UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended September 30, 2011
  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
 (Exact name of Registrant as specified in its charter)
 
 Georgia

26-2569462(State of organization)

(I.R.S. Employer Identification Number)
 
 725 Broad Street

30901Augusta, Georgia

(Zip Code)(Address of principal executive offices)
 
 (706) 724-0851
 (Registrant's Telephone Number)
 
 Indicate by check mark whether the Registrant (1) has 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) has been subject to such filing requirements for the past 90 days. Yes ̈Nox
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo ̈
 
 Indicate by check mark whether the Registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
 
 Large Accelerated Filer   ̈
Smaller Reporting Company  ̈
Accelerated Filer   ̈
Non-Accelerated Filer  x
 
 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈Nox
 
 Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.YesxNo ̈
  Table of Contents
 MORRIS PUBLISHING GROUP, LLC
 QUARTERLY REPORT
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
  TABLE OF CONTENTS
  PageFORWARD-LOOKING STATEMENTS

iiiPART I.Item 1. Financial Statements:Unaudited condensed consolidated balance sheets as of September 30, 2011 (unaudited) and December 31, 2010 (audited).


1Unaudited condensed consolidated statements of operations for the three and nine-month periods ended September 30, 2011and 2010, as restated.


2Unaudited condensed consolidated statements of cash flows for the nine-month periods ended September 30,2011 and 2010, as restated.


3Notes to the unaudited condensed consolidated financial statements.


4Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.


15Item 3.Quantitative and Qualitative Disclosures about Market Risk.


35Item 4.Controls and Procedures.


35PART II.Item 1.Legal Proceedings.


36Item 1A.Risk Factors.


36Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.


36Item 3.Defaults Upon Senior Securities.


36Item 4.Reserved.


36Item 5.Other Information.


36Item 6.Exhibits.


36
  In this report, Morris Publishing Group, LLC ("Morris Publishing") is considered as and will be referred to as a wholly owned subsidiary of MPG Newspaper Holding, LLC ("MPG Holdings"), a subsidiary of Shivers Trading & Operating Company. "We," "us" "Company" and "our" also refer to Morris Publishing and its subsidiaries and "parent" refers to MPG Holdings.
  Morris Communications Company, LLC, a privately held media company, is an affiliate of Morris Publishing.
  -ii-
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  FORWARD-LOOKING STATEMENTS
  This report contains forward-looking statements. These statements relate to future periods and include statements regarding our anticipated performance. You may find discussions containing such forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of this report.
  Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results, to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
  Although we believe that these statements are based upon reasonable assumptions, we can give no assurance that these statements will be realized. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this report. We assume no obligation to update or revise them or provide reasons why actual results may differ. Important factors that could cause our actual results to differ materially from our expectations include those described in Part I, Item 1A-Risk Factors, included within our Annual Report on Form 10-K for the year ended December 31, 2010, as well as other risks and factors identified from time to time in our United States Securities and Exchange Commission filings.
  Some of the factors that could cause our actual results to be materially different from our forward-looking statements are as follows:
  ·
our ability to service our debt;·
our ability to comply with the financial tests and other covenants in our existing and future debt obligations;·
further deterioration of economic conditions in the markets we serve;·
risks from increased competition from alternative forms of media;·
our ability to contain the costs of labor and employee benefits;·
our ability to maintain or grow advertising and circulation revenues;·
our ability to successfully implement our business strategy;·
our ability to retain employees;·
industry cyclicality and seasonality;·
fluctuations in the cost of our supplies, including newsprint.
  -iii-
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  Part I
  Morris Publishing Group, LLC and SubsidiariesCondensed consolidated balance sheets(Dollars in thousands)

September 30,


December 31,2011


2010(unaudited)


(audited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
5,251


$
2,636Accounts receivable, net of allowance for doubtful accounts of $1,671 and $1,763 at September 30, 2011 and December 31, 2010, respectively


20,153



26,251Inventories


2,312



2,160Deferred income taxes, net


944



669Income tax receivable


1,348



2,062Assets held for sale


1,952



1,952Prepaids and other current assets


1,533



953Total current assets


33,493



36,683NET PROPERTY AND EQUIPMENT


82,725



85,754OTHER ASSETS:Intangible assets, net of accumulated amortization of $3,789 and $3,573 at September 30, 2011 and December 31, 2010, respectively


5,731



5,946Deferred loan costs and other assets, net of accumulated amortization of loan costs of $769 and $472 at September 30, 2011 and December 31, 2010, respectively


2,534



2,684Total other assets


8,265



8,630Total assets

$
124,483


$
131,067LIABILITIES AND MEMBER'S INTEREST IN ASSETSCURRENT LIABILITIES:Accounts payable

$
6,682


$
4,218Current maturities of long-term debt


10,000



13,000Accrued interest expense


1,853



2,163Due to Morris Communications


2,444



211Deferred revenues


12,405



12,135Accrued employee costs


4,335



3,083Other accrued liabilities


2,485



1,292Total current liabilities


40,204



36,102LONG-TERM DEBT, less current portion and original issue discount


59,709



67,115DEFERRED INCOME TAXES, net


21,830



22,632OTHER LONG-TERM LIABILITIES


2,577



2,668Total liabilities


124,320



128,517COMMITMENTS AND CONTINGENCIES (Note 8)MEMBER'S INTEREST IN ASSETSMember's surplus


163



2,550Total member's interest in assets


163



2,550Total liabilities and member's interest in assets

$
124,483


$
131,067See notes to unaudited condensed consolidated financial statements.
  -1-
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  Morris Publishing Group, LLC and SubsidiariesCondensed consolidated statements of operations (unaudited)Three months ended September 30,


Nine months ended September 30,(Dollars in thousands)

2011


2010


2011


2010(Restated, See Note 2)





(Restated, See Note 2)NET OPERATING REVENUES:Advertising

$
37,089


$
42,089


$
112,717


$
126,945Circulation


14,943



15,255



45,252



46,388Other


2,966



2,359



7,664



6,189Total net operating revenues


54,998



59,703



165,633



179,522OPERATING EXPENSES:Labor and employee benefits


21,760



24,129



67,406



73,007Newsprint, ink and supplements


5,338



6,518



16,749



18,691Other operating costs (excluding depreciation and amortization)


24,237



24,541



71,315



72,366Depreciation and amortization expense


2,061



2,365



6,307



7,227Total operating expenses


53,396



57,553



161,777



171,291OPERATING INCOME


1,602



2,150



3,856



8,231OTHER EXPENSES (INCOME):Interest expense, including accretion of original issue discount and amortization of debt issuance costs


2,606



3,232



8,313



14,001Income from cancellation of debt, net


-



-



-



(218,164
)Interest income


(2
)


-



(3
)


(2
)Other income, net


(27
)


(39
)


(64
)


(108
)Total other expense (income), net


2,577



3,193



8,246



(204,273
)(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION


(975
)


(1,043
)


(4,390
)


212,504INCOME TAX (BENEFIT) PROVISION


(404
)


(170
)


(1,430
)


8,462NET (LOSS) INCOME

$
(571
)

$
(873
)

$
(2,960
)

$
204,042See notes to unaudited condensed consolidated financial statements.
  -2-
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  Morris Publishing Group, LLC and SubsidiariesCondensed consolidated statements of cash flows (unaudited)Nine months ended September 30,(Dollars in thousands)

2011


2010As Restated, (See Note 2)OPERATING ACTIVITIES:Net (loss) income

$
(2,960
)

$
204,042Adjustments to reconcile net (loss) income to cash provided by operating activities:Cancellation of debt


-



(222,905
)Depreciation and amortization


6,307



7,227Write-off of deferred loan costs


-



3,121Amortization of debt issuance costs


297



334Accretion of original issue discount


1,999



1,853Bad debt write-off


187



343Loss on sale of property and equipment, net


85



52Deferred income taxes


(1,077
)


(3,105
)Changes in assets and liabilitiesAccounts receivable


5,911



5,914Inventories


(152
)


(24
)Prepaids and other current assets


(580
)


592Other assets


(148
)


(1,399
)Accounts payable


2,464



(2,197
)Income taxes receivable


714



44Accrued employee costs


1,252



1,431Accrued interest expense


(310
)


7,666Due to Morris Communications


2,233



60Deferred revenues and other accrued liabilities


1,463



1,117Income taxes payable


-



13,012Other long-term liabilities


(91
)


(47
)Net cash provided by operating activities


17,594



17,131INVESTING ACTIVITIES:Capital expenditures


(3,200
)


(668
)Net proceeds from sale of property and equipment


53



75Net cash used in investing activities


(3,147
)


(593
)FINANCING ACTIVITIES:Redemption of New Notes


(12,405
)


(9,884
)Repayment of Tranche A term loan-Original Credit Agreement


-



(19,700
)Repayments on Tranche B term loan-Original Credit Agreement


-



(7,360
)Proceeds from Refinancing Indebtedness


-



7,126Repayment of Refinancing Indebtedness


-



(7,126
)Proceeds from Working Capital Facility


3,750



5,703Repayments on Working Capital Facility


(3,750
)


(5,703
)Payment of debt issuance costs


-



(1,046
)Capital contribution by parent


573



-Advances on loan receivable from Morris Communications


-



(1,000
)Net cash used in financing activities


(11,832
)


(38,990
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


2,615



(22,452
)CASH AND CASH EQUIVALENTS, beginning of period


2,636



25,638CASH AND CASH EQUIVALENTS, end of period

$
5,251


$
3,186SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid

$
6,308


$
3,293Income tax refund (See Note 7)


(1,342
)


(2,252
)See notes to unaudited condensed consolidated financial statements.
  -3-
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 MORRIS PUBLISHING GROUP, LLC
 Notes to condensed consolidated financial statements (unaudited)
 (Dollars in thousands)
  1.
Basis of Presentation and Summary of Significant Accounting Policies
  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 financial position and results of operations of Morris Publishing Group, LLC and subsidiaries ("Morris Publishing", "Company") for the three-month and nine-month periods ended September 30, 2011. All such adjustments are of a normal recurring nature. Results of operations for the three-month and nine-month interim periods ended September 30, 2011 are not necessarily indicative of results expected for the full year. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, the Company believes that the disclosures herein are adequate to keep the information presented from being misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2010. The accounting policies that are employed are the same as those shown in Note 1 to the consolidated financial statements as of December 31, 2010 and 2009 and for each of three years ended December 31, 2010.
  The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
  As further described in Note 3, certain expenses, assets and liabilities of Morris Communications Company, LLC ("Morris Communications"), an affiliate of Morris Publishing, have been allocated to the Company. These allocations were based on estimates of the proportion of corporate expenses, assets and liabilities related to the Company, utilizing such factors as revenues, number of employees, salaries and wages expenses, and other applicable factors. In the opinion of management, these allocations have been made on a reasonable and consistent basis. The costs of these services charged to the Company may not reflect the actual costs the Company would have incurred for similar services as a stand-alone company. The Company and Morris Communications have executed various agreements with respect to the allocation of assets, liabilities and costs.
  Extinguishment of debt and original issue discount—On March 1, 2010 (the "Effective Date"), the Company restructured its debt through the consummation of a plan of reorganization confirmed by the U.S. Bankruptcy Court (the "Restructuring").
  As part of the Restructuring, the claims of the holders of the7% Senior Subordinated Notes due 2013, dated as of August 7, 2003 (the "Original Notes"), in an aggregate principal amount of $278,478, plus accrued interest, were cancelled in exchange for the issuance of $100,000 in aggregate stated principal amount ofthe Floating Rate Secured Notes due 2014 (the “New Notes”).
  Under the accounting guidance for a debt extinguishment, the total maturities of the New Notes were recorded at fair value on the Effective Date of the Restructuring, and interest, as accrued on the aggregate stated principal amount outstanding of New Notes, is recorded as an expense within the consolidated statements of operations. The excess of the stated aggregate principal amount of New Notes over their fair value is original issue discount ("OID") which is accreted over the term of the New Notes.
 Based upon trading activity in the New Notes, the fair value of the New Notes was $91,000 at issuance. Therefore, the Company recorded the New Notes as indebtedness of $91,000, with $9,000 of OID to be accreted as additional interest over the life of the New Notes.
  Fair value of financial instruments—The Company estimated the fair values presented below using appropriate valuation methodologies and market information available as of September 30, 2011. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation
  -4-
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  methodologies could have a material effect on the estimated fair values. Additionally, the fair values were estimated at September 30, 2011, and current estimates of fair value may differ from the amounts presented.
  The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
  Cash and equivalents, accounts receivable and accounts payable. The carrying amount of these items approximates fair value due to their short term nature.
  Long-term debt. To estimate the fair value of the $74,103 aggregate stated principal amount outstanding of New Notes, the Company used the average price of the corporate bond trades reported nearest the end of the three-month period ended September 30, 2011. At September 30, 2011, the fair value of the New Notes was approximately $57,100.
  Inventories—Inventories consist principally of newsprint, prepress costs and supplies, which are stated at the lower of cost or market value. The cost of newsprint inventory is determined by the last in, first out method ("LIFO"). Costs for newsprint inventory would have been $1,316 and $1,314 higher at September 30, 2011 and December 31, 2010, respectively, had the first in, first out method been used for all inventories.
  There were no LIFO liquidations for the three and nine-month periods ended September 30, 2011 and September 30, 2010.
  2.
Restatement of 2010 Quarterly Unaudited Condensed Consolidated Financial Statements
  As previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010, subsequent to the issuance of the Company's Form 10-Q as of and for the quarter ended September 30, 2010, management identified an error in its accounting for the debt modification within the unaudited condensed consolidated financial statements filed on Forms 10-Q for the quarterly periods ended March 31, 2010, June 30, 2010, and September 30, 2010. The debt modification in the Restructuring should have been accounted for as debt extinguishment rather than troubled debt restructuring.
  Under accounting guidance for debt extinguishment, the New Notes should have been recorded at $91,000, the estimated fair value of the New Notes on the Effective Date. The $9,000 difference between the aggregate stated principal amount and the fair value of the New Notes is OID, which should be accreted (utilizing the effective interest rate method), as additional interest expense over the four and one-half year term of the New Notes. However, the Company had recorded the New Notes as indebtedness on the Effective Date of $145,000 ($100,000 of face amount of principal plus $45,000 of maximum future interest costs), in error. In effect, the maximum future interest costs ("Future Interest Indebtedness") were recorded as indebtedness with respect to the New Notes, such that future cash interest on the New Notes was not treated as an expense, but was treated as a reduction of this recorded indebtedness.
  Under accounting guidance for debt extinguishment, the income from the cancellation of debt ("COD" income) on the Restructuring was calculated utilizing the fair value of the New Notes as the total indebtedness. In effect, the COD income was increased by $54,000 (the elimination of the $45,000 of Future Interest Indebtedness plus the $9,000 in OID) over the amount previously recorded on the Effective Date.
  Under accounting guidance for debt extinguishment, the Company should have recorded interest on the New Notes, as well as accretion of the OID, as interest expense. Following guidance for troubled debt restructuring, the Company had recorded the interest on the New Notes during the first, second and third quarters of 2010 as a reduction of Future Interest Indebtedness, rather than interest expense, in error.
  In addition, the Company should have deferred the $593 in loan costs directly associated with the issuance of the New Notes during the first quarter of 2010 and amortized these costs over the term of the New Notes. Following the guidance for troubled debt restructuring, the Company had recorded these loan costs within the legal and consultant costs directly related to the Restructuring ("Debt Restructuring Costs"), a direct offset to COD income during the first quarter of 2010.
  -5-
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  The table below reflects the impact of the restatement of the Company's quarterly unaudited condensed consolidated statement of operations filed on Form 10-Q for the three-month period ended September 30, 2010:
  Statement of Operations-Affected Line Items

Amount as Previously Reported


Adjustments


Restated AmountOperating income

$
2,150


$
-


$
2,150Other expense (income)Interest expense and debt amortization costs


120



3,112



3,232Cancellation of debt income


(1,587
)


1,587



-Other income, net


(39
)


-



(39
)Total other (income) expense, net


(1,506
)


4,699



3,193Income (loss) before income taxes


3,656



(4,699
)


(1,043
)Income tax provision (benefit)


1,487



(1,657
)


(170
)Net income (loss)

$
2,169


$
(3,042
)

$
(873
)
  The table below reflects the impact of the restatement of the Company's quarterly unaudited condensed consolidated statement of operations filed on Form 10-Q for the nine-month period ended September 30, 2010:
  Statement of Operations-Affected Line Items

Amount as Previously Reported


Adjustments


Restated AmountOperating income

$
8,231


$
-


$
8,231Other expense (income)Interest expense and debt amortization costs


6,477



7,524



14,001Cancellation of debt income, net


(167,736
)


(50,428
)


(218,164
)Interest income


(2
)


-



(2
)Other income, net


(108
)


-



(108
)Total other income, net


(161,369
)


(42,904
)


(204,273
)Income before income taxes


169,600



42,904



212,504Income tax (benefit) provision


(6,669
)


15,131



8,462Net income

$
176,269


$
27,773


$
204,042
  Furthermore, the Company reclassified bad debt expense within net cash provided by operating activities for the first nine months of 2010 to properly reflect the amount as an adjustment to reconcile net income to cash provided by operating activities rather than as a change in accounts receivable. The amount of this reclassification was $343 for the nine-month period ended September 30, 2010.
  -6-
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  The table below reflects the impact of the restatement of the Company's quarterly unaudited condensed consolidated cash flow filed on Form 10-Q for the nine-month period ended September 30, 2010:
  Statements of Cash Flow-Affected Line Items

Amounts as Previously Reported


Adjustments


Restated AmountsOPERATING ACTIVITIES:Net income

$
176,269


$
27,773


$
204,042Adjustments to reconcile net income to cash provided by operating activities:Cancellation of debt


(173,069
)


(49,836
)


(222,905
)Accretion of original issue discount


-



1,853



1,853Bad debt expense


-



343



343Deferred income taxes


(17,774
)


14,669



(3,105
)Changes in assets and liabilities:Deferred loan costs and other assets


(1,992
)


593



(1,399
)Accounts receivable


6,257



(343
)


5,914Accrued interest expense


5,413



2,253



7,666Net cash provided by operating activities


19,826



(2,695
)


17,131FINANCING ACTIVITIES:Cash interest payments on New Notes


(3,288
)


3,288



-Payment of debt issuance costs


(453
)


(593
)


(1,046
)Net cash used in financing activities


(41,685
)


2,695



(38,990
)
  3.
Transactions with Parent and Affiliates
  Management, Technology, and Shared Services Fees (See Note 1)—
  Management fee
  The Company is a party to a Management and Services Agreement (the "Morris Communications Services Agreement") with Morris Communications, pursuant to which the Company pays a management fee.The management fee compensates Morris Communications for corporate services and costs incurred on behalf of Morris Publishing, including executive, legal, secretarial, tax, internal audit, risk management, employee benefit administration, travel and other support services.
  Prior to March 1, 2010, the Effective Date of the Restructuring, the management fee was 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 Morris Publishing's business by Morris Communications).
  On January 6, 2010, Morris Publishing entered into a Fourth Amendment to Management and Services Agreement ("Fourth Amendment"), effective upon the consummation of the Restructuring, changing the fees payable by the Company to an allocation of the actual amount of costs of providing the services, with the fees, along with the technology and shared services fees (as described below), together, not to exceed $22,000 in any calendar year.
  The Company has recorded the management fee within other operating costs in the accompanying condensed consolidated statements of operations.
  Technology and shared services fee
  Pursuant to the Morris Communications Services Agreement, the Company has paid Morris Communications and its subsidiary MStar Solutions, LLC ("MStar") a technology and shared services fee.
  Prior to March 1, 2010, the Effective Date of the Restructuring, the technology and shared services fee was payable to Morris Communications and was based on the lesser of 2.5% of Morris Publishing's total net operating revenue or the actual technology and shared services costs allocated to the Company based upon usage.
  -7-
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  Subsequent to March 1, 2010 and prior to September 1, 2011, the technology and shared services fee payable to Morris Communications was based on the allocation of the actual amount of costs of Morris Communications providing these services, subject to the dollar limitations under the Fourth Amendment (as described above).
  On July 7, 2011, Morris Publishing entered into a Master Services Agreement (the “NIIT MSA”) with NIIT Media Technologies, LLC ("NIIT Media"), where NIIT Media will provide the services that had historically been provided by Morris Communications' subsidiary, MStar Solutions, LLC (“MStar”), under the Morris Communications Services Agreement.
  Under the Morris Communications Services Agreement, services were provided to Morris Publishing by both Morris Communications and MStar. Generally, under the NIIT MSA, NIIT Media is expected to provide substantially all of the services formerly provided by MStar under the Morris Communications Services Agreement, but Morris Communications is expected to continue providing other services under the Morris Communications Services Agreement.
  NIIT Technologies Limited, a global information technology services organization headquartered in New Delhi, India, indirectly owns a 60% membership interest in NIIT Media. MStar contributed substantially all of its assets to NIIT Media in return for a 40% membership interest in NIIT Media.
  The "Commencement Date" of the NIIT MSA was September 1, 2011 and has a term of five years from July 7, 2011, with Morris Publishing and Morris Communications having the right to renew the agreement for an additional five-year term. During the first twelve months following the Commencement Date, all services will be performed at a fixed fee of $19,300, to be allocated between Morris Publishing and Morris Communications based upon services received.
  Following the first anniversary of the Commencement Date, the NIIT MSA provides for monthly charges based on volume and types of services performed and a fee schedule to be agreed upon, provided that, so long as the current level of services required by Morris Communications and Morris Publishing do not change, the combined fees charged to Morris Publishing and Morris Communications will be subject to annual limits ranging from $16,100 to $17,100 during the remainder of the initial five-year term.
  Jointly, Morris Publishing and Morris Communications have agreed to exclusively procure the contemplated services from NIIT Media, and committed to minimum charge commitments totaling $55,300 over the five years following the Commencement Date, with cumulative annual thresholds that must be met on each anniversary of the Commencement Date. Morris Communications and Morris Publishing will each be responsible to pay for the NIIT MSA services provided to or related to their respective businesses (and their subsidiaries).
  Morris Communications is required to indemnify Morris Publishing or pay NIIT Media for services, or liabilities related to services, provided or attributable to Morris Publishing to the extent that payments for services during any calendar year would otherwise exceed $22,000 for (i) services under the Morris Communications Services Agreement, plus (ii) NIIT MSA services that were formerly provided under the Morris Communications Services Agreement.
  On July 7, 2011, Morris Publishing, Morris Communications and MStar entered into the Fifth Amendment to Management and Services Agreement (the “Fifth Amendment”). The Fifth Amendment clarifies that services under the Fourth Amendment shall be suspended over time in phases to coincide with the provision of such services by NIIT Media under the NIIT MSA.
  The Company has recorded all technology and shared services fees within other operating costs in the accompanying condensed consolidated statements of operations.
  -8-
 Table of Contents
  Due to Morris Communications—Due to Morris Communications represents a net short-term payable that resulted from operating activities between the Company and its affiliate or parent.
 Health and Disability Plan—The Company participates in Morris Communications’ health and disability plan for active employees. Prior to the second quarter of 2011, Morris Communications had allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. The Company had also allocated its portion of Morris Communications’ health and disability obligation.
  During the second quarter of 2011, the Company began recording its actual costs and obligation associated with the Morris Communications' health and disability plan. This change did not have a material impact on the Company's financial statements.
  The health and disability expense was $1,703 and $1,884 for the three-month periods ended September 30, 2011 and 2010, respectively, and $5,835 and $5,807 for the nine-month periods ended September 30, 2011 and 2010, respectively.
  The Company's obligation under the plan was $1,204 and $1,243 as of September 30, 2011 and December 31, 2010, respectively. The Company has recorded this liability within accrued employee costs in the accompanying condensed consolidated balance sheets.
  Workers’ Compensation Expense—The Company has participated in Morris Communications’ workers’ compensation self-insurance plan, which is guaranteed and secured by the Company’s ultimate parent, Questo, Inc. ("Questo"), through a letter of credit. Accordingly, Morris Communications has allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. The expenses allocated to the Company, based on a percentage of total salaries expense, were $308 and $337 for the three-month periods ended September 30, 2011 and 2010, respectively, and $965 and $1,151 for the nine-month periods ended September 30, 2011 and 2010, respectively.
  Income taxes—The Company is a single member limited liability company and is not subject to income taxes, with its results being included in the consolidated federal income tax return of its ultimate parent. However, the Company is required to provide for its portion of income taxes under a "Tax Consolidation Agreement" with its ultimate parent and other affiliated entities. Accordingly, the Company recognizes an allocation of income taxes in its separate financial statements as if it filed a separate income tax return and remitted taxes for its current tax liability.
  On January 6, 2010, the Company entered into an Amended and Restated Tax Consolidation Agreement ("Amended Tax Agreement") with its parent entities, MPG Newspaper Holding, LLC ("MPG Holdings"), Shivers Trading & Operating Company (“Shivers”), and Questo, and its affiliated entity, Morris Communications. The amendments in the agreement (1) clarify that the Company will not be liable for adverse consequences related to specified extraordinary transactions in 2009 primarily relating to its parent entity and other related entities, (2) provide that, in calculating the Company's tax payment obligation, the indebtedness of its parent entity, MPG Holdings, will be treated as if it were the Company's indebtedness and (3) provide that the Trustee of the Indenture to the New Notes (the "New Indenture") will have an approval right with respect to elections or discretionary positions taken for tax return purposes related to specified transactions or actions taken with respect to the indebtedness of MPG Holdings, if such elections, positions or actions would have an adverse consequence on the New Notes or the Company.
  In addition, to the extent the terms of the Amended Tax Agreement require the Company to pay less than the amount of taxes that would have been required under the separate return method; such lesser amount will not reduce the Company's tax expense, but will be treated as a capital contribution by its parent.
  The Company accounts for income taxes under the provisions of the liability method as required by accounting guidance, which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not.
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  4.
Recently Issued Accounting Standards
  In January 2010, the Federal Accounting Standards Board (the "FASB") issued Accounting Standards Update 2010-6, "Improving Disclosures about Fair Value Measurements" which discusses the level of disaggregation required for each class of assets and liabilities and for fair value measurements that fall within Level 2 or 3 of the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures concerning purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this pronouncement did not have a material impact on the Company's financial statements.
  In October 2009, the FASB issued Accounting Standards Update No. 2009-13, "Revenue Recognition—Multiple Deliverable Revenue Arrangements," which amends previous guidance related to the accounting for revenue arrangements with multiple deliverables. The guidance is effective for fiscal years beginning on or after September 15, 2010, and applies to the Company's 2011 financial statements. Under the new guidance, when vendor specific objective evidence or third party evidence of the selling price for a deliverable in a multiple element in an arrangement cannot be determined; a best estimate of the selling price is required to allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing of when revenue is recognized. The adoption of the new guidance did not have a material impact to the Company's financial position, results of operations or cash flows.
  5.
Other Intangible Assets and Goodwill
  Newspaper mastheads (newspaper titles and Web site domain names) are not subject to amortization and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
  The impairment test consists of a comparison of the fair value of the Company’s mastheads with the carrying amount. The Company performed impairment tests on newspaper mastheads as of December 31, 2010 and no impairment loss was recognized.
  Intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. The facts and circumstances indicating possible impairment of the finite-lived intangible assets existed; therefore the Company performