pursuant
to the agreement, the Consenting Holders have agreed, among other things, to
tender their Existing Notes for their pro rata share of New Notes, to timely
vote to accept the Prepackaged Plan and to consent to an amendment to the
indenture governing the Existing Notes.




If the
minimum tender condition of the Exchange Offer, which requires the tendering of
at least ninety-nine percent of the aggregate principal amount of the
outstanding Existing Notes, has been satisfied, we must consummate the Exchange
Offer within three (3) business days after the expiration date of the Exchange
Offer.


If the
minimum tender condition has not been satisfied by the Exchange Offer’s
expiration date, we, among other things, must commence the chapter 11 cases
within seven (7) calendar days after the conclusion of the solicitation of
acceptances of the Prepackaged Plan. In addition, we must obtain the approval of
a disclosure statement and the confirmation of the Prepackaged Plan from the
Bankruptcy Court not later than 5:00 pm Eastern time on the date that is thirty
(30) calendar days after the commencement of the chapter 11 cases, subject to
the schedule of the Bankruptcy Court and must consummate the Prepackaged Plan
not later than 5:00 pm Eastern time on the date that is eleven (11) calendar
days after the date on which the Prepackaged Plan is confirmed by the Bankruptcy
Court.




In
addition, we must limit our ability to take certain actions, including issuing
securities, hiring additional employees, making capital expenditures and
incurring indebtedness prior to the consummation of the Restructuring and we
must have certain amounts of cash on hand when the Restructuring is
consummated.




With
respect to the Amended Credit Agreement:




·
            The
      aggregate outstanding balance on the Tranche A Term Loan shall not exceed
      $19.7 million at any time, nor shall it be held by any of our affiliates
      at any time. In addition, the aggregate outstanding balance of the Tranche
      B Term Loan shall not exceed $6.8 million (plus accrued paid-in-kind
      interest) at any time;




·
            On
      or prior to one hundred fifty (150) days from the consummation of the
      Restructuring, we must refinance the Tranche A Term Loan, and we may, at
      our option, refinance the Tranche B Term Loan, in each case with a Term
      Loan and/or revolver that is provided by an unaffiliated commercial bank
      and not by any of our affiliates. If the Tranche B Term Loan is not
      refinanced on or prior to one hundred fifty (150) days from the
      consummation of the Restructuring, the Tranche B Term Loan will mature
      four and one half years from the date the New Notes are issued and will
      only be capable of amortization or repayment on a pro rata basis with the
      New Notes; and


-29-






·
            We
      must enter into deposit account control agreements to perfect the security
      interest granted under the New Notes with respect to each deposit account
      that is or will be in place for the benefit of our lenders under the
      Amended Credit Agreement on or prior to the consummation of the
      Restructuring.




With
respect to the New Indenture, we must:




·
            allow
      the holders of the New Notes to appoint a non-voting observer to each of
      our board of directors so long as any New Notes remain
      outstanding;




·
            make
      certain amendments to our tax consolidation agreement within fifteen (15)
      business days of commencing the Exchange Offer;
  and




·
            make
      certain amendments to our management and services agreement that will
      become effective upon the consummation of the Restructuring to limit the
      total fee to $22 million per annum.




In
addition, we may enter into a first-lien secured working capital facility (the
“Working Capital Facility”) with an aggregate maximum principal amount not to
exceed $10.0 million, provided that any Working Capital Facility permits (1) the
payment of interest on the New Notes at all times (other than when an event of
default under the Working Capital Facility shall have occurred and be
continuing), and (2) the amortization of the New Notes when there is no
outstanding balance on the Working Capital Facility. As a condition to obtaining
the Working Capital Facility, we are required to use available cash to amortize
the Tranche A Term Loan (or the refinanced debt, if
applicable).


Subject
to earlier termination, the Restructuring Support Agreement will automatically
terminate upon the earlier of the consummation of the Restructuring and
September 30, 2010.




Amendments
to Restructuring Term Sheet or Restructuring Support Agreement—
Subsequent to September 30, 2009, we entered into amendments to the Term Sheet
or Restructuring Support Agreement. Under the amendments to the Term Sheet, the
deadline to execute a Restructuring Support Agreement was ultimately extended
until 5:00 p.m. EDT on October 30, 2009. The Restructuring Support Agreement was
executed on October 30, 2009.




The
Amendment to the Restructuring Support Agreement extended the requirement to
commence the exchange offer solicitation until 5:00 p.m. EDT on November 17,
2009.




Amendments
to Forbearance Agreement— Subsequent to September 30, 2009, Amendment No.
16 ultimately extended the Forbearance Period to December 11, 2009. However, the
Forbearance Period would have terminated earlier on October 30, 2009 if we
had not entered into a Restructuring Support Agreement with the Ad Hoc
Committee by that date, or on November 6, 2009 if we had not commenced exchange
offer solicitation by that date.




Amendment
No. 17 (“Amendment No. 17”) to the Forbearance Agreement amended the definition
of a Forbearance Termination Event as defined in the Forbearance Agreement
to eliminate the requirement that we commence the exchange offer solicitation no
later than November 6, 2009, to eliminate the termination on December 11, 2009
and to include the termination of the Restructuring Support Agreement as a
Forbearance Termination Event. Other terminating events include an acceleration
of the maturity of our obligations under the Amended Credit Agreement, the
occurrence of any other default under the Original Indenture, or if we file for
bankruptcy protection or breaches its covenants under the Forbearance
Agreement.




Amendment
No. 14 to the Forbearance Agreement, dated as of October 15, 2009 amended the
Forbearance Agreement to permit the acquisition of the senior secured debt by
Tranche Holdings and the amendment and acquisition of such senior secured debt
by Morris Communications and MPG Revolver under the Senior Refinancing
Transaction.


-30-








GOING
CONCERN





There are
several risk factors relating to our outstanding debt that raise uncertainty
about our liquidity and ability to continue as a going concern. Specifically,
our debt exceeds our assets, and our creditors may have the right to accelerate
the debt before its maturity due to our failure to pay the $9.7 million interest
payments due February 1, 2009 and August 3, 2009 on the Existing
Notes.




Under the
Forbearance Agreement and the Amendments thereto, the Holders representing
holders of over seventy-five percent of aggregate principal outstanding of the
Existing Notes have agreed 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
Original Indenture unless there is an occurrence of a Forbearance Termination
Event as described in Amendment No. 17 .




In
response to all the factors described above, we are attempting to restructure
the amounts outstanding on the Existing Notes through the Exchange Offer or the
Prepackaged Plan. However, the timing and ultimate outcome of such efforts
cannot be determined at this time.




