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 June 30, 2008
 
 or
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from
to
 
 Commission
File Number: 333-112246
 Morris Publishing Group,
LLC
 Morris
Publishing Finance Co.*
 (Exact
name of Registrants as specified in their charters)
 
 Georgia
              
              26-2569462Georgia
              
              20-0183044(State
      of organization)
              
              (I.R.S.
      Employer Identification Numbers)
 
 725 Broad Street
              
              30901Augusta,
      Georgia
              
              (Zip
      Code)(Address
      of principal executive offices)
 
 (706)
724-0851
 (Registrants’
Telephone Number)
 
 Indicate
by check mark whether the Registrants (1) have filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
 
 Yes   ̈                                     No  x
 
 Indicate
by check mark whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See the
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Check one:
 Large
      Accelerated Filer ̈
                Accelerated
      Filer ̈Non-Accelerated
      Filerx
                Smaller
      Reporting Company ̈
 Indicate
by check mark whether the Registrant Morris Publishing Group, LLC is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes   ̈                                    No  x
 
 Indicate
by check mark whether the Registrant Morris Publishing Finance Co. is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes  x                                    No   ̈
 
 *
              Morris
      Publishing Finance Co. meets the conditions set forth in General
      Instruction H (1) (a) and (b) of Form 10-Q and is therefore
      filing this form with the reduced disclosure
  format.


Table of Contents


MORRIS
PUBLISHING GROUP, LLC


MORRIS
PUBLISHING FINANCE CO.
 QUARTERLY
REPORT
 FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2008
 
 TABLE OF CONTENTS
 
 PageFORWARD LOOKING STATEMENTS
              
              iiiPART
      I.Item
      1. Financial Statements:Unaudited  condensed consolidated balance sheets as of
      June 30, 2008 and December 31, 2007
              
              
              1Unaudited condensed consolidated statements of income for the
      three and six month periods ended June 30, 2008 and
    2007
              
              
              2Unaudited condensed consolidated statements of cash flows for
      the six month periods ended June 30, 2008 and 2007
              
              
              3Notes to condensed consolidated financial
      statements
              
              
              4Item
      2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              
              10Item
      3. Quantitative and Qualitative Disclosures about
      Market Risk
              
              
              22Item
      4. Controls and Procedures
              
              
              22PART
      II.Item
      1. Legal Proceedings.
              
              
              23Item
      1A. Risk Factors
              
              
              23Item
      2. Unregistered Sales of Equity Securities and Use
      of Proceeds.
              
              
              23Item
      3. Defaults Upon Senior
      Securities.
              
              
              23Item
      4. Submission of Matters to a Vote of Security
      Holders.
              
              
              23Item
      5. Other Information
              
              
              23Item
      6. Exhibits
              
              
              23
 
 Morris
Publishing Group, LLC is a wholly owned subsidiary of Morris Communications
Company, LLC, a privately held media company. Morris Publishing Finance Co., a
wholly owned subsidiary of Morris Publishing Group, LLC, was incorporated in
2003 for the sole purpose of serving as a co-issuer of our senior subordinated
notes in order to facilitate the offering. Morris Publishing Finance Co. does
not have any operations or assets of any kind and will not have any revenues. In
this report, “Morris Publishing,” “we,” “us” and “our” refer to Morris
Publishing Group, LLC and its subsidiaries. “Morris Communications” and “parent”
refers to Morris Communications Company, LLC.
  -ii-
 Table of Contents
  FORWARD LOOKING STATEMENTS
 
 This
report contains forward-looking statements. These statements relate to future
periods and include statements regarding our anticipated performance. You may
find discussions containing such forward-looking statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 2 of this report.
 
 Generally,
the words “anticipates,” “believes,” “expects,” “intends,” “estimates,”
“projects,” “plans” and similar expressions identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements or industry results, to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements.
 
 Although
we believe that these statements are based upon reasonable assumptions, we can
give no assurance that these statements will be realized. Given these
uncertainties, investors are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are made as of the
date of this report. We assume no obligation to update or revise them or provide
reasons why actual results may differ. Important factors that could cause our
actual results to differ materially from our expectations include, without
limitation:
 
 §
              Increases
      in financing, labor, health care and/or other costs, including costs of
      raw materials, such as newsprint;
 
 §
              Continued
      decreases in advertising revenues;
 
 §
              General
      economic or business conditions, either nationally, regionally or in the
      individual markets in which we conduct business (and, in particular, the
      Jacksonville, Florida market), may further deteriorate, continuing to have
      an adverse impact on our advertising or circulation revenues or on our
      business strategy;
 
 §
              Without
      either an improvement in the Morris Communications consolidated financial
      results in 2008, a reduction of  Morris Communications’
      consolidated indebtedness or further relaxation of the financial
      covenants, we are at risk of failing to meet one or more of our
      financial covenants as of September 30, 2008, in which event Morris
      Communications and its subsidiaries (including us) would be unable to
      borrow on the revolver and may be required to prepay the entire principal
      due under the Credit Agreement;
                
                If
      this was to occur, it could lead to an event of default under the
      indenture governing the notes. In such an event, we cannot assure the
      bondholders that we would have sufficient assets to pay amounts due
      on the notes. As a result, the bondholders may receive less than the full
      amount they would be otherwise entitled to receive on the
      notes;
                  
                  Specifically,
      there is an event of default under the bond indenture if we
      fail to pay other indebtedness (such as the Senior Credit Facility)
      exceeding $5 million upon final maturity or within 20 days of an
      acceleration;
 
 §
              Other
      risks and uncertainties.
 
 -iii-
 Table of Contents
  Part
I
 
 Morris
      Publishing Group, LLCUnaudited
      condensed consolidated balance sheets(Dollars in thousands)
              
              June
      30, 2008
              
              
              December
      31, 2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              4,890
              
              
              $
              4,135Accounts
      receivable, net of allowance for doubtful accounts of  $2,035
      and $2,695 at June 30, 2008  and December 31, 2007,
      respectively
              
              
              40,181
              
              
              
              50,227Note
      receivable
              
              
              10,067
              
              
              
              10,067Inventories
              
              
              3,279
              
              
              
              3,092Due
      from Morris Communications
              
              
              -
              
              
              
              4,384Prepaid
      and other current assets
              
              
              874
              
              
              
              934Total
      current assets
              
              
              59,291
              
              
              
              72,839NET
      PROPERTY AND EQUIPMENT
              
              
              118,022
              
              
              
              123,809OTHER
      ASSETS:Restricted
      cash held in escrow
              
              
              -
              
              
              
              12,392Goodwill
              
              
              170,685
              
              
              
              170,685Intangible
      assets, net of accumulated amortization of $6,262 and $5,912 at June 30,
      2008 and December 31, 2007, respectively
              
              
              8,306
              
              
              
              8,657Deferred
      loan costs and other assets, net of accumulated amortization of loan costs
      of $6,469 and $6,116 at June 30, 2008 and December 31, 2007,
      respectively
              
              
              8,969
              
              
              
              9,836Total
      other assets
              
              
              187,960
              
              
              
              201,570Total
      assets
              
              $
              365,273
              
              
              $
              398,218LIABILITIES
      AND MEMBER'S DEFICIENCY IN ASSETSCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              5,629
              
              
              $
              7,635Current
      maturities of long-term debt
              
              
              7,875
              
              
              
              5,625Accrued
      interest
              
              
              8,285
              
              
              
              9,218Current
      portion of deferred taxes
              
              
              688
              
              
              
              688Due
      to Morris Communications
              
              
              2,782
              
              
              
              -Deferred
      revenues
              
              
              13,975
              
              
              
              13,600Accrued
      employee costs
              
              
              8,579
              
              
              
              9,948Current
      portion of post retirement benefits due to Morris
      Communications
              
              
              984
              
              
              
              984Other
      accrued liabilities
              
              
              1,881
              
              
              
              1,397Total
      current liabilities
              
              
              50,678
              
              
              
              49,095LONG-TERM
      DEBT, less current portion
              
              
              409,228
              
              
              
              422,250DEFERRED
      INCOME TAXES, less current portion
              
              
              18,169
              
              
              
              18,628POSTRETIREMENT
      BENEFITS DUE TO MORRIS COMMUNICATIONS
              
              
              21,826
              
              
              
              21,127OTHER
      LONG-TERM LIABILITIES
              
              
              3,715
              
              
              
              3,592Total
      liabilities
              
              
              503,616
              
              
              
              514,692COMMITMENTS
      AND CONTINGENCIES (NOTE 7)MEMBER'S
      DEFICIENCY IN ASSETSMember's
      deficit
              
              
              (132,494
              )
              
              
              (143,712
              )Accumulated
      other comprehensive income
              
              
              1,179
              
              
              
              1,179Loan
      (receivable from) payable to Morris Communications, net
              
              
              (7,028
              )
              
              
              26,059Total
      member's deficiency in assets
              
              
              (138,343
              )
              
              
              (116,474
              )Total
      liabilities and member's deficiency in assets
              
              $
              365,273
              
              
              $
              398,218See
      notes to consolidated financial statements.
  -1-
 Table of Contents
  Morris
      Publishing Group, LLCUnaudited
      condensed consolidated statements of incomeThee months ended June 30,
              
              
              Six months ended June 30,(Dollars in
      thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007NET
      OPERATING REVENUES:Advertising
              
              $
              65,192
              
              
              $
              78,734
              
              
              $
              130,509
              
              
              $
              153,777Circulation
              
              
              14,751
              
              
              
              14,339
              
              
              
              29,464
              
              
              
              28,547Other
              
              
              2,228
              
              
              
              2,516
              
              
              
              4,906
              
              
              
              5,039Total
      net operating revenues
              
              
              82,171
              
              
              
              95,589
              
              
              
              164,879
              
              
              
              187,363OPERATING
      EXPENSES:Labor
      and employee benefits
              
              
              33,586
              
              
              
              36,930
              
              
              
              67,997
              
              
              
              73,655Newsprint,
      ink and supplements
              
              
              9,657
              
              
              
              9,959
              
              
              
              18,800
              
              
              
              21,082Other
      operating costs (excluding depreciation and amortization)
              
              
              26,836
              
              
              
              28,196
              
              
              
              54,856
              
              
              
              56,765Depreciation
      and amortization expense
              
              
              3,501
              
              
              
              4,366
              
              
              
              7,025
              
              
              
              9,105Total
      operating expenses
              
              
              73,580
              
              
              
              79,451
              
              
              
              148,678
              
              
              
              160,607OPERATING
      INCOME
              
              
              8,591
              
              
              
              16,138
              
              
              
              16,201
              
              
              
              26,756OTHER
      EXPENSES (INCOME):Interest
      expense, including amortization of debt issuance costs
              
              
              6,856
              
              
              
              9,437
              
              
              
              14,878
              
              
              
              18,756Gain
      on repurchases of debt
              
              
              (860
              )
              
              
              -
              
              
              
              (9,271
              )
              
              
              -Interest
      income
              
              
              (284
              )
              
              
              (1
              )
              
              
              (470
              )
              
              
              (4
              )Other,
      net
              
              
              (41
              )
              
              
              (44
              )
              
              
              (72
              )
              
              
              (85
              )Total
      other expense, net
              
              
              5,671
              
              
              
              9,392
              
              
              
              5,065
              
              
              
              18,667INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
              
              
              2,920
              
              
              
              6,746
              
              
              
              11,136
              
              
              
              8,089PROVISION
      FOR INCOME TAXES
              
              
              933
              
              
              
              2,715
              
              
              
              3,504
              
              
              
              3,326INCOME
      FROM CONTINUING OPERATIONS
              
              
              1,987
              
              
              
              4,031
              
              
              
              7,632
              
              
              
              4,763DISCONTINUED
      OPERATIONSIncome
      from discontinued operations
              
              
              -
              
              
              
              1,534
              
              
              
              -
              
              
              
              1,636Provision
      for income taxes
              
              
              -
              
              
              
              618
              
              
              
              -
              
              
              
              664INCOME
      FROM DISCONTINUED OPERATIONS
              
              
              -
              
              
              
              916
              
              
              
              -
              
              
              
              972NET
      INCOME
              
              $
              1,987
              
              
              $
              4,947
              
              
              $
              7,632
              
              
              $
              5,735See
      notes to consolidated financial statements.
 
 -2-
 Table of Contents
 
 Morris
      Publishing Group, LLCUnaudited
      condensed consolidated statements of cash flowsSix
      months ended June 30,(Dollars in
      thousands)
              
              2008
              
              
              2007OPERATING
      ACTIVITIES:Net
      income
              
              $
              7,632
              
              
              $
              5,735Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
              
              
              7,025
              
              
              
              10,282Deferred
      income taxes
              
              
              (459
              )
              
              
              (1,460
              )Amortization
      of debt issuance costs
              
              
              1,048
              
              
              
              797(Gain)
      loss on sale of fixed assets, net
              
              
              (103
              )
              
              
              17Capital
      contributions by parent for services rendered
              
              
              3,585
              
              
              
              -Pre-tax
      gain on repurchases of debt
              
              
              (9,271
              )
              
              
              -Changes
      in assets and liabilities, net of effects of businesses
      acquired:Accounts
      receivable
              
              
              10,046
              
              
              
              9,011Inventories
              
              
              (187
              )
              
              
              (1,700
              )Prepaids
      and other current assets
              
              
              61
              
              
              
              (595
              )Other
      assets
              
              
              (181
              )
              
              
              (158
              )Accounts
      payable
              
              
              (2,006
              )
              
              
              (1,555
              )Accrued
      employee costs
              
              
              (1,369
              )
              
              
              (1,176
              )Accrued
      interest
              
              
              (933
              )
              
              
              10Due
      to Morris Communications
              
              
              7,166
              
              
              
              413Deferred
      revenues and other liabilities
              
              
              859
              
              
              
              3,050Postretirement
      obligations due to Morris Communications
              
              
              699
              
              
              
              606Other
      long-term liabilities
              
              
              124
              
              
              
              187Net
      cash provided by operating activities
              
              
              23,736
              
              
              
              23,464INVESTING
      ACTIVITIES:Capital
      expenditures
              
              
              (1,480
              )
              
              
              (6,712
              )Restricted
      cash released from escrow
              
              
              12,392
              
              
              
              -Net
      proceeds from sale of assets
              
              
              696
              
              
              
              130Acquisitions
      of businesses, net of cash acquired
              
              
              -
              
              
              
              (75
              )Net
      cash provided by (used in) investing activities
              
              
              11,608
              
              
              
              (6,657
              )FINANCING
      ACTIVITIES:Repurchase
      of senior subordinated debt
              
              
              (12,251
              )
              
              
              -Proceeds
      from revolving credit facility
              
              
              55,000
              
              
              
              26,000Repayments
      on revolving credit facility
              
              
              (42,000
              )
              
              
              (28,000
              )Repayments
      on term loan
              
              
              (2,250
              )
              
              
              -Repayment
      on loan payable to Morris Communications
              
              
              (33,088
              )
              
              
              (14,007
              )Net
      cash used in financing activities
              
              
              (34,589
              )
              
              
              (16,007
              )NET INCREASE
      IN CASH AND CASH EQUIVALENTS
              
              
              755
              
              
              
              800CASH
      AND CASH EQUIVALENTS, beginning of period
              
              
              4,135
              
              
              
              6,964CASH
      AND CASH EQUIVALENTS, end of period
              
              $
              4,890
              
              
              $
              7,764SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
              
              $
              14,763
              
              
              $
              17,949Income
      taxes paid to Morris Communications
              
              $
              34,468
              *
              
              $
              5,505Dividends
      applied against loan receivable from Morris Communications
              
              $
              -
              
              
              $
              40,000Promissory
      note receivable from GateHouse Media, Inc.
              
              $
              10,000
              
              
              $
              10,000See
      notes to consolidated financial statements.*
      Includes $30,505 in income taxes payable to Morris Communications at
      December 31, 2007 on the gain on sale of discontinued
      operations.
 
 -3-
 Table of Contents
 
 MORRIS PUBLISHING GROUP, LLC
 Notes
to condensed consolidated financial statements (unaudited)
 (Dollars
in thousands)
 
 1.
              Basis
      of Presentation and Change in Significant Accounting
    Policies
 
 Basis of
presentation– The accompanying condensed consolidated financial
statements furnished herein reflect all adjustments, which in the opinion of
management, are necessary for the fair presentation of the Company’s financial
position and results of operations. All such adjustments are of a normal
recurring nature. Results of operations for the three month interim period in
2008 are not necessarily indicative of results expected for the full year. While
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) have been condensed or omitted, the
Company believes that the disclosures herein are adequate to keep the
information presented from being misleading. These condensed consolidated
financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the
fiscal year ended December 31, 2007. The accounting policies followed for the
interim financial reporting period are the same as those disclosed in Note 1 of
the notes to the financial statements included in the Company’s Form 10-K,
except for the adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 157, “Fair Value
Measurements” and SFAS No. 159,“The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115”.
 
 2.
              Transactions
      with Morris Communications
 
 Management,
Technology and Shared Services Fees—The Company receives certain
services from, and has entered into certain transactions with its parent, Morris
Communications. The Company has recorded these fees within other operating costs
in the accompanying consolidated financial statements.
 
 Ø
              Management
      Fee—This fee compensates Morris Communications for corporate
      services and costs incurred on behalf of the Company, including executive,
      legal, secretarial, tax, internal audit, risk management, employee benefit
      administration, airplane usage and other support services. A fee equal to
      the greater of 4.0% of the Company’s annual total operating revenues or
      the amount of actual expenses allocable to the management of the Company’s
      business by Morris Communications (such allocations to be based upon time
      and resources spent on the management of the Company’s business by Morris
      Communications) is charged to the
Company.
 
 Ø
              Technology
      and Shared Services Fee—This
      fee compensates Morris Communications for certain technology and shared
      services and is based on the lesser of 2.5% of the Company’s total net
      operating revenue or the actual technology costs allocated to Morris
      Publishing based upon usage.
 
 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.  While the intent of this amendment was to retain cash and to reduce
the Company’s operating expenditures, the elimination of these fees increases
the need for the Company to pay dividends in the future to its
Parent.
 
 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 June 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 $3,585 for the two months ended June 30, 2008.
 
 The
management fees expensed totaled $3,287 and $3,824 for the three months ended
June 30, 2008 and 2007, respectively, and $6,595 and $7,495 for the six months
ended June 30, 2008 and 2007, respectively. The management fees from
discontinued operations totaled $673 and $1,336 for the three and six month
periods ended June 30, 2007.
 
 The
technology and shared services fees expensed totaled $2,054 and $2,390 for the
three months ended June 30, 2008 and 2007, respectively, and $4,122 and $4,684
for the six months ended June 30, 2008 and 2007, respectively. The technology
and shared services fees from discontinued operations totaled $420 and $835 for
the three and six month periods ended June 30, 2007.
 
 The
Company believes that these fee allocations were made on a reasonable basis, and
approximate all of the material incremental costs it would have incurred had it
been operating on a stand-alone basis; however, there has been no independent
study or any attempt to obtain quotes from third parties to determine what costs
of obtaining such services from third parties would have been.
  -4-
 Table of Contents
  Employees’ 401(k)
plan- The Company participates in Morris Communications’ 401(k) plan.
Under this plan, contributions by employees to the 401(k) plan are matched (up
to 5% of pay) by Morris Communications. Effective July 13, 2008, the Company has
suspended the employer matching contributions for the remainder of
2008.
 
 Expenses
were allocated to the Company based on specific identification of employer
matching contributions of $793 and $881 for the three months ended June 30, 2008
and 2007, respectively, and $1,635 and $1,792 for the six months ended June 30,
2008 and 2007, respectively.
 
 Retiree health
care benefits- The Company participates in Morris Communications’ retiree
health care plan, which provides certain health care benefits for eligible
retired employees and their dependents. The plan requires the Company to be
separately liable for its portion of the postretirement health benefit
obligation. Accordingly, the Company and Morris Communications have completed a
formal actuarial valuation of the postretirement obligation for the Company as
of and for the year ended December 31, 2007.
 
 Under
Morris Communications’ plan, full-time employees who were hired before January
1, 1992 and retire after ten years of service are eligible for these benefits.
Full-time employees hired on or after January 1, 1992 must have 25 years of
service to be eligible. Generally, this plan pays a percentage of most medical
expenses (reduced for any deductible) after payments made by government programs
and other group coverage. This plan is unfunded. Lifetime benefits under the
plan are limited to $100 per employee. Expenses related to this plan have been
allocated to the Company based on total headcount. The expenses allocated to the
Company, net of the related employee contributions recorded, were $350 and $303
for the three months ended June 30, 2008 and 2007, respectively, and $699 and
$606 for the six months ended June 30, 2008 and 2007, respectively.
 
 The
Company was also allocated its portion of the postretirement health benefit
obligation. The amounts allocated to the Company, based on total headcount were
$24,738 and $24,039 as of June 30, 2008 and December 31, 2007,
respectively.
 
 Upon
adoption of  SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans”, at the December 31, 2007
measurement date, the Company’s post retirement liability decreased in the
aggregate amount of $1,929 and member’s deficiency in assets decreased by
$1,929, less the $750 income tax effect.
 
 The
following is an estimate of the Company’s net periodic benefit cost for all of
2008:
 
 Service
      cost
              
              $
              352Interest
      cost
              
              
              1,401Unrecognized
      gain from earlier periods
              
              
              -Net
      periodic benefit cost
              
              
              1,753Less:
      estimated employee cash contributions
              
              
              (353
              )Estimated
      net benefit expense
              
              $
              1,400
 
 Health and
Disability Plan- The Company has participated in Morris Communications’
health and disability plan for active employees. Accordingly, Morris
Communications has allocated to the Company certain expenses associated with the
payment of current obligations and the estimated amounts incurred but not yet
reported. The expense allocated to the Company based on the total headcount, was
$2,866 and $3,310 for the three months ended June 30, 2008 and 2007,
respectively, and $5,270 and $6,241 for the six months ended June 30, 2008 and
2007, respectively.
 
 The
Company was also allocated its portion of the health and disability obligation.
The amounts allocated to the Company, based on total headcount, were $2,070 and
$2,404 as of June 30, 2008 and December 31, 2007, respectively. The Company has
recorded this liability within accrued employee costs in the accompanying
financial statements.
 
 Workers’
Compensation Expense- The Company has participated in Morris
Communications’ workers’ compensation self-insurance plan. Accordingly, Morris
Communications has allocated to the Company certain expenses associated with the
payment of current obligations and the estimated amounts incurred but not yet
reported. The expenses allocated to the Company, based on a percentage of total
salaries expense, were $393 and $603 for the three months ended June 30, 2008
and 2007, respectively, and $1,012 and $1,375 for the six months ended June 30,
2008 and 2007, respectively.
 
 Receivable
fromMorris Communications - Under the Company’s indenture related to the
senior subordinated notes, the Company is permitted to loan up to $40,000 at any
one time to Morris Communications or any of its wholly owned subsidiaries
outside the Publishing Group, solely for purposes of funding its working
capital, capital expenditures and acquisition requirements. The Company is also
permitted to invest in or lend an additional $20,000 at any one time outstanding
to Morris Communications or any other Person(s), as defined in the debt
indenture.
  -5-
 Table of Contents
  The
interest-bearing portion of all loans from the Company to Morris Communications
bear the same rate as the borrowings under the Credit Agreement (for the three
month period ended June 30, 2008, this rate was LIBOR (adjusted to the nearest
1/16th) + 1.25%). The Company distinguishes between intercompany transactions
incurred in the ordinary course of business and settled on a monthly basis
(which do not bear interest) and those of a more long-term nature that are
subject to an interest accrual. Interest is accrued on the average outstanding
long-term balance each month.
 
 Given the
historical practice of Morris Publishing and Morris Communications settling a
significant portion of the outstanding loan receivable balance with a dividend,
this arrangement is considered in substance a capital distribution transaction
and is classified as contra-equity within member’s deficit. In addition,
interest accrued on this loan receivable is reported as contra-equity within
member’s deficiency in assets for the periods presented.
 
 The
amount outstanding on the intercompany loan due from Morris Communications was
$7,028, net of the $5,472 in accumulated interest accrued on the receivable as
of June 30, 2008. The amount outstanding on the intercompany loan due from
Morris Communications was $4,446 as of December 31, 2007, offset by $30,505 due
to Morris Communications for income taxes payable on the pre-tax gain on the
sale of discontinued operations.
 
 During
the three month periods ended June 30, 2008 and 2007, the Company reported the
$119 and $716, respectively, in accrued loan receivable interest as
contra-equity. The average interest rate for the three month periods ended June
30, 2008 and 2007 was 3.92% and 6.29%, respectively, on average loan receivable
balances of $12,058 and $44,979, respectively.
 
 During
the six month periods ended June 30, 2008 and 2007, the Company reported the
$341 and $1,259, respectively, in accrued loan receivable interest as
contra-equity. The average interest rate for the six month periods ended June
30, 2008 and 2007 was 4.40% and 6.27%, respectively, on average loan receivable
balances of $15,242 and $38,853, respectively.
 
 Restricted
payments - The Company is permitted under its debt arrangement to make
restricted payments, which includes dividends and loans to affiliates in excess
of the permitted limits described above, up to the sum of (1) 100% of the
Company’s cumulative consolidated income before interest, taxes, depreciation
and amortization (“Consolidated EBITDA”, as defined in the indenture) earned
subsequent to the debt’s August 2003 issue date less (2) 140% of the
consolidated interest expense of the Company for such period.
 
 At June
30, 2008, the Company had approximately $87,977 available for future restricted
payments under the credit indenture.
 
 Restricted cash
released from escrow - The Company elected to have $12,350 of the net
proceeds from the November 30, 2007 sale of the fourteen daily newspapers, three
nondaily newspapers, a commercial printing operation and other related
publications to GateHouse Media Inc. deposited into an escrow account in order
to potentially fund other acquisitions by the Company or Parent through a
tax-deferred Section 1031 exchange. Interest earned on the cash balance in the
escrow account totaled $42 in 2007 and $52 during the three month period ended
March 31, 2008.
 
 At the
end of the first quarter of 2008, the Company’s Parent acquired qualified
replacement property using the $12,444 in the Company’s escrow account. At the
same time, the Parent returned the escrow funds by using its cash to pay down
balances due on the Company’s revolving credit facility.
 
 3.
              Recently
      Issued Accounting Standards
 
 In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. This statement does not require any new fair value measurements;
rather, it applies under other accounting pronouncements that require or permit
fair value measurements. The provisions of this statement are to be applied
prospectively as of the beginning of the fiscal year in which this statement is
initially applied, with any transition adjustment recognized as a
cumulative-effect adjustment to the opening balance of retained earnings. The
provisions of SFAS No. 157 are effective for the fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”)
FAS 157-2, which delays the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods within those years for
all non-financial assets and non-financial liabilities, except those that are
recognized at fair value in the financial statements on a recurring basis (at
least annually). The 2008 adoption of SFAS No. 157 for the Company’s financial
assets and financial liabilities did not have a material impact on its
consolidated financial statements. The Company is evaluating the effect, if any,
that the implementation of SFAS No. 157 in 2009 for non-financial assets and
non-financial liabilities will have on its financial position, results of
operations, and cash flows.
  -6-
 Table of Contents
  In
February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115”  (“SFAS No. 159”). SFAS No. 159 provides the
option to report certain financial assets and liabilities at fair value, with
the intent to mitigate volatility in financial reporting that can occur when
related assets and liabilities are recorded on different bases and is effective
for fiscal years beginning after November 15, 2007. The Company’s adoption of
SFAS No. 159 had no effect on its financial position, results of operations, and
cash flows.
 
 In May of
2008, the FASB issued SFAS No.162, “The Hierarchy of Generally Accepted
Accounting Principles”. The pronouncement mandates the GAAP hierarchy
reside in the accounting literature as opposed to the audit literature. This has
the practical impact of elevating FASB Statements of Financial Accounting
Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days
following SEC approval. The Company does not believe this pronouncement will
impact its financial position, results of operations, and cash
flows.
 
 4.
              Long-Term
      Debt
 
 During
the second quarter of 2008, the Company repurchased $2,406 of its $300 million
7% senior subordinated notes for a total purchase price, including accrued
interest, of $1,596. The pre-tax gain on these redemptions was $860. At June 30,
2008, $278,478 was outstanding on the senior subordinated notes.
 
 During
the quarter the Company paid $1,125 in principal due on the Tranche A term loan
and has another $3,375 in principal payments due by the end of 2008. In
addition, the Company repaid the $593 bank swing line loan outstanding at the
end of the first quarter of 2008.
 
 At June
30, 2008 and December 31, 2007, total debt was $417,103 and $427,875,
respectively, with $52,000 and $39,000 outstanding on the $175 million revolving
credit facility, respectively.
 
 At June
30, 2008, the interest rate on the $86,625 Tranche A term loan outstanding was
4.063% and the weighted average interest rate on the revolver was
3.75%.
 
 The
average interest rate on the debt outstanding was approximately 5.9848% and
6.6932% at June 30, 2008 and December 31, 2007, respectively. The commitment fee
on the unborrowed funds available under the revolver was 0.375% at June 30, 2008
and December 31, 2007.
 
 The
following table summarizes the scheduled principal payments on the debt
outstanding as of June 30, 2008:
 
 Balance
              
              
              Payments
      due by period(Dollars in
      thousands)
              
              June
      30, 2008
              
              
              Last
      six months in 2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013Credit AgreementTranche
      A
              
              $
              86,625
              
              
              $
              3,375
              
              
              $
              10,125
              
              
              $
              14,625
              
              
              $
              24,750
              
              
              $
              33,750
              
              
              $
              -Revolving
      debt
              
              
              52,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              52,000
              
              
              
              -138,625
              
              
              
              3,375
              
              
              
              10,125
              
              
              
              14,625
              
              
              
              24,750
              
              
              
              85,750
              
              
              
              -Senior Subordinated
    Indenture
              
              
              278,478
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              278,478Total
              
              $
              417,103
              
              
              $
              3,375
              
              
              $
              10,125
              
              
              $
              14,625
              
              
              $
              24,750
              
              
              $
              85,750
              
              
              $
              278,478
 
 At June
30, 2008, the Company could borrow and use for general corporate purposes
approximately $13,778 under the Company’s most restrictive covenants which were
from the senior bank credit facility and the Company was in compliance with all
financial covenants under its debt arrangements.
  On July
3, 2007, the Company, as borrower, entered into an Amendment
No. 1 under the 2005 Credit Agreement. The 2005 Credit Agreement contains
financial covenants requiring the Company to meet certain financial tests on an
on-going basis, including minimum interest coverage ratio, minimum fixed charge
coverage ratio, and maximum cash flow ratios, based upon
consolidated financial results of Morris Communications and substantially
all of its subsidiaries (including the Company). The amendment relaxed these
financial tests for an 18 month period from and including June 30, 2007 through
but excluding December 31, 2008.
  -7-
 Table of Contents
  Even with
these relaxed covenants, without either an improvement in the Morris
Communications consolidated financial results in 2008, a reduction of Morris
Communications’ indebtedness or further relaxation of the financial
covenants, the Company is at risk of failing to meet one or more of
its financial covenants as of September 30, 2008, in which event Morris
Communications and its subsidiaries (including the Company) would be unable to
borrow on the revolver and may be required to prepay the entire principal due
under the Credit Agreement.
  If this
was to occur, it could lead to an event of default under the indenture
governing the notes. In such an event, the Company cannot assure the
bondholders that it would have sufficient assets to pay amounts due on the
notes. As a result, the bondholders may receive less than the full amount they
would be otherwise entitled to receive on the notes.
  Specifically,
there is an event of default under the bond indenture if the
Company fails to pay other indebtedness (such as the Senior Credit
Facility) exceeding $5,000 upon final maturity or within 20 days of an
acceleration.
 
 5.
              Goodwill
      and Other Intangible Assets
 
 Goodwill
is the excess of cost over fair market value of tangible net assets acquired.
Goodwill is not presently amortized but tested for impairment annually or when
the facts or circumstances at any of the Company’s reporting units indicate a
possible impairment of goodwill as a result of a continual decline in
performance or as a result of fundamental changes in a market in accordance with
SFAS No. 142, “Goodwill and
Other Intangible Assets”.
 
 Other
intangible assets acquired consist primarily of mastheads and licenses on
various acquired properties, customer lists, as well as other assets. Other
intangible assets acquired (mastheads and domain names) which have indefinite
lives and are not currently amortized, are tested for impairment annually or
when facts or circumstances indicate a possible impairment of the intangible
assets as a result of a continual decline in performance or as a result of
fundamental changes in a market.
 
 Certain
other intangible assets acquired (subscriber lists, non-compete agreements and
other assets) are amortized over their estimated useful lives (from 5 to 20
years).
 
 At
December 31, 2007, the Company performed the annual impairment tests of goodwill
and the indefinite-lived intangible assets. At June 30, 2008, the Company
performed an impairment test because the current facts and circumstances
indicated a possible impairment of the intangible assets as a result of a
continual decline in the Company’s performance.  Both tests resulted in no
impairments.
 
 Amortization
expense of other intangible assets totaled $176 and $1,040 for the three months
ended June 30, 2008 and 2007, respectively, and $351 and $2,452 for the six
months ended June 30, 2008 and 2007, respectively, with a large portion of
intangible assets becoming fully amortized during last year.
 
 Changes
in the carrying amounts of goodwill and other intangible assets of the Company
for the three months ended June 30, 2008 were as follows:
 
 Goodwill
              
              
              Other
      intangible assetsBalance
      at December 31, 2007
              
              
              170,685
              
              
              
              8,657Amortization
      expense
              
              
              -
              
              
              
              (351
              )Balance
      at June 30, 2008
              
              $
              170,685
              
              
              $
              8,306
 
 The
remaining expense for the last six months of 2008 and for the four succeeding
years for the existing finite-lived intangible assets is as
follows:
 
 2008
              
              $
              3492009
              
              
              6812010
              
              
              6652011
              
              
              5362012
              
              
              419
 
 -8-
 Table of Contents
  Other
finite-lived and indefinite-lived intangible assets at June 30, 2008 and
December 31, 2007 were as follows:
 
 Cost
              
              
              Accumulated amortization
              
              
              Net costJune
      30, 2008:Finite-lived
      intangible assetsSubscriber
      lists
              
              $
              9,354
              
              
              $
              5,411
              
              
              $
              3,943Non-compete
      agreements and other assets
              
              
              51
              
              
              
              44
              
              
              
              7Total
      finite-lived intangible assets
              
              
              9,405
              
              
              
              5,455
              
              
              
              3,950Indefinite-lived
      intangible assetsNewspaper
      mastheads
              
              
              5,031
              
              
              
              792
              
              
              
              4,239Domain
      names
              
              
              132
              
              
              
              15
              
              
              
              117Total
      indefinite-lived intangible assets
              
              
              5,163
              
              
              
              807
              
              
              
              4,356Total
      other intangible assets
              
              $
              14,568
              
              
              $
              6,262
              
              
              $
              8,306December
      31, 2007:Finite-lived
      intangible assetsSubscriber
      lists
              
              $
              9,354
              
              
              $
              5,066
              
              
              $
              4,288Non-compete
      agreements and other assets
              
              
              51
              
              
              
              38
              
              
              
              13Total
      finite-lived intangible assets
              
              
              9,405
              
              
              
              5,104
              
              
              
              4,301Indefinite-lived
      intangible assetsNewspaper
      mastheads
              
              
              5,031
              
              
              
              792
              
              
              
              4,239Domain
      names
              
              
              132
              
              
              
              15
              
              
              
              117Total
      indefinite-lived intangible assets
              
              
              5,163
              
              
              
              807
              
              
              
              4,356Total
      other intangible assets
              
              $
              14,568
              
              
              $
              5,911
              
              
              $
              8,657
 
 6.
              Discontinued
      Operations
 
 On
November 30, 2007, the Company completed the sale (“GateHouse
sale”) of fourteen daily newspapers, three nondaily newspapers, a commercial
printing operation and other related publications to GateHouse Media, Inc.
("GateHouse"). The total purchase price was $115,000 plus a working capital
adjustment. One hundred five million dollars was received at closing in cash,
with the remainder payable in the form of a one-year promissory note bearing
interest at 8% per annum. The preliminary working capital adjustment paid by
GateHouse to the Company at the closing of the transaction totaled $2,500, with
the remaining working capital adjustment currently recorded within other
consolidated assets on the Company’s consolidated balance sheet.
 
 At June
30, 2008, the balance on the on the note receivable was $10,067, including $67
in accrued interest.
 
 During
the three and six month periods ended June 30, 2008, the Company
received interest payments on these notes totaling $200 and $400,
respectively.
 
 In
accordance with Statement of Financial Accounting Standards  (“SFAS”)
No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, the results of operations
of all newspapers, publications and businesses included in to the GateHouse sale
have been recorded as discontinued operations during the three month and six
month periods ended June 30, 2007.
 
 During
the second quarter of 2007, income from discontinued operations, net of the $617
provision for income taxes, was $917, with total operating revenues of $17,349
and total operating costs of $15,815.
 
 During
the first six months of 2007, income from discontinued operations, net of the
$665 provision for income taxes, was $972, with total operating revenues of
$33,271 and total operating costs of $31,634.
 
 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.
  -9-
 Table of Contents
  ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 The
following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements as of and for the three month and six month
periods ended June 30, 2008 and 2007 and with our consolidated financial
statements as of December 31, 2007 and 2006 and for each of three years in the
period ended December 31, 2007, filed on Form
10-K.
 
 Overview
 
 Morris
Publishing currently owns and operates 13 daily newspapers as well as nondaily
newspapers, city magazines and free community publications in the Southeast,
Midwest, Southwest and Alaska.
 
 While
most of our revenue is generated from advertising and circulation from our
newspaper operations, we also print and distribute periodical publications and
operate commercial printing operations in conjunction with our newspapers. In
addition, our newspaper operations generate revenues from both print and online
media formats.
 
 Linage,
the number of inserts, internet page views, along with rate and mix of
advertisement are the primary components of advertising revenue. The advertising
rate depends largely on our market reach, primarily through circulation, and
market penetration. The number of copies sold and the amount charged to our
customers are the primary components of circulation revenue. Our other revenue
consists primarily of commercial printing and other online revenue.
 
 During
the first six months of 2008, advertising and circulation revenue represented
79.2% and 17.9%, respectively, of our total net operating
revenue.  Our advertising revenue consisted of 52.8% in retail, 40.0%
in classified and 7.2% in national. Online advertising revenue, included in all
advertising categories above, represented 13.5% of our total advertising revenue
during the first six months of 2008.
 
 Our
advertising results exhibit that from time to time, each individual newspaper
may perform better or worse than our newspaper group as a whole due to certain
local or regional conditions. The material variances in the advertising
categories listed above and at each newspaper are discussed in more detail in
our results of operations, which follows.
 
 We
continue to see overall declines in circulation at our newspapers which is
consistent with the industry as a whole; however, a portion of our decline also
comes from the discontinuation of unprofitable distribution routes in some of
our markets. We continue to focus on circulation retention efforts through
lengthened subscriptions periods, new payment methods, and increased service
levels.
 
 Employee
and newsprint costs are the primary costs at each newspaper. Our operating
performance is affected by newsprint prices, which historically have fluctuated.
Newsprint costs have represented 10 - 15% of total operating expenses. Historically,
newsprint has been subject to significant price fluctuations from year to year,
unrelated in many cases to general economic trends. Supply and demand has
typically controlled pricing.
 
 Critical
accounting policies and estimates
 
 Critical
accounting policies are those that are most significant to the portrayal of our
financial position and results of operations and require difficult, subjective
and complex judgments by management in order to make estimates about the effect
of matters that are inherently uncertain. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts in our condensed consolidated financial statements. We evaluate our
estimates on an on-going basis, including those related to our allowances for
bad debts, asset impairments, post-retirement benefits, self-insurance and
casualty, management fees, income taxes and commitments and contingencies. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities.
 
 Although
actual results have historically been reasonably consistent with management’s
expectations, the actual results may differ from these estimates or our
estimates may be affected by different assumptions or conditions.
 
 Other
than our adoption during the first quarter of 2008 of Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” and
SFAS No. 159,“The Fair Value
Option for Financial Assets and Financial Liabilities-Including an Amendment of
FASB Statement No. 115”,we believe there have been no significant
changes during the first six months of 2008 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, 2007 filed with the Securities and Exchange
Commission on Form 10-K.
  -10-
 Table of Contents
  Information
availability
 
 Our
quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on
Form 8-K and all amendments to those reports are available free of charge on our
Web site, morris.com , as soon as feasible after such reports are electronically
filed with or furnished to the Securities and Exchange Commission. In addition,
information regarding corporate governance at Morris Publishing and our parent,
Morris Communications Company, LLC (“Morris Communications”), is also available
on our Web site. The information on our Web site is not incorporated by
reference into, or as part of, this Report on Form 10-Q.
 
 Financial
summary for the three months ended June 30, 2008 compared to June 30,
2007
 
 Financial
Summary.The following table summarizes our consolidated financial
results for the three months ended June 30, 2008 and 2007:
 
 Three
      months ended June 30,(Dollars in
      millions)
              
              2008
              
              
              2007
              
              
              %
      change period over periodTotal
      net operating revenues
              
              $
              82.2
              
              
              $
              95.6
              
              
              
              (14.0
              %)Total
      operating expenses
              
              
              73.6
              
              
              
              79.5
              
              
              
              (7.4
              %)Operating
      income from continuing operations
              
              
              8.6
              
              
              
              16.1
              
              
              
              (46.8
              %)Interest
      expense
              
              
              6.9
              
              
              
              9.4
              
              
              
              (27.3
              %)Pre-tax
      gain on repurchases of debt
              
              
              (0.9
              )
              
              
              -
              
              
              
              -Other
              
              
              (0.3
              )
              
              
              -
              
              
              
              -Other
      expenses, net
              
              
              5.7
              
              
              
              9.4
              
              
              
              (39.6
              %)Income
      from continuing operations before taxes
              
              
              2.9
              
              
              
              6.7
              
              
              
              (56.7
              %)Provision
      for income taxes
              
              
              0.9
              
              
              
              2.7
              
              
              
              (65.6
              %)Income
      from continuing operations
              
              
              2.0
              
              
              
              4.0
              
              
              
              (50.7
              %)Income
      from discontinued operations, net of provision for income
      taxes
              
              
              -
              
              
              
              0.9
              
              
              
              (100.0
              %)Net
      income
              
              $
              2.0
              
              
              $
              4.9
              
              
              
              (59.8
              %)
 
 Operating income from
continuing operations
 
 During
the second quarter, operating income was $8.6 million, down $7.5 million, or
46.8%, from the second quarter of last year.
 
 Total net
operating revenues were $82.2 million, down $13.4 million, or
14.0%.
 
 Our
advertising revenue results continued to be affected by the weak economic
conditions in all of our markets and the secular trends impacting our industry.
We expect the current economic slowdown to continue to affect us for some
time.
 
 Our total
advertising revenue was $65.2 million, a decrease of $13.5 million, or 17.2%,
from last year. Retail, national and classified advertising revenue were down
12.4%, 4.4% and 24.6%, respectively, with these year over year comparisons being
unfavorably impacted by Easter Sunday occurring during March compared to April
last year.
 
 Advertising
and circulation revenue represented 79.3% and 18.0%, respectively, of our total
net operating revenue.  Our advertising revenue consisted of 53.8% in
retail, 39.6% in classified and 6.7% in national. Online advertising revenue,
included in all advertising categories above, was 13.4% of our total advertising
revenue, up from 10.9% last year.
 
 Print
advertising continued to be soft during the quarter, particularly in the
classified categories. Compared to 2007, run of press advertising revenue was
$40.4 million, down $11.4 million, or 22.0%, and insert advertising revenue was
$13.2 million, down $2.1 million, or 13.7%. Advertising revenue from specialty
products printed by us, but not a part of main newspaper product, was $2.9
million, down $0.2 million, or 7.8%, from the second quarter last
year.
 
 Online
advertising revenue, included in all advertising categories above, was $8.7
million, up $0.2 million, or 2.2%, from last year, having been impacted by
cyclical trends particularly in the employment category. Excluding the
employment and other online categories, online advertising revenue was up $1.0
million, or 26.7%.
 
 Unique
page views, a key measure of interest in our newspapers’ Web sites, continued to
grow and were 26.9% higher than in 2007. Total page views were up
13.4%.
 
 Our
existing Florida newspapers and publications, which account for 35.3% of our
total advertising revenues, contributed 55.1% of our entire net decline in
advertising revenue. The real estate collapse not only impacted this category
but has significantly impacted the retail and employment
categories.
  -11-
 Table of Contents
  Jacksonville,
our largest newspaper, was down $6.4 million, or 25.0%, with classified
accounting for 72.5%, retail 23.3% and national 4.2% of the decrease. St.
Augustine was down $0.5 million, or 18.4%, with continued weakness in the
employment and real estate classified categories. While we are targeting a
variety of revenue streams in these markets to offset the declines, we expect
the softness in these markets to continue for the remainder of the year and into
next year.
 
 Augusta’s
advertising revenue was down $2.0 million, or 21.5%, with the current economic
climate contributing to the softness in April’s Masters Golf tournament
business.
 
 In
Savannah, our newspaper’s advertising revenue was down $1.2 million, or 17.2%,
resulting from a weakening real estate market.
 
 Lubbock
was down $0.9 million, or 12.5%, Amarillo was down $0.7 million, or 10.8%,
Topeka was down $0.5 million, or 10.2%, and Athens was down $0.5 million, or
14.5%.
 
 Total
combined advertising revenue from our other five daily newspapers was down $0.5
million, or 8.5%.
 
 Advertising
revenue from all of our nondaily publications was unchanged from last
year.
 
 During
the second quarter of 2008, circulation revenue was $14.8 million, up $0.4
million, or 2.9%, from the second quarter of last year, partially due to home
delivery price increases in many of our markets, but primarily due to the change
in the way we sell home delivery subscriptions in Florida.
 
 In prior
years, we sold home delivery newspapers in Jacksonville and St. Augustine
directly to the carriers and derived our revenue from the wholesale rate to the
carrier. During the first quarter of 2008 we began selling these copies directly
to the subscribers and paying our carriers a delivery fee, in effect, favorably
impacting our circulation revenue while increasing our other operating
costs.  Adjusting the $1.0 million in incremental carrier delivery
costs at these two newspapers from our circulation revenue; our total
circulation revenue was down $0.5 million, or 3.8%. The impact of this
change will become greater as we continue the implementation of this change at
these papers.
 
 Other
income was $2.2 million, down $0.4 million, or 11.5%.
 
 Our total
operating costs were $73.6 million, down $5.9 million, or 7.4%, being favorably
impacted by the savings from many of the initiatives we began last year to
adjust our cost structure.
 
 As stated
above, the change in the way we pay our newspaper carriers in our Florida
markets distorts the full impact of our cost saving efforts. Adjusting for this
change, our total operating costs were down $6.9 million, or 10.2%.
 
 More
specifically, our operating costs were favorably impacted by reduced supplements
cost and head count reductions and unfavorably impacted by increased fuel costs.
The savings from decreased consumption of newsprint was directly offset by the
increase in average cost per ton of newsprint.
 
 Total
labor and employee benefit costs were $33.6 million, down $3.3 million, or 9.1%;
newsprint, ink and supplements costs were $9.7 million, down $0.3 million, or
3.0%; and other operating costs were $26.8 million, down $1.4 million, or 4.9%.
Depreciation and amortization expense was $3.5 million, down $0.9 million, or
19.8%, with a large portion of intangible assets becoming fully amortized during
last year.
 
 Discontinued
operations
 
 On
November 30, 2007, we completed the sale of fourteen daily newspapers, three
nondaily newspapers, a commercial printing operation and other related
publications to GateHouse Media, Inc. ("GateHouse"). The total purchase price
was $115 million plus a working capital adjustment. One hundred five million
dollars was received at closing in cash, with the remainder payable in the form
of a one-year promissory note bearing interest at 8% per annum. The preliminary
working capital adjustment paid by GateHouse to us at the closing of the
transaction totaled $2.5 million, with the remaining working capital adjustment
currently recorded within other consolidated assets on our consolidated balance
sheet.
 
 At June
30, 2008, the balance on the on the note receivable was $10.0 million, plus $67
thousand in accrued interest.
 
 In
accordance with Statement of Financial Accounting Standards  (“SFAS”)
No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, the results of operations
of all newspapers, publications and businesses included in the sale to GateHouse
(“GateHouse sale”) have been recorded as discontinued operations during the
three and six month periods ended June 30, 2007.
  -12-
 Table of Contents
  During
the second quarter of 2007, income from discontinued operations, net of the
provision for income taxes, was $0.9 million, with total operating revenues of
$17.3 million and total operating costs of $15.8 million.
 
 Net income and
other
 
 Interest
and loan amortization expense totaled $6.9 million, down $2.6 million from $9.5
million last year primarily due to the reduction in our outstanding
debt.
 
 During
the second quarter of 2008, we repurchased $2.4 million of our $300 million 7%
senior subordinated notes for a total purchase price, including accrued
interest, of $1.5 million. The pre-tax gain on these transactions was $0.9
million.
 
 Income
from continuing operations before income taxes was $2.9 million, down $3.8
million from $6.7 million last year.
 
 The
provision for income taxes from continuing operations was $0.9 million, down
$1.8 million from the second quarter of last year, due to the reduction in
income. Our effective tax rate was 32.0% for the second quarter of 2008
down from 40.2% for the same period last year.
 
 Income
from continuing operations was $2.0 million compared to $4.0 million in income
from continuing operations for the second quarter last year.
 
 Net
income during the second quarter of 2007 was $4.9 million.
 
 Results
of operations from continuing operations for the three months ended June 30,
2008 compared to June 30, 2007
 
 Net operating
revenue from continuing operations. The table below presents the total
net operating revenue from continuing operations and related statistics for the
three months ended June 30, 2008 compared to June 30, 2007:
 
 (Dollars in
      millions)
              
              Three months ended June 30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Net
      operating revenuesAdvertisingRetail
              
              $
              35.1
              
              
              $
              40.0
              
              
              
              (12.4
              %)Classified
              
              
              25.8
              
              
              
              34.2
              
              
              
              (24.6
              %)National
              
              
              4.3
              
              
              
              4.5
              
              
              
              (4.4
              %)Total
      advertising revenues
              
              
              65.2
              
              
              
              78.7
              
              
              
              (17.2
              %)Circulation
              
              
              14.8
              
              
              
              14.3
              
              
              
              2.9
              %Other
              
              
              2.2
              
              
              
              2.6
              
              
              
              (111.4
              %)Total
      net operating revenues
              
              $
              82.2
              
              
              $
              95.6
              
              
              
              (14.0
              %)
 
 Retail advertising
revenue:
 
 Retail
advertising revenue was $35.1 million, down $4.9 million, or 12.4%, from the
prior year, with significant declines from department, telecommunications,
electronics, office supply, and furniture stores in many of our
markets.
 
 Insert
retail revenue was $11.8 million, down $1.8 million, or 13.4%, while print
retail advertising revenue was $17.8 million, down $3.3 million, or 15.8%, from
second quarter of last year. Retail advertising revenue from specialty products
printed by us, but not a part of main newspaper product, was $2.7 million, down
$0.2 million, or 5.7%, from last year. Retail online revenue was $2.7 million,
up $0.4 million, or 16.4%, from second quarter of last year.
 
 Jacksonville’s
retail advertising was down $1.5 million, or 14.4%, and St. Augustine was down
$0.1 million, or 1.4%.
 
 Augusta
was down $1.2 million, or 22.0%
 
 As for
our other larger daily newspapers, Lubbock was down $0.5 million, or 14.0%,
Savannah was down $0.3 million, or 9.5%, Amarillo was down $0.3 million, or
11.3%, and Topeka was down $0.3 million, or 11.9%.
 
 Juneau
and Brainerd were both down $0.2 million, or 26.0% and 14.8%,
respectively.
 
 Athens’
retail advertising revenue was down slightly from last year.
  -13-
 Table of Contents
  Classified advertising
revenue:
 
 Total
classified advertising revenue was $25.8 million, down $8.4 million, or 24.6%,
from the second quarter of 2007.
 
 Classified
print advertising revenue was $19.9 million, down $7.7 million, or 28.0%, and
online classified revenue was $5.6 million, down $0.5 million, or 7.5%, from the
second quarter of last year. Classified insert and specialty advertising revenue
were each down slightly from last year.
 
 Our
Jacksonville newspaper’s classified advertising revenue was down $4.6 million,
or 37.4%, and our St. Augustine newspaper was down $0.5 million, or
32.1%.
 
 As for
our other larger daily newspapers, Savannah was down $0.8 million, or 25.3%, and
Augusta was down $0.7 million, or 19.2%.
 
 Our
Athens, Lubbock and Amarillo newspapers were each down $0.4 million, or 28.7%,
12.8% and 11.8%, respectively.
 
 National advertising
revenue:
 
 Total
national advertising revenue was $4.3 million, down $0.2 million, or 4.4%, from
second quarter last year.
 
 Circulation:
 
 Daily and
Sunday circulation volume was down 8.2% and 9.1%, respectively, with
Jacksonville contributing 40% of each decline. Amarillo, Augusta, Savannah and
Lubbock, together, accounted for approximately 43% of the daily and Sunday
declines.
 
 We have
eliminated expensive third-party circulation programs that were perceived by our
advertisers to have limited value, and we have cut circulation in areas that
were no longer profitable due to increasing delivery costs. Additionally, our
pricing actions have contributed to our declines.
 
 We are
seeing an increase in non-renewal stops in every one of our newspaper markets
likely due to the inflationary pressure of the high cost of fuel and other
commodities being felt by consumers.
 
 Net operating
expense from continuing operations. The table below presents
the total operating expenses from continuing operations and related statistics
for the newspaper operations for three months ended June 30, 2008 compared to
June 30, 2007:
 
 (Dollars in
      millions)
              
              Three months ended June 30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Operating
      expensesLabor
      and employee benefits
              
              $
              33.6
              
              
              $
              36.9
              
              
              
              (9.1
              %)Newsprint,
      ink and supplements
              
              
              9.7
              
              
              
              10.0
              
              
              
              (3.0
              %)Other
      operating costs
              
              
              26.8
              
              
              
              28.2
              
              
              
              (4.8
              %)Depreciation
      and amortization
              
              
              3.5
              
              
              
              4.4
              
              
              
              (19.8
              %)Total
      operating expenses
              
              $
              73.6
              
              
              $
              79.5
              
              
              
              (7.4
              %)
 
 Labor and employee benefits
from continuing operations:
 
 Our
salaries and wages totaled $23.8 million, down $2.0 million, or 7.6%. Average
FTE’s (or full time equivalents) were down 266.9, or 9.0%, and average pay rate
was up 1.6%.
 
 Jacksonville’s
average FTE’s were down 117.5, or 14.0%, contributing 44.0% of our average total
net decrease.
 
 Commissions
and bonuses were $3.4 million, down $1.2 million, or 26.5%, from last year, due
to the decrease in advertising sales.
 
 Employee
medical insurance cost was $2.9 million, down $0.4 million, or 13.4%, due to the
decrease in plan participants.
 
 Compared
to the second quarter last year, post retirement benefit cost was $0.3 million,
up 15.3%.
 
 Employer
matching contributions to the 401(k) plan totaled $0.8 million, down $0.1
million from $0.9 million during the three months ended June 30, 2007. Until
July 13, 2008, contributions by employees to the plan were matched up to 5% of
pay by us. Effective July 13, 2008, we suspended the employer matching
contributions for the remainder of 2008.
  -14-
 Table of Contents
  Newsprint, ink and
supplements cost from continuing operations:
 
 Compared
to last year, total newsprint expense was $8.4 million, up slightly, or 0.6%,
with a 21.0% decrease in newsprint consumption more than offset by a 27.2%
increase in the average cost per ton of newsprint. During the second half of
2008, we expect additional newsprint cost increases and continued decreases in
consumption.
 
 Supplements
expense decreased 22.4% to $0.7 million, and ink expense decreased 4.4% to $0.6
million.
 
 Other operating
costs:
 
 The
combined technology and shared services fee from our parent and management fee
charged to continuing operations by our parent under the management agreement
totaled $5.3 million, down $0.9 million, or 13.8%, from $6.2 million in the
second quarter of last year. Excluding these fees, other operating costs were
down $0.3 million, or 1.3%.
 
 The $5.3
million management fee included $3.6 million of non-cash charges resulting from
the suspension of the management fee from May 1, 2008 through December 31, 2008.
We treated these as expenses incurred on our behalf by our parent, and as a
capital contribution.
 
 Financial
summary for the six months ended June 30, 2008 compared to June 30,
2007
 
 Financial
Summary.The following table summarizes our consolidated financial
results for the six months ended June 30, 2008 and 2007:
 
 Six
      months ended June 30,(Dollars in
      millions)
              
              2008
              
              
              2007
              
              
              %
      change period over periodTotal
      net operating revenues
              
              $
              164.9
              
              
              $
              187.4
              
              
              
              (12.0
              %)Total
      operating expenses
              
              
              148.7
              
              
              
              160.6
              
              
              
              (7.4
              %)Operating
      income from continuing operations
              
              
              16.2
              
              
              
              26.8
              
              
              
              (39.4
              %)Interest
      expense
              
              
              14.9
              
              
              
              18.8
              
              
              
              (20.7
              %)Pre-tax
      gain on repurchases of debt
              
              
              (9.3
              )
              
              
              -
              
              
              
              -Other
              
              
              (0.5
              )
              
              
              -
              
              
              
              -Other
      expenses, net
              
              
              5.1
              
              
              
              18.8
              
              
              
              (72.9
              %)Income
      from continuing operations before taxes
              
              
              11.1
              
              
              
              8.0
              
              
              
              37.7
              %Provision
      for income taxes
              
              
              3.5
              
              
              
              3.3
              
              
              
              5.4
              %Income
      from continuing operations
              
              
              7.6
              
              
              
              4.7
              
              
              
              60.2
              %Income
      from discontinued operations, net of provision for income
      taxes
              
              
              -
              
              
              
              1.0
              
              
              
              (100.0
              %)Net
      income
              
              $
              7.6
              
              
              $
              5.7
              
              
              
              33.1
              %
 
 Operating income from
continuing operations
 
 During
the first six months of 2008, operating income was $16.2 million, down $10.6
million, or 39.4%, from the same period last year.
 
 Total net
operating revenues were $164.9 million, down $22.5 million, or
12.0%.
 
 Advertising
revenue was $130.5 million, a decrease of $23.3 million, or 15.1%, from last
year. Retail, national and classified advertising revenue were down 10.4%, 6.8%
and 21.8%, respectively. We expect the deepening economic slowdown and secular
changes to continue to affect us for some time.
 
 Compared
to 2007, run of press advertising revenue was $80.9 million, down $21.2 million,
or 20.8%, and insert advertising revenue was $25.6 million, down $2.9 million,
or 10.3%. Advertising revenue from specialty products printed by us, but not a
part of main newspaper product, was $6.5 million, down $0.2 million, or 3.6%,
from the first six months of last year.
 
 Online
advertising revenue was $17.6 million, up $1.2 million, or 7.1%, from last year,
with significant gains in the retail category. Unique page views, a key measure
of interest in our newspapers’ Web sites, continued to grow and were 26.1%
higher than in 2007. Total page views were up 12.5%.
 
 Our
existing Florida newspapers and publications, which accounted for 35.6% of our
total advertising revenue, contributed 64.1% of our entire net decline in
advertising revenue in the first half of the year.
  -15-
 Table of Contents
  Advertising
revenue in Jacksonville, our largest newspaper, was down $13.2 million, or
25.4%, and St. Augustine was down $0.8 million, or 15.0%, with both newspapers
reporting declines in all categories.
 
 Augusta’s
advertising revenue was down $2.6 million, or 14.2%, with declines in all
categories and Savannah’s advertising revenue was down $2.0 million, or 15.0%,
with a majority of each newspaper’s decline occurring during the second
quarter.
 
 Lubbock
was down $1.3 million, or 10.0%, Amarillo was down $1.2 million, or 9.8%, Topeka
was down $0.8 million, or 7.7%, and Athens was down $0.7 million, or
11.0%.
 
 Total
combined advertising revenue from our other five daily newspapers was down $0.3
million, or 3.1%.
 
 Advertising
revenue from all of our nondaily publications was up $0.2 million, or
2.1%.
 
 During
the first six months of 2008, circulation revenue was $29.5 million, up $1.0
million, or 3.2%, from the first six months of last year due to home delivery
price increases and a change in the way we sell home delivery subscriptions in
Florida.
 
 In prior
years, we sold home delivery newspapers in Jacksonville and St. Augustine
directly to the carriers and derived our revenue from the wholesale rate to the
carrier. During the first quarter of 2008 we began selling these copies directly
to the subscribers and paying our carriers a delivery fee, in effect, favorably
impacting our circulation revenue while increasing our other operating
costs.  Adjusting the $1.2 million in incremental carrier delivery
costs at these newspapers from circulation revenue; our total circulation
revenue was down $0.3 million, or 1.1%.
 
 Other
income was $4.9 million, down $0.2 million, or 2.6%.
 
 Our total
operating costs were $148.7 million, down $11.9 million, or 7.4%, being
favorably impacted by the savings from many of the initiatives we began last
year to adjust our cost structure. We estimate a total overall cost savings of
$4.1 million from our recent initiatives.
 
 As stated
above, the change in the way we pay our newspaper carriers in our Florida
markets distorts the full impact of our cost saving efforts. Adjusting for this
change, our total operating costs were down $13.1 million, or 8.2%.
 
 More
specifically, our operating costs were favorably impacted by the savings from
the decrease in consumption of newsprint and the reduction in supplements cost,
in employee health insurance costs and in head count. Our operating costs
continued to be unfavorably impacted by increased fuel costs.
 
 Total
labor and employee benefit costs were $68.0 million, down $5.7 million, or 7.7%;
newsprint, ink and supplements costs were $18.8 million, down $2.3 million, or
10.8%; and other operating costs, excluding depreciation and amortization, were
$54.9 million, down $1.8 million, or 3.4%. Depreciation and amortization expense
was $7.0 million, down $2.1 million, or 22.8%, with a large portion of
intangible assets becoming fully amortized.
 
 Discontinued
operations
 
 During
the first six months of 2007, income from discontinued operations, net of the
provision for income taxes, was $1.0 million, with total operating revenues of
$33.3 million and total operating costs of $31.6 million.
 
 Net income and
other
 
 Interest
and loan amortization expense totaled $14.9 million, down $3.9 million from
$18.8 million last year primarily due to the reduction in our outstanding
debt.
 
 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 gain on these transactions was $9.3
million.
 
 During
the six month period ended June 30, 2008, we received two interest payments on
the GateHouse promissory note totaling $0.4 million.
 
 Income
from continuing operations before income taxes was $11.1 million, up $3.0
million from $8.1 million last year.
 
 The
provision for income taxes was $3.5 million, up $0.2 million from the same
period last year. Our effective tax rate was 31.5% for the six month period down
from 41.1% for the same period last year.
  -16-
 Table of Contents
  Income
from continuing operations was $7.7 million, up $2.9 million from $4.8 million
during the first six months of 2007.
 
 Net
income during the first six months of 2007 was $5.7 million.
 
 Results
of operations from continuing operations for the six months ended June 30, 2008
compared to June 30, 2007
 
 Net operating
revenue from continuing operations. The table below presents the total
net operating revenue from continuing operations and related statistics for the
six months ended June 30, 2008 compared to June 30, 2007:
 
 (Dollars in
      millions)
              
              Six months ended June 30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Net
      operating revenuesAdvertisingRetail
              
              $
              68.9
              
              
              $
              77.0
              
              
              
              (10.4
              %)Classified
              
              
              52.2
              
              
              
              66.7
              
              
              
              (21.8
              %)National
              
              
              9.4
              
              
              
              10.1
              
              
              
              (6.8
              %)Total
      advertising revenues
              
              
              130.5
              
              
              
              153.8
              
              
              
              (15.1
              %)Circulation
              
              
              29.5
              
              
              
              28.5
              
              
              
              3.2
              %Other
              
              
              4.9
              
              
              
              5.1
              
              
              
              (2.6
              %)Total
      net operating revenues
              
              $
              164.9
              
              
              $
              187.4
              
              
              
              (12.0
              %)
 
 Retail advertising
revenue:
 
 Retail
advertising revenue was $68.9 million, down $8.0 million, or 10.4%, from the
prior year.
 
 Insert
retail revenue was $22.8 million, down $2.6 million, or 10.3%, while print
retail advertising revenue was $34.6 million, down $6.4 million, or 15.6%, from
the first six months of last year. Retail advertising revenue from specialty
products printed by us, but not a part of main newspaper product, was $6.2
million, down $0.1 million, or 2.3%, from last year. Retail online revenue was
$5.4 million, up $1.1 million, or 26.1%, from the first six months of last
year.
 
 Jacksonville’s
retail advertising was down $3.5 million, or 17.1%.
 
 As for
our other larger daily newspapers, Augusta was down $1.4 million, or 14.0%,
Lubbock was down $0.9 million, or 12.5%, Savannah was down $0.3 million, or
4.9%, Amarillo was down $0.7 million, or 11.8%, and Topeka was down $0.5
million, or 9.6%.
 
 Juneau
and Brainerd were both down $0.2 million, or 16.0% and 11.6%, respectively.
Athens’ retail advertising revenue was down slightly from last
year.
 
 Bluffton
was up $0.2 million, or 24.2%.
 
 Classified advertising
revenue:
 
 Total
classified advertising revenue was $52.2 million, down $14.6 million, or 21.8%,
from the first six months of 2008.
 
 Classified
print advertising revenue was $40.2 million, down $13.9 million, or 25.7%, and
online classified revenue was $11.4 million, down $0.4 million, or 3.2%, from
the first six months of last year. Classified insert and specialty advertising
revenue were each down slightly from last year.
 
 Our
Jacksonville newspaper’s classified advertising revenue was down $8.9 million,
or 35.5%, and our St. Augustine newspaper was down $0.8 million, or
26.9%.
 
 As for
our other larger daily newspapers, Savannah was down $1.5 million, or 23.6%,
Augusta was down $0.8 million, or 12.0%, Athens was down $0.6 million, or 23.8%,
Amarillo was down $0.5 million, or 9.1%, Lubbock was down $0.5 million, or 8.8%,
and Topeka was down $0.4 million, or 8.5%.
 
 Our other
five daily newspapers combined were down $0.4 million, or 8.6%.
 
 Our
nondaily publications were down $0.2 million, or 5.9%.
  -17-
 Table of Contents
  National advertising
revenue:
 
 Total
national advertising revenue was $9.4 million, down $0.7 million, or 6.8%, from
the first six months last year, primarily due to the declines in
Jacksonville.
 
 Circulation:
 
 Daily and
Sunday circulation volume was down 7.2% and 7.9%, respectively, with
Jacksonville contributing nearly 40% of each decline. Amarillo, Augusta,
Savannah and Lubbock, together, accounted for approximately 50% of the daily and
Sunday declines.
 
 While
some of these declines were the direct result of our cutting of distribution in
unprofitable areas, the high cost of fuel is impacting the sales and retention
efforts at many of our newspapers.
 
 In
addition, we have eliminated expensive third-party circulation programs that
many advertisers believe have limited value, and recent price increases have
caused some loss in circulation.
 
 Net operating
expense from continuing operations. The table below presents
the total operating expenses from continuing operations and related statistics
for the newspaper operations for the six months ended June 30, 2008 compared to
June 30, 2007:
 
 (Dollars in
      millions)
              
              Six months ended June 30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Operating
      expensesLabor
      and employee benefits
              
              $
              68.0
              
              
              $
              73.7
              
              
              
              (7.7
              %)Newsprint,
      ink and supplements
              
              
              18.8
              
              
              
              21.1
              
              
              
              (10.8
              %)Other
      operating costs
              
              
              54.9
              
              
              
              56.7
              
              
              
              (3.4
              %)Depreciation
      and amortization
              
              
              7.0
              
              
              
              9.1
              
              
              
              (22.8
              %)Total
      operating expenses
              
              $
              148.7
              
              
              $
              160.6
              
              
              
              (7.4
              %)
 
 Labor and employee benefits
from continuing operations:
 
 Our
salaries and wages totaled $48.1 million, down $3.3 million, or 6.4%. Average
FTE’s (or full time equivalents) were down 279.0, or 9.3%, and average pay rate
was up 3.2%.
 
 During
2008, Jacksonville eliminated 124 employees, with total annual salary and wage
savings of approximately $2.5 million. Jacksonville’s employee severance costs
totaled $0.6 million during the first six months of 2008. The majority
of Jacksonville’s FTE reductions with severance were from the outsourcing
of ad production and the transfer of circulation retention, customer services
and credit and collection services to our shared services in
Augusta.
 
 Commissions
and bonuses were $7.6 million, down $1.4 million, or 15.3%, from last year, due
to the decrease in advertising sales.
 
 Employee
medical insurance cost was $5.3 million, down $1.0 million, or 15.6%, due to the
decrease in plan participants.
 
 Compared
to the first six months of last year, post retirement benefit cost was $0.7
million, up 15.3%.
 
 Employer
matching contributions to the 401(k) plan totaled $1.6 million, down $0.2
million from $1.8 million during the six months ended June 30, 2007. Effective
July 13, 2008, we suspended the employer matching contributions (up to 5% of
pay) for the remainder of 2008. The total employer match from the middle of July
until December 31, 2007 was $1.6 million on an average of 2,300 plan
participants. On August 1, 2008, the plan included 2,079
participants.
 
 Newsprint, ink and
supplements cost from continuing operations:
 
 Compared
to last year, total newsprint expense was $16.4 million, down $1.5 million, or
8.3%, with an 18.0% decrease in newsprint consumption slightly offset by an
11.8% increase in the average cost per ton of newsprint.
 
 Supplements
expense decreased $0.6 million, or 31.7%, to $1.3 million, and ink expense
decreased $0.1 million, or 6.6%, to $1.1 million.
  -18-
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  Other operating
costs:
 
 The
combined technology and shared services fee from our parent and management fee
charged to continuing operations by our parent under the management agreement
totaled $10.7 million, down $1.4 million, or 11.9%, from $12.2 million in the
first six months of last year. Excluding these fees, other operating costs were
down $0.3 million, or 0.6%.
 
 Liquidity
and capital resources
 
 We
believe that our principal sources of liquidity, which are existing cash and
cash equivalents, cash flows provided from operating activities, and the
borrowing capacity under revolving credit facilities, will be sufficient to meet
our ongoing operating needs through the third quarter of
2008.
  Our
primary source of liquidity is the cash flow generated from operations and our
primary needs for cash are funding operating expense, debt service on our bank
credit facilities and the senior subordinated notes, capital expenditures,
income taxes, dividends and loans to affiliates, and working
capital.
 
 Cash was
$4.9 million at June 30, 2008, up $0.8 million from $4.1 million at December 31,
2007.
  On July
3, 2007, we, as borrower, entered into an Amendment
No. 1 under the 2005 Credit Agreement. The 2005 Credit Agreement contains
financial covenants requiring us to meet certain financial tests on an on-going
basis, including minimum interest coverage ratio, minimum fixed charge coverage
ratio, and maximum cash flow ratios, based upon consolidated financial results
of Morris Communications and substantially all of its subsidiaries (including
us). The amendment relaxed these financial tests for an 18 month period from and
including June 30, 2007 through but excluding December 31, 2008.
  However,
without either an improvement in the Morris Communications consolidated
financial results during 2008, a reduction of Morris Communications'
consolidated indebtedness or further relaxation of the financial covenants, we
are at risk of failing to meet one or more of our financial covenants as of
September 30, 2008, in which event Morris Communications and its
subsidiaries (including us) would be unable to borrow on the revolver and may be
required to prepay the entire principal due under the Credit
Agreement.
  If this
was to occur, it could lead to an event of default under the indenture governing
the notes. In such an event, we cannot assure the bondholders that we would have
sufficient assets to pay amounts due on the notes. As a result, the bondholders
may receive less than the full amount they would be otherwise entitled to
receive on the notes.
  Specifically,
there is an event of default under the bond indenture if we fail to pay
other indebtedness (such as the Senior Credit Facility) exceeding $5 million
upon final maturity or within 20 days of an
acceleration.
  Operating
activities. Net cash provided by operations was $23.7 million for
the first six months of 2008, up $0.2 million from $23.5 million for the same
period in 2007.
 
 Current
assets were $59.3 million and current liabilities were $50.7 million as of June
30, 2008 as compared to current assets of $72.8 million and current liabilities
of $49.1 million as of December 31, 2007. We manage our working capital through
the utilization of our revolving credit facility. The outstanding balance on the
revolving credit facility is classified as a long-term liability, in accordance
with its terms.
 
 During
the second quarter of 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 December 31, 2008. The intent of this amendment was to retain cash
and reduce our operating expenditures.
 
 While the
required payment of these fees has been 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 $3.6 million in total costs for the
period May 1, 2008 through June 30, 2008 being recorded as capital contributions
from our parent.
 
 While the
suspension of the payment of the fees under the management agreement increases
the need for Morris Publishing to pay future dividends to Morris Communications,
this need should be offset somewhat by cost savings initiatives underway at the
parent similar to those begun last year by Morris Publishing.
 
 Investment
activities. Net cash provided by investing activities was $11.6 million
for the first six months of 2008 compared to $6.7 million used by investing
activities for the same period in 2007.
 
 On
November 30, 2007, we sold fourteen daily newspapers, three nondaily newspapers,
a commercial printing operation and other related
publications to GateHouse Media Inc. At close, we elected to have $12.4 million
of the net proceeds deposited into an escrow account in order to fund other
acquisitions by ourselves or our parent through a tax-deferred Section 1031
exchange.
 
 At the
end of the first quarter of 2008, our Parent acquired qualified replacement
property using the $12.4 million in our escrow account. At the same time, our
Parent returned the escrow funds by using its cash to pay down balances due on
our revolving credit facility.
 
 For the
first six months in 2008 and 2007, we spent $1.9 million and $6.7 million on
property, plant and equipment, respectively.
 
 For 2008,
we expect our total capital expenditures to be between $3 million and $7
million.
 
 The $10
million promissory note receivable from GateHouse Media matures during the
fourth quarter of 2008.
  -19-
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  Financing
activities. Net cash used in financing activities was $34.6 million for
the first six months of 2008 compared to $16.0 million for the same period in
2007.
 
 Period end debt
summary:
 
 Total
debt was $417.1 million at June 30, 2008, down from $427.9 million at December
31, 2007. We had $52 million outstanding on our $175 million revolving credit
facility, up $13 million from $39 million at December 31, 2007.
 
 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 of $12.5 million. At
June 30, 2008, $278.5 million was outstanding on the senior subordinated
notes.
 
 During
the first six months of 2008, we paid $2.3 million in principal due on the
Tranche A term loan and have another $3.4 million in principal payments due by
the end of 2008.
 
 At June
30, 2008, the interest rate on the $86.6 million Tranche A term loan outstanding
was 4.0625% and the weighted average interest rate on the revolver was
3.75%.
 
 As of
June 30, 2007, our total debt was $522.0 million, with $47 million outstanding
on the revolving credit facility.
 
 As of
June 30, 2008, our annualized cost of debt outstanding was approximately
5.9848%, down from 6.7342% at the end of the same period last year.
 
 At June
30, 2008, we could borrow and use for general corporate purposes approximately
$13.8 million under the most restrictive covenants of our debt arrangements
and we
were in compliance with all covenants under our bond indenture and credit
facilities.
 
 Loan receivable from
to Morris Communications:
 
 Our
indenture, with certain restrictions described in Note 2 of our financial
statements, allows us to make loans both to and from Morris
Communications.
 
 The
interest-bearing portion of all loans from us to our parent bear the same rate
as the borrowings under the Credit Agreement (currently, this rate is LIBOR
(adjusted to the nearest 1/16th) + 1.25%). We distinguish between intercompany
transactions incurred in the ordinary course of business and settled on a
monthly basis (which do not bear interest) and those of a more long-term nature
that are subject to an interest accrual. Interest is accrued on the average
outstanding long-term balance each month.
 
 Given the
historical practice of us and our parent settling a significant portion of the
outstanding loan receivable balance with a dividend, this arrangement is
considered in substance a capital distribution transaction and is classified as
contra-equity within member’s deficit. In addition, interest accrued on this
loan receivable is reported as contra-equity within member’s deficiency in
assets for the periods presented. (See Note 2)
 
 The
amount outstanding on the intercompany loan receivable from Morris
Communications was $7.0 million as of June 30, 2008. The amount outstanding on
the intercompany loan receivable due from Morris Communications was $4.4 million
as of December 31, 2007 offset by $30.5 million loan payable to Morris
Communications for income taxes payable on the GateHouse sale.
 
 During
the six month periods ended June 30, 2008 and 2007, we reported the $0.3 million
and $1.3 million, respectively, in accrued loan receivable interest as
contra-equity. As of June 30, 2008, the total accumulated interest accrued on
the loan receivable was $5.5 million.
 
 The
average interest rate for the six month periods ended June 30, 2008 and 2007 was
4.3958% and 6.2708%, respectively, on average loan receivable balances of $15.2
million and $38.9 million, respectively.
  -20-
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  Dividends:
 
 We, with
certain restrictions under our indenture, may make dividend payments to our
parent to fund its cash needs for general business purposes, capital
expenditures and acquisitions. At June 30, 2008, we had an additional $88
million available for future restricted payments under the notes
indenture.
 
 Morris
Publishing Finance Co. overview
 
 Morris
Publishing Finance Co., a wholly-owned subsidiary of Morris Publishing Group,
LLC, was incorporated in 2003 for the sole purpose of serving as a co-issuer of
our senior subordinated notes in order to facilitate the offering. Morris
Publishing Finance Co. does not have any operations or assets of any kind and
will not have any revenue.
  -21-
 Table of Contents
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
 
 There
have been no material changes regarding the registrants’ market risk position
from the information provided in our annual report dated December 31, 2007 filed
with the Securities and Exchange Commission on Form 10-K.
 
 Although
some of our outstanding debt is at a fixed rate, increases in the interest rates
applicable to borrowings under our bank credit facilities would result in
increased interest expense and a reduction in our net income.  (See
the quantitative and qualitative disclosures about market risk are discussed
under the caption “Market Risk” in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in said annual report and Note 4
to our unaudited condensed consolidated financial statements as of and for the
three months ending June 30, 2008 regarding long-term debt).
 
 Based on
our $138.6 million of variable rate debt at June 30, 2008, 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 $0.8
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 June 30, 2008. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
 
 There has
not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13A-15(d) under the Exchange Act
that occurred during the three month period ended June 30, 2008, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
  -22-
 Table of Contents
  Item 1. Legal Proceedings.





None.





Item
1A. Risk Factors.





Without
either an improvement in the Morris Communications consolidated financial
results during 2008, a reduction of Morris Communications' consolidated
indebtedness or further relaxation of the financial covenants, we are at risk of
failing to meet one or more of our financial covenants as of September 30,
2008, in which event Morris Communications and its subsidiaries (including
us) would be unable to borrow on the revolver and may be required to prepay the
entire principal due under the Credit Agreement.
  If this
was to occur, it could lead to an event of default under the indenture governing
the notes. In such an event, we cannot assure the bondholders that we would have
sufficient assets to pay amounts due on the notes. As a result, the bondholders
may receive less than the full amount they would be otherwise entitled to
receive on the notes.
  Specifically,
there is an event of default under the bond indenture if we fail to pay
other indebtedness (such as the Senior Credit Facility) exceeding $5 million
upon final maturity or within 20 days of an
acceleration.




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





None.




Item
3. Defaults Upon Senior Securities.





None.





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





None.




Item
5. Other Information.





None.





Item
6. Exhibits.





31.1
            
            Rule 13a-14(a)
      Certifications31.2
            
            Rule 13a-14(a)
      Certifications32.1
            
            Section 1350
      Certifications  -23-
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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: August 13, 2008
            
            By:
            
            /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
              and
      as its Principal Financial Officer)





SIGNATURES





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




MORRIS
      PUBLISHING FINANCE CO.Date: August
    13, 2008
            
            By:
            
            /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
              and
      as its Principal Financial
Officer)