The
holders of the Existing Notes may terminate the Restructuring Support Agreement
if we breach the agreement, if the Exchange Offer fails and the bankruptcy court
does not approve the plan of reorganization, if there is a material adverse
change regarding Morris Publishing, or for certain other reasons. If the
Restructuring fails, our ability to continue as a going concern would be in
jeopardy.


If neither the Exchange
Offer nor the Prepackaged Plan is consummated, we likely would need to seek
relief under the Bankruptcy Code without the benefit of having a plan of
reorganization pre-approved by its creditors. If we seek bankruptcy
relief under these circumstances, there can be no assurance as to the value, if
any, that would be available to holders of the Existing Notes. The Existing
Notes are our unsecured obligations and rank junior to the secured obligations
under our amended credit facility. Accordingly, upon any distribution to our
creditors in any foreclosure, dissolution, winding-up, liquidation or
reorganization, or other insolvency proceeding relating to us or our property
other than in connection with the Prepackaged Plan, the holders of the
indebtedness under our Amended Credit Agreement will be entitled to be paid in
full before any payment may be made with respect to the Existing
Notes. 
 If the
Restructuring Support Agreement is terminated prior to consummation of the
Restructuring, if the Forbearance Agreement is terminated, or if Restructuring
is not consummated on or before May 15, 2010, an event of default under its
Amended Credit Agreement would occur. Upon an event of default under the Amended
Credit Agreement, the lenders under the agreement could immediately terminate
their commitments to continue our term loans and/or declare the amounts that we
owe under the Amended Credit Agreement to be immediately due and payable. If
this were to occur, we would face an immediate liquidity crisis and would likely
have to file for bankruptcy without the benefit of an agreed Prepackaged
Plan.
  As a
result of the aforementioned factors and related uncertainties, there is
substantial doubt about our ability to continue as a going
concern.





ACCOUNTING
PRONOUNCEMENTS




Accounting
standards codification




In June
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied in the preparation of financial
statements in conformity with GAAP. The standard explicitly recognizes rules and
interpretive releases of the SEC under federal securities laws as authoritative
GAAP for SEC registrants. This pronouncement is effective for financial
statements issued for fiscal years and interim periods ending after September
15, 2009. We have adopted the provisions of this pronouncement for the quarter
ending September 30, 2009. There was no impact to the consolidated financial
results as this charge is disclosure-only in nature.


-31-








Recently
adopted standards




In May
2009, the FASB issued a pronouncement establishing general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
It also requires the disclosure of the date through which subsequent events are
evaluated and the basis for that date, that is, whether that date represents the
date the financial statements are issued or are available to be issued. The
effective date for the pronouncement is for interim or annual periods ending on
or after June 15, 2009. We adopted the provisions of the pronouncement as of
April 1, 2009, which did not have a material impact on our financial position,
cash flows or results of operations.




In April
2009, the FASB and Accounting Principles Board ("APB") issued pronouncements
requiring an entity to provide disclosures about fair value of financial
instruments in interim financial information. This pronouncement is to be
applied prospectively and is effective for interim and annual periods ending
after June 15, 2009. We adopted the provisions of these pronouncements in
the quarter ended June 30, 2009. There was no impact on the
unaudited condensed consolidated financial statements as it relates only to
additional disclosures which are included inthe
notes to these financial statements.





In April
2009, the FASB issued a pronouncement providing additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This pronouncement also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. This pronouncement is effective for interim and annual reporting
periods ending after June 15, 2009, and is applied prospectively. We concluded
that the adoption of this pronouncement as of April 1, 2009 did not have a
material impact on our results of operations, financial position or cash
flows.




In April
2008, the FASB issued a pronouncement amending the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under a prior pronouncement. More
specifically, the pronouncement removed the requirement under the previous
pronouncement to consider whether an intangible
asset can be renewed without substantial cost or material modifications to the
existing terms and conditions and instead, requires an entity to consider its
own historical experience in renewing similar arrangements. The pronouncement
also required expanded disclosure related to the determination of intangible
asset useful lives. The pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and may impact any
intangible assets we acquire in future transactions.




In
February 2007, the FASB issued a pronouncement permitting entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value, and establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. The pronouncement is effective for financial
statements issued for fiscal years beginning after November 15, 2007. We adopted
the provisions of the pronouncement on January 1, 2008, and have elected not to
measure any of our current eligible financial assets or liabilities at fair
value.




In
September 2006, the FASB issued a pronouncement on fair value measurement, and
in February 2008, subsequently amended the pronouncement to address the fair
value measurements for purposes of lease classification or measurement. The
pronouncement, as amended, defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. The
pronouncement is applicable to other accounting pronouncements that require or
permit fair value measurements, except those relating to lease accounting, and
accordingly does not require any new fair value measurements. The pronouncement
is effective for financial assets and liabilities in fiscal years beginning
after November 15, 2007, and for non-financial assets and liabilities in fiscal
years beginning after November 15, 2008 except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. Our
adoption of the provisions of the pronouncement on January 1, 2008, with respect
to financial assets and liabilities measured at fair value, did not have a
material impact on our fair value measurements or our financial statements for
the year ended December 31, 2008.


-32-








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.




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.




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.




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.


FINANCIAL
SUMMARIES




Financial
summary for the three months ended September 30, 2009 compared to September
30, 2008





Quarter
      Ended September 30,(Dollars in
      thousands)
              
              2009
              
              
              2008Total
      net operating revenues
              
              $
              62,297
              
              
              $
              78,246Impairment
      of goodwill
              
              
              -
              
              
              
              170,685Debt
      restructuring costs
              
              
              2,508
              
              
              
              -Total
      other operating expenses
              
              
              56,613
              
              
              
              71,394Operating
      income (loss)
              
              
              3,176
              
              
              
              (163,833
              )Interest
      expense
              
              
              6,272
              
              
              
              6,776Recovery
      in note receivable reserve
              
              
              (4,000
              )
              
              
              -Other
              
              
              (242
              )
              
              
              (254
              )Other
      expenses, net
              
              
              2,030
              
              
              
              6,522Income
      (loss) before taxes
              
              
              1,146
              
              
              
              (170,355
              )Provision
      (benefit) for income taxes
              
              
              435
              
              
              
              (7,154
              )Net
      income (loss)
              
              $
              711
              
              
              $
              (163,201
              )






Compared
to the third quarter of 2008, total net operating revenues were $62.3 million,
down $15.9 million, or 20.4%, and total operating expenses were $59.1 million,
down $183.0 million, or 75.6%. Our total other operating expenses, which exclude
the impairment of goodwill and debt restructuring costs, were down $14.8
million, or 20.7%, from last year.




Our
operating income was $3.2 million for the third quarter of 2009, up $167.0
million from an operating loss of $163.8 million last year.




Interest
and loan amortization expense totaled $6.3 million, down $0.5 million from last
year.


-33-








At the
end of the first quarter of 2009, we reserved the $11.5 million due on the note
receivable from Gatehouse. In September of 2009, Morris Publishing and Gatehouse
agreed to a one time payment in the amount of $4.0 million to settle the
outstanding obligation, of which $1.5 million was for the reimbursement of
working capital. The entire $4.0 million was recorded as a reduction in the note
receivable reserve.




Our
income before taxes was $1.1 million, compared to a loss before taxes of $170.4
million last year.




Our
income tax provision was $0.5 million in 2009, compared to an income tax benefit
of $7.2 million last year.


During
2008, the $170.7 million impairment of goodwill resulted in only a small income
tax benefit for financial reporting purposes because most of the goodwill was
not deductible for income tax purposes.




Our net
income was $0.7 million compared to a net loss of $163.2 million during the
third quarter last year.




Results
of operations for the three months ended September 30, 2009 compared to
September 30, 2008




Net
operating revenue. The table below presents the total net operating
revenue and related statistics for the three months ended September 30, 2009
compared to September 30, 2008:




(Dollars
      in thousands)
              
              Quarter
      Ended September 30,
              
              
              Percentage
      change2009
              
              
              2008
              
              
              2009
      vs. 2008Net
      operating revenuesAdvertisingRetail
              
              $
              26,105
              
              
              $
              33,469
              
              
              
              (22.0
              %)National
              
              
              3,065
              
              
              
              4,069
              
              
              
              (24.7
              %)Classified
              
              
              15,375
              
              
              
              23,377
              
              
              
              (34.2
              %)Total
      advertising revenues
              
              $
              44,545
              
              
              
              60,915
              
              
              
              (26.9
              %)Circulation
              
              
              15,740
              
              
              
              15,293
              
              
              
              2.9
              %Other
              
              
              2,012
              
              
              
              2,038
              
              
              
              (1.3
              %)Total
      net operating revenues
              
              $
              62,297
              
              
              $
              78,246
              
              
              
              (20.4
              %)






Advertising
revenue.Advertising revenue was $44.5 million, a decrease of $16.4
million, or 26.9%, from last year.




During
the third quarter of 2009, advertising revenue represented 71.5% of our total
net operating revenue. Our advertising revenue consisted of 58.6% in retail,
34.5% in classified and 6.9% in national, compared to 54.9%, 38.4%, and 6.7%,
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.




Retail,
national and classified advertising categories were down 22.0%, 24.7% and 34.2%,
respectively.




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.


-34-








Compared
to last year, run of press advertising revenue was $25.6 million, down $11.2
million, or 30.5%, and insert advertising revenue was $10.7 million, down $2.0
million, or 16.0%. Advertising revenue from specialty products printed by us,
but not a part of main newspaper product, was $2.0 million, down $1.0 million,
or 30.5%.




Online
advertising revenue was $6.2 million, down $2.2 million, or 26.0%, from last
year. Compared to last year, total page-views were 163.0 million, down 1.6
million, or 1.0% while unique page-views were 15.3 million, up 2.9 million, or
23.4%.




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.




Our
existing Florida newspapers and publications, which account for 32.2% of our
total advertising revenues, contributed 41.6% of our entire net decline in
advertising revenue.




Advertising
revenue in Jacksonville was down $5.7 million, or 32.1%, and St. Augustine was
down $0.4 million, or 20.3%.




Augusta
was down $1.9 million, or 27.3%, Savannah was down $1.1 million, or 20.7%,
Lubbock was down $1.5 million, or 25.1%, Amarillo was down $1.1 million, or
20.0%, Topeka was down $1.0 million, or 24.6%, and Athens was down $0.8 million,
or 31.3%.




Our six
other daily newspapers were, together, down $1.1 million, or 22.8%. Our
non-dailies were down $1.8 million, or 29.3%, with significant declines from
Skirt!
magazines, Jacksonville’s non-dailies and our four city magazines.




Retail
advertising revenue:




Retail
advertising revenue was $26.1 million, down $7.4 million, or 22.0%, from the
prior year.




Insert
retail revenue was $9.6 million, down $1.9 million, or 16.5%, while print retail
advertising revenue was $12.3 million, down $4.3 million, or 25.9%, from last
year. Retail advertising revenue from specialty products printed by us, but not
a part of main newspaper product, was $1.8 million, down $0.9 million, or 32.6%,
from last year. Retail online revenue was $2.4 million, down $0.3 million, or
9.8%, from last year.




Our
Jacksonville newspaper’s retail advertising revenue was down $2.6 million, or
29.5%, contributing 35.1% of our total net decline.




Classified
advertising revenue:




Total
classified advertising revenue was $15.4 million, down $8.0 million, or 34.2%,
from 2008.




Print
classified advertising revenue was $11.6 million, down $6.1 million, or 34.2%,
and online classified advertising revenue was $3.6 million, down $1.8 million,
or 33.7%, from last year. Excluding the employment category, online classified
advertising revenue was down 18.0% from last year.




Jacksonville
was down $2.5 million, or 37.8%, contributing 31.3% of our total net
decline.




National
advertising revenue:




Total
national advertising revenue was $3.0 million, down $1.0 million, or 24.7%, from
last year. Jacksonville was down $0.6 million, or 25.8%.




Circulation
revenue.During the third quarter of 2009, circulation revenue was $15.7
million, up $0.5 million, or 2.9%, from the same quarter last year, primarily
due to price.


-35-








Circulation
revenue represented 25.3% of our total net operating revenue during the third
quarter of 2009, compared to 19.5% during the same period last
year.




During
2008, Jacksonville’s daily single copy prices, 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 $2.00. In addition,
significant home delivery price increases (both daily and Sunday) were
implemented in Jacksonville and at many of our newspapers last
year.




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 third quarter of
2009.




Other
revenue. Other revenue was $2.0 million, unchanged from last
year.




Net
operating expense.The table below presents the total other operating
expenses and related statistics for the newspaper operations for three months
ended September 30, 2009 compared to September 30, 2008:




(Dollars
      in thousands)
                
                Quarter
      Ended September 30
                
                
                Percentage
      change2009
                
                
                2008
                
                
                2009
      vs. 2008Other
      operating expensesLabor
      and employee benefits
                
                $
                25,550
                
                
                $
                31,936
                
                
                
                (20.0
                %)Newsprint,
      ink and supplements
                
                
                4,559
                
                
                
                9,191
                
                
                
                (50.4
                %)Other
      operating costs
                
                
                23,571
                
                
                
                26,795
                
                
                
                (12.0
                %)Depreciation
      and amortization*
                
                
                2,932
                
                
                
                3,472
                
                
                
                (15.6
                %)Total
      other operating expenses
                
                $
                56,612
                
                
                $
                71,394
                
                
                
                (20.7
                %)*Excludes
      impairment of goodwill and debt restructuring costs






Labor
and employee benefits. Total labor and employee benefit costs were $25.6
million, down $6.4 million, or 20.0%, being favorably impacted by reductions in
head count and wages, the suspension of employer 401(k) contributions during the
third quarter of last year and the termination of the post retirement plan at
the end of 2008.




Our
salaries and wages totaled $18.1 million, down $6.0 million, or 25.0%. Average
full time employee equivalents (“FTE’s”) were down 489, or 19.1%.




Excluding
the $0.1 million and $0.9 million in severance payments made during the third
quarter of 2009 and 2008, respectively, our average pay rate was down 4.1%.
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.




Commissions
and bonuses were $2.8 million, down $1.0 million, or 25.0%, from last
year.




Employee
medical insurance cost was $3.1 million, up $1.4 million, or 81.5%; a 124.5%
increase in medical costs per employee.




Post
retirement benefit costs and employer matching contributions to the 401(k) plan
were $0.3 million and $0.1 million during the third quarter of 2008,
respectively.




Other
employee costs totaled $1.6 million, down $0.4 million, or 18.6%, primarily due
to the reduction in payroll taxes.




Newsprint,
ink and supplements cost. Newsprint, ink and supplements costs were $4.6
million, down $4.6 million, or 50.4%.


-36-








Compared
to last year, total newsprint expense was $3.9 million, down $4.2 million, or
51.4%, with a 35.5% decrease in newsprint consumption and a 24.7% decrease in
the average cost per ton of newsprint.




Supplements
expense decreased $0.4 million, or 61.5%, to $0.3 million, and ink expense
decreased $0.1 million, or 20.0%, to $0.4 million.




Other
operating costs. Other operating costs were $23.6 million, down $3.2
million, or 12.0%.




The
combined technology and shared services fee from our parent and management fee
charged by our parent under the management agreement totaled $4.0 million, down
$1.0 million, or 20.4%, from last year. These combined fees included $5.1
million of non-cash charges resulting from the suspension of the management fee
from May 1, 2008 through September 30, 2008. We treated these as expenses
incurred on our behalf by our parent, and as a capital
contribution.




Depreciation
and amortization. Depreciation and amortization expense, excluding
impairment charges, was $2.9 million, down $0.5 million, or 15.5%. Our third
quarter of 2008 operating results included a $170.7 million pre-tax impairment
of all of our goodwill, a non-cash charge that reflected the continuing and
expected future declines in advertising revenues in the newspaper
industry.




Debt
restructuring costs. As a result of our troubled debt restructuring, we
incurred a total of $2.5 million in legal, investment banking and consulting
fees during the third quarter of 2009, including fees paid to advisors and
consultants of our senior creditors and certain of our note
holders.




Financial
summary for the nine months ended September 30, 2009 compared to September 30,
2008




Nine
      months ended September 30,(Dollars
      in thousands)
              
              2009
              
              
              2008Total
      net operating revenues
              
              $
              190,004
              
              
              $
              243,125Debt
      restructuring costs
              
              
              7,994
              
              
              
              -Impairment
      of goodwill
              
              
              -
              
              
              
              170,685Total
      other operating expenses
              
              
              175,558
              
              
              
              220,072Operating
      income (loss)
              
              
              6,452
              
              
              
              (147,632
              )Interest
      expense
              
              
              20,714
              
              
              
              21,654Write-off
      of note receivable, net
              
              
              7,538
              
              
              
              -Gains
      on repurchases of debt
              
              
              -
              
              
              
              (9,271
              )Other
              
              
              (765
              )
              
              
              (796
              )Other
      expenses, net
              
              
              27,487
              
              
              
              11,587Loss
      before taxes
              
              
              (21,035
              )
              
              
              (159,219
              )Benefit
      for income taxes
              
              
              (7,871
              )
              
              
              (3,650
              )Net
      loss
              
              $
              (13,164
              )
              
              $
              (155,569
              )


Compared
to the first nine months of 2008, total net operating revenues were $190.0
million, down $53.1 million, or 21.8%, and total operating expenses were $175.6
million, down $215.2 million, or 109.8%. Our total other operating expenses,
which exclude the impairment charges and debt restructuring costs, were down
$44.5 million, or 20.2%, from last year.




Operating
income was $6.5 million for the first nine months of 2009 compared to an
operating loss of $147.6 million for the same period last year.




Interest
and loan amortization expense totaled $20.7 million, down $0.9 million from last
year.


-37-





At the
end of the first quarter of 2009, we reserved the $11.5 million due on the note
receivable from Gatehouse, given Gatehouse’s reported losses in the last three
years and its reported liquidity problems at that time. In September of 2009,
Morris Publishing and Gatehouse agreed to a one time payment in the amount of
$4.0 million to settle the outstanding obligation, of which $1.5 million was for
the reimbursement of working capital. The remaining $7.5 million, previously
reserved, was written off.




During
the first six months of 2008, we repurchased $21.5 million of our $300 million
7% senior subordinated notes for a total purchase price, including accrued
interest, of $12.5 million. The pre-tax gains on these transactions was $9.3
million.




Our loss
before taxes was $21.0 million, compared to a net loss before taxes of $159.2
million last year.




Our
income tax benefit was $7.8 million in 2009 compared to $3.6 million last year.
During 2008, the $170.7 million impairment of goodwill resulted in only a small
income tax benefit for financial reporting purposes because most of the goodwill
was not deductible for income tax purposes.




Our net
loss was $13.2 million compared to a net loss of $155.6 million during the first
nine months of last year.




Results
of operations for the nine months ended September 30, 2009 compared to September
30, 2008




Net
operating revenue. The table below presents the total net operating
revenue and related statistics for the first nine months ended September 30,
2009 compared to September 30, 2008:   (Dollars
      in thousands)
                  
                  Nine
      Months Ended September 30,
                  
                  
                  Percentage
      change2009
                  
                  
                  2008
                  
                  
                  2009
      vs. 2008Net
      operating revenuesAdvertisingRetail
                  
                  $
                  79,409
                  
                  
                  $
                  102,407
                  
                  
                  
                  (22.5
                  %)National
                  
                  
                  10,122
                  
                  
                  
                  13,460
                  
                  
                  
                  (24.8
                  %)Classified
                  
                  
                  47,068
                  
                  
                  
                  75,557
                  
                  
                  
                  (37.7
                  %)Total
      advertising revenues
                  
                  $
                  136,599
                  
                  
                  
                  191,424
                  
                  
                  
                  (28.6
                  %)Circulation
                  
                  
                  47,253
                  
                  
                  
                  44,757
                  
                  
                  
                  5.6
                  %Other
                  
                  
                  6,152
                  
                  
                  
                  6,944
                  
                  
                  
                  (11.4
                  %)Total
      net operating revenues
                  
                  $
                  190,004
                  
                  
                  $
                  243,125
                  
                  
                  
                  (21.8
                  %)






Advertising
revenue.Advertising revenue was $136.6 million, a decrease of $54.8
million, or 28.6%, from last year.




During
the first nine months of 2009, advertising revenue represented 71.9% of our
total net operating revenue. Our advertising revenue consisted of 58.1% in
retail, 34.5% in classified and 7.4% in national, compared to 53.5%, 39.5%, and
7.0%, 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.




Retail,
national and classified advertising categories were down 22.5%, 24.8% and 37.7%,
respectively.




Compared
to last year, run of press advertising revenue was $79.1 million, down $38.6
million, or 32.8%, and insert advertising revenue was $32.1 million, down $6.1
million, or 16.0%. Advertising revenue from specialty products printed by us,
but not a part of main newspaper product, was $6.3 million, down $3.2 million,
or 33.8%.


-38-





Online
advertising revenue was $19.1 million, down $6.9 million, or 26.5%, from last
year. Compared to last year, total page-views were 487.2 million, down 1.4
million, or 0.3% while unique page-views were 43.1 million, up 7.5 million, or
21.1%.




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.




Our
existing Florida newspapers and publications, which account for 33.7% of our
total advertising revenues, contributed 38.1% of our entire net decline in
advertising revenue.




Advertising
revenue in Jacksonville was down $18.0 million, or 32.0%, and St. Augustine was
down $1.5 million, or 24.2%.




Augusta
was down $6.9 million, or 31.0%, Savannah was down $4.5 million, or 26.6%,
Lubbock was down $4.9 million, or 27.8%, Amarillo was down $3.4 million, or
21.7%, Topeka was down $3.5 million, or 26.5%, and Athens was down $2.7 million,
or 32.9%.




Our six
other daily newspapers were, together, down $3.6 million, or 22.8%. Our
non-dailies were down $5.8 million, or 30.4%, with significant declines all of
our non-daily publications.




Retail
advertising revenue:




Retail
advertising revenue was $79.4 million, down $22.9 million, or 22.5%, from the
prior year.




Insert
retail revenue was $28.8 million, down $5.5 million, or 16.0%, while print
retail advertising revenue was $37.5 million, down $13.7 million, or 26.8%, from
last year. Retail advertising revenue from specialty products printed by us, but
not a part of main newspaper product, was $5.9 million, down $3.0 million, or
34.2%, from last year. Retail online revenue was $7.2 million, down $0.7
million, or 9.3%, from last year.




Our
Jacksonville newspaper’s retail advertising revenue was down $5.6 million, or
22.4%, contributing 25.2% of our total net decline.




Classified
advertising revenue:




Total
classified advertising revenue was $47.1 million, down $28.6 million, or 37.7%,
from 2008.




Print
classified advertising revenue was $35.7 million, down $22.2 million, or 38.3%,
and online classified advertising revenue was $10.9 million, down $5.9 million,
or 34.8%, from last year. Excluding the employment category, online classified
advertising revenue was down 17.1% from last year.




Jacksonville
was down $10.0 million, or 44.2%, contributing 35.0% of our total net
decline.




National
advertising revenue:




Total
national advertising revenue was $10.1 million, down $3.3 million, or 24.8%,
from last year, with Jacksonville contributing 66.2% of the net decrease.
Jacksonville was down $2.2 million, or 28.1%.




Circulation
revenue.During the first nine months of 2009, circulation revenue was
$47.3 million, up $2.5 million, or 5.6%, from the same quarter last year,
primarily due to price increases and the change in the way we sell home delivery
subscriptions in Florida.


-39-





Bluffton
converted from a free to a paid distribution newspaper as of December 1, 2008
and reported total circulation revenue of $0.3 million for the first nine months
of 2009.




Average
daily and Sunday circulation volume was down 9.3% and 7.5%, respectively, with
Jacksonville contributing approximately 48% of each category’s
decline.




Other
revenue. Other revenue was $6.2 million, down $0.8 million, or 11.4%,
from $6.9 million in 2008 primarily due to the reduction in Skirt! third party
licensing fees.




Net
operating expense.The table below presents the total other
operating expenses and related statistics for the newspaper operations for nine
months ended September 30, 2009 compared to September 30,
2008:





(Dollars
      in thousands)
              
              Nine
      Months Ended September 30,
              
              
              Percentage
      change2009
              
              
              2008
              
              
              2009
      vs. 2008Other
      operating expensesLabor
      and employee benefits
              
              $
              77,307
              
              
              $
              99,933
              
              
              
              (22.6
              %)Newsprint,
      ink and supplements
              
              
              17,327
              
              
              
              27,991
              
              
              
              (38.1
              %)Other
      operating costs
              
              
              71,847
              
              
              
              81,651
              
              
              
              (12.0
              %)Depreciation
      and amortization*
              
              
              9,077
              
              
              
              10,497
              
              
              
              (13.5
              %)Total
      other operating expenses
              
              $
              175,558
              
              
              $
              220,072
              
              
              
              (20.2
              %)*
      Excludes impairment of goodwill and debt restructuring
    costs
   Labor
and employee benefits. Total labor and employee benefit costs were $77.3
million, down $22.6 million, or 22.6%, being favorably impacted by reductions in
head count and wages, the suspension of employer 401(k) contributions
during the first nine months of last year and the termination of the post
retirement plan at the end of 2008.




Our
salaries and wages totaled $56.7 million, down $15.5 million, or 21.5%. Average
full time employee equivalents (“FTE’s”) were down 523, or 19.7%.




Excluding
the $1.1 million and $1.7 million in severance payments made in the first nine
months of 2009 and 2008, respectively, our average pay rate was down 1.8%.
Effective April 1, 2009, we reduced employee wages by 5 to 10
percent.




Commissions
and bonuses were $8.3 million, down $3.0 million, or 26.3%, from last
year.




Total
employee medical insurance cost of $7.0 million was unchanged from last year
which reflects a 23.6% increase per employee.




Post
retirement benefit costs and employer matching contributions to the 401(k) plan
were $1.0 million and $1.8 million during the first nine months of 2008,
respectively.




Other
employee costs totaled $5.3 million, down $1.3 million, or 19.2%, primarily due
to the reduction in payroll taxes.




Newsprint,
ink and supplements cost.Newsprint, ink and supplements costs were $17.3
million, down $10.7 million, or 38.1%.




Compared
to last year, total newsprint expense was $15.1 million, down $9.4 million, or
38.5%, due to a 32.8% decrease in newsprint consumption and a 8.5% decrease in
the average cost per ton of newsprint.




Supplements expense
decreased $0.9 million, or 43.1%, to $1.1 million, and ink expense
decreased $0.4 million, or 25.4%, to $1.3 million.




-40-








Other
operating costs. Other operating costs were $71.8 million, down $9.7
million, or 12.0%.




The
combined technology and shared services fee from Morris Communications and
management fee charged by Morris Communications under the management agreement
totaled $12.4 million, down $3.5 million, or 21.8%, from $15.8 million in the
first nine months of last year.




The
combined technology and shared services fees during the first nine months of
last year included $8.7 million of non-cash charges resulting from the
suspension of the management fee from May 1, 2008 through September 30, 2008. We
treated these as expenses incurred on our behalf by our parent, and as a capital
contribution.




Depreciation
and amortization expense. Depreciation and amortization expense,
excluding the impairment of goodwill, was $9.1 million, down $1.4 million, or
13.5%. Our 2008 operating results included a $170.7 million pre-tax impairment
of all of our goodwill.




Debt
restructuring costs. As a result of our troubled debt restructuring,
we incurred a total of $8.0 million in legal, investment banking and
consulting fees during the first nine months of 2009, including fees paid to
advisors and consultants of our senior creditors and of certain of our note
holders.


-41-





LIQUIDITY
AND CAPITAL RESOURCES




Our
unrestricted cash balance was $26.7 million at September 30, 2009, compared with
$4.8 million at December 31, 2008.
  At the
end of the third quarter of 2009, our primary source of liquidity is the cash
flow generated from operations and our unrestricted cash balances. Our primary
short term needs for cash are funding operating expense, restructuring costs and
expenses relating to our senior and subordinated indebtedness, debt service on
the Tranche A senior debt under our amended credit facilities, capital
expenditures, income taxes, and working capital. We expect that our cash on hand
will be sufficient for us to complete the Restructuring through either the
Exchange Offer or the Prepackaged Plan. If the Restructuring is not successful,
neither our cash on hand nor our other assets would be sufficient to repay our
current indebtedness.
  On the
Effective Date of the Restructuring, we expect to use our available cash in
excess of $7 million, after the payment of restructuring costs and expenses, to
prepay our senior indebtedness, and will be dependent upon this remaining $7
million of available cash and our cash flow from operations for our liquidity.
As permitted under the Restructuring Support Agreement, we intend to seek to a
$10 million revolving working capital facility to provide our primary source of
liquidity (other than cash flow from operations), and to use all remaining
available cash to further reduce the senior indebtedness.
  After the
Restructuring, the Restructuring Support Agreement requires that any cash flow
in excess of a $5 million working capital balance will be used to amortize the
Working Capital Facility and any remaining Tranche A Term Loan (or the
refinanced Tranche A and Tranche B senior debt), and then the New Notes and the
Tranche B Term Loan on a pro rata basis.
  Thus, so
long as the New Notes are outstanding, we do not expect to have any significant
reserves of cash or liquidity beyond a limited amount of cash on hand or a
Working Capital Facility of $10 million. After the Restructuring, if our monthly
average available cash (including amounts available under any Working Capital
Facility) falls below $2 million, then we would be in default under the New
Indenture and our Amended Credit Agreement, and our ability to continue as a
going concern could be in jeopardy.
 
 Operating
Activities. Net cash provided by operations was $25.7 million for the
first nine months of 2009, down $2.6 million from $28.3 million for the same
period in 2008.




Current
assets were $64.9 million and current liabilities, excluding the current portion
of long-term debt, were $51.5 million as of September 30, 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.




During
2008, we amended our management and service agreement with Morris Communication
to temporarily eliminate the management fee and technology and shared services
fee payable by us to our parent for the period from May 1, 2008 through
September 30, 2008. The intent of the amendment was to retain cash and reduce
our operating expenditures.




While the
required payment of these fees had been temporarily eliminated, our other
operating costs continue to reflect all of the costs of the management and
technology and shared services incurred by our parent, with the $8.7 million in
total costs for the period May 1, 2008 through September 30, 2008 being recorded
as capital contributions from our parent. The elimination of the fee had the
effect of increasing net cash provided by operations in 2008 by this $8.7
million.




-42-


Investment
Activities. Net cash used in investing activities was $0.5 million for
the first nine months of 2009 compared to $11.4 million provided by investing
activities for the same period in 2008.


For the
first nine months in 2009 and 2008, we spent $0.7 million and $1.7 million on
property, plant and equipment, respectively.




During
the first nine months of 2009 and 2008, we received $0.2 million and $0.7
million, respectively, in net proceeds from the sale of miscellaneous property
and equipment.




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 used in financing activities was $3.3 million for
the first nine months of 2009 compared to $35.0 million used in financing
activities for the same period in 2008.




Period
End Debt Summary




During
the first nine months of 2009, we failed to pay the $9.7 million interest
payments which were due on February 1, 2009 and August 3, 2009 on the Existing
Notes. In addition, we failed to meet the consolidated cash flow ratio and
the consolidated interest coverage ratio under the Original Credit
Agreement as of the end of the third quarter of 2009. As a
result, we classified all of the debt outstanding under the Original Indenture
and the Original Credit Agreement, as of September 30, 2009 and December 31,
2008, as the current portion of long-term debt within current liabilities
on the condensed consolidated balance sheets.




Total
debt was $415.0 million at September 30, 2009, up from $411.7 million at
December 31, 2008. The average interest rate on our total debt outstanding was
5.77% at September 30, 2009 and 5.78% at December 31, 2008. At September 30,
2008, the average interest rate on the $424.0 million total debt outstanding was
6.26%.




At
September 30, 2009, we had $60.0 million outstanding on our revolving credit
facility, up $10.0 million from $50.0 million at December 31, 2008. At September
30, 2009, the amount available on the revolving line of credit was a maximum of
$60.0 million.




The
commitment fee on the unborrowed funds available under the revolving line of
credit was 0.50% at September 30, 2009 and December 31, 2008.




At
September 30, 2009, the interest rate was 3.25% on the $76.5 million Tranche A
Term Loan outstanding and was 3.27% on the revolving line of credit. During the
first nine months of 2009, we paid $6.8 million in principal due on the term
loan under the Original Credit Agreement.




At
September 30, 2008, the interest rate on the $85.5 million Tranche A Term Loan
outstanding was 6.31% and the weighted average interest rate on the $60.0
million outstanding on the revolving line of credit was 5.78%. The commitment
fee on the unborrowed funds available under the revolving line of credit was
0.05% at September 30, 2008.




During
the first nine months of 2008, we paid $3.4 million in principal due on the
Tranche A Term Loan and we repurchased a total of $21.5 million of our $300
million 7% Senior Subordinated Notes for a total purchase price of $12.5
million.




The
principal amount outstanding on the Existing Notes was $278.5 million at
September 30, 2009 and December 31, 2008. At September 30, 2009, the interest
expense accrued on the Existing Notes, including the past due interest payments,
totaled $22.7 million.


-43-








Intercompany
loan receivable permitted under the Original Indenture




At
September 30, 2009, the amount outstanding on the intercompany loan due from
Morris Communications was $24.5 million, and the accumulated interest accrued on
the intercompany loan receivable was $6.5 million, resulting in a net
intercompany receivable of $18.0 million. The amount outstanding on the
intercompany loan due from Morris Communications was $12.2 million as of
December 31, 2008.




During
the nine-month periods ended September 30, 2009 and 2008, we reported $0.6
million and $0.5 million, respectively, in interest accrued on the intercompany
loan receivable as contra-equity. The average interest rate for the nine-month
periods ended September 30, 2009 and 2008 was 3.35% and 4.18%, respectively, on
average loan receivable balances of $24,418 and $16,119 (excluding the income
taxes payable on the GateHouse sale), respectively.




Dividends
declared and recorded




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




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.


-44-





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 5 to our
unaudited condensed consolidated financial statements as of and for the three
months ending September 30, 2009 regarding long-term debt).




Based on
our $136.5 million of variable rate debt at September 30, 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 September 30, 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 September 30, 2009, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.


-45-





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.





There are
several risk factors relating to our outstanding debt that raise uncertainty
about our liquidity and ability to continue as a going concern. Specifically,
our debt exceeds our assets, and our creditors may have the right to
accelerate the debt before its maturity given the defaults from our failure to
pay the $9.7 million interest payments due February 1, 2009 and August 3, 2009
on the $278,478,000 outstanding principal amount of 7 % Senior Subordinated
Notes due 2013 (the “Existing Notes”). Under the Forbearance Agreement, dated as
of February 26, 2009 and as amended by Amendment No. 17 to the Forbearance
Agreement, dated as of November 6, 2009, either the holders, or investment
advisors, or managers (the “Holders”) representing holders of over seventy-five
percent of the outstanding principal amount of Existing Notes have agreed 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 Existing Notes (the “
Original Indenture”) for a period ultimately ending on the termination of the
“Restructuring Support Agreement”, as described below.





On
October 30, 2009, we entered a Restructuring Support Agreement with the Holders
of over seventy percent of the aggregate principal amount of the Existing Notes.
Under the agreement, Morris Publishing and the Holders have agreed to implement
a restructuring and reorganization of the company as set forth in the Term
Sheet, dated as of September 23, 2009, and as amended by the Amendment to the
Term Sheet, dated as of October 15, 2009.





The Term
Sheet provides, among other things, for the restructuring of the Existing Notes
through an out-of-court Exchange Offer (the “Exchange Offer”) or a filing of
chapter 11 under title 11 of the United States Code (the “Bankruptcy Code”)
and a plan of reorganization confirmed under the Bankruptcy Code (the
“Prepackaged Plan”). The financial restructuring, whether accomplished through
the Exchange Offer or the Prepackaged Plan, is referred to as the
“Restructuring”.





In
addition, on October 15, 2009, we as borrower, entered into the “Amended Credit
Agreement” to amend and restate our Credit Agreement, dated as of December 14,
2005 (the “Original Credit Agreement”). The execution of the Amended Credit
Agreement was part of the “Senior Refinancing Transaction” contemplated by the
Term Sheet, which was a was a condition precedent to the
Restructuring





The
amendment immediately followed the acquisition by Tranche Holdings of all $136.5
million in outstanding loans under the Original Credit Agreement. The Amended
Credit Agreement converted all existing loans under the Original Credit
Agreement into the following three tranches of Term Loans: $19.7 million in
Tranche A Term Loans, $6.8 million in Tranche B Term Loans, and $110.0 million
in Tranche C Term Loans. All $6.8 million of the Tranche B Term Loans and all
$110 million of the Tranche C Term Loans were acquired by two of Morris
Publishing’s affiliates.





Upon the
exchange of the Existing Notes under the Restructuring, the $110 million in
Tranche C Term Loans will be satisfied or contributed to capital by our
affiliates and the $26.5 million in aggregate principal outstanding on the
Tranche A and Tranche B Term Loans will be refinanced within 150 days of the
exchange, with new facilities provided solely by one or more unaffiliated
commercial banks or other financial institutions.




-46-







Some of
the risks related to the failure of the Exchange Offer and rejection of the
Prepackaged Plan, include without limitation, the following:






1)We believe that restructuring through the Exchange Offer or the
Prepackaged Plan is critical to an efficient restructuring. If we do not
consummate either plan, we likely will need to seek relief under the Bankruptcy
Code without the benefit of a plan of reorganization that has been approved by
our creditors.




We
believe that seeking relief under the Bankruptcy Code other than in connection
with the Prepackaged Plan could materially and adversely affect the
relationships between us and our existing and potential readers, advertisers,
employees, vendors, suppliers, and other stakeholders and subject us to other
direct and indirect adverse consequences. For example:




·
            reputational
      damage could cause subscribers and advertisers to move to our competitors
      or to alternative media sources;




·
            such
      a bankruptcy filing could erode our customers’ confidence in our ability
      to produce and deliver our publications and, as a result, there could be a
      significant and precipitous decline in our revenues, profitability and
      cash flow;




·
            it
      may be more difficult to retain, attract or replace key
      employees;




·
            we
      could be forced to operate in bankruptcy for an extended period of time
      while we tried to develop a reorganization plan that could be
      confirmed;




·
            our
      trade creditors and other partners could seek to terminate their
      relationship with us, require financial assurances or enhanced
      performance, or refuse to provide credit on the same terms as prior to the
      reorganization case;




·
            we
      may not be able to obtain debtor-in-possession financing or use of cash
      collateral to sustain us during the reorganization case under chapter 11
      of the Bankruptcy Code; and




·
            if
      we were not able to confirm and implement a plan of reorganization or if
      sufficient post petition financing were not available, we may be forced to
      liquidate under chapter 7 of the Bankruptcy
  Code.




Any
distributions that a holder might receive in respect of their Existing Notes
under a liquidation or under a protracted reorganization case or cases under the
Bankruptcy Code other than in connection with the Prepackaged Plan likely would
be substantially delayed and the value of any potential recovery likely would be
adversely impacted by such delay.




Furthermore,
in the event of any foreclosure, dissolution, winding-up, liquidation or
reorganization, or other insolvency proceeding other than in connection with the
Prepackaged Plan, there can be no assurance as to the value, if any, that would
be available to holders of Existing Notes. The Existing Notes are our unsecured
obligations and rank junior to the secured obligations under our Amended Credit
Agreement. Accordingly, upon any distribution to our creditors in any
foreclosure, dissolution, winding-up, liquidation or reorganization, or other
insolvency proceeding relating to us or our property other than in connection
with the Prepackaged Plan, the holders of our indebtedness under our existing
Amended Credit Agreement will be entitled to be paid in full before any payment
may be made with respect to the Existing Notes. As a result, the holders of the
Existing Notes may receive consideration that is substantially less than what is
being offered in either restructuring plan.


-47-




2) If the
Restructuring Support Agreement or the Forbearance Agreement is terminated, or
if the Restructuring is not consummated on or before May 15, 2010, an event of
default under our Amended Credit Agreement would occur. Upon an event of default
under our Amended Credit Agreement, the lenders under our Amended Credit
Agreement could immediately terminate their commitments to continue our Term
Loans and/or declare the amounts that we owe under the Amended Credit Agreement
to be immediately due and payable. If this were to occur, we would face an
immediate liquidity crisis and we would likely have to file for bankruptcy
without the benefit of an agreed Prepackaged Plan. An event of default under our
Amended Credit Agreement also may trigger adverse consequences in connection
with other of our agreements.
 
 Even if
the Restructuring is successfully completed, we will be required to meet ongoing
financial and operational covenants under the terms of both the Amended Credit
Agreement and the New Indenture, including the requirement that we must
refinance the Tranche A Term Loan within 150 days after the Restructuring at an
interest rate no greater than LIBOR plus 970 basis points and with certain other
terms. If we are unable to successfully refinance the Tranche A Term Loan, or if
we fail to meet other debt covenants, then we may be forced to liquidate and
holders of the New Notes may not receive payment in full on their New
Notes.
  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.





-48-







Item
6. Exhibits.


10.1
              
              Amendment
      No. 5 to Forbearance Agreement, effective July 14, 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 holders of over 75% of the outstanding Notes issued under
      the Indenture, dated as of August 7, 2003.10.2
              
              Waiver
      No. 8, effective July 14, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.3
              
              Amendment
      No. 6 to Forbearance Agreement, effective July 31, 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 holders of over 75% of the outstanding Notes issued under
      the Indenture, dated as of August 7, 2003.10.4
              
              Amendment
      No. 6 and Waiver No. 9, effective July 31, 2009, with JPMorgan Chase Bank,
      N.A. as Administrative Agent under the Credit Agreement, dated as of
      December 14, 2005.10.5
              
              Amendment
      No. 7 to Forbearance Agreement, effective August 14, 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 holders of over 75% of the outstanding Notes issued under
      the Indenture, dated as of August 7, 2003.10.6
              
              Waiver
      No. 10, effective August 14, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.7
              
              Amendment
      No. 8 to Forbearance Agreement, effective August 21, 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 holders of over 75% of the outstanding Notes issued under
      the Indenture, dated as of August 7, 2003.10.8
              
              Waiver
      No. 11, effective August 21, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.9
              
              Amendment
      No. 9 to Forbearance Agreement, effective August 28, 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 holders of over 75% of the outstanding Notes issued under
      the Indenture, dated as of August 7, 2003.10.10
              
              Waiver
      No. 12, effective August 28, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.11
              
              Amendment
      No. 10 to Forbearance Agreement, effective September 4, 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 holders of over 75% of the outstanding Notes
      issued under the Indenture, dated as of August 7, 2003.
 10.12
              
              Waiver
      No. 13, effective September 4, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.13
              
              Amendment
      No. 11 to Forbearance Agreement, effective September 11, 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 holders of over 75% of the outstanding Notes
      issued under the Indenture, dated as of August 7, 2003.10.14
              
              Waiver
      No. 14, effective September 11, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.15
              
              Amendment
      No. 12 to Forbearance Agreement, effective September 18, 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 holders of over 75% of the outstanding Notes
      issued under the Indenture, dated as of August 7, 2003.10.16
              
              Waiver
      No. 15, effective September 18, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.  -49-
   10.17
              
              Amendment
      No. 13 to Forbearance Agreement, effective September 25, 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 holders of over 75% of the outstanding Notes
      issued under the Indenture, dated as of August 7, 2003.10.18
              
              Waiver
      No. 16, effective September 25, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement, dated as of December 14,
      2005.10.19
              
              Amended
      and Restated Credit Agreement, dated as of October 15, 2009, among Morris
      Communications Company, LLC, Morris Publishing, Group, LLC, various
      lenders party thereto and Tranche Manager, LLC, as Administrative Agent,
      for $136,500,000 of senior secured Term Loan facilities. (1)10.20
              
              Restructuring
      Support Agreement, dated as of October 30, 2009, between Morris Publishing
      Group, LLC, Morris Publishing Finance Co., as issuers, and all other
      subsidiaries of Morris Publishing Group, LLC , as subsidiary guarantors,
      and holders of over 72% of the outstanding Notes issued under the
      Indenture, dated as of August 7, 2003. (2)31.1
              
              Rule
      13a-14(a) Certifications31.2
              
              Rule
      13a-14(a) Certifications32.1
              
              Section
      1350 Certifications
  (1)
              Filed
      as an exhibit to the Form 8-K of Morris Publishing filed with the
      Securities Exchange Commission on October 21,
  2009.
 
 (2)
              Filed
      as an exhibit to the Form 8-K of Morris Publishing filed with the
      Securities Exchange Commission on November 5,
  2009.


-50-





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:
      November 13, 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:
      November 13, 2009
            
            By:
            
            /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
              and
      as its Principal Financial Officer)




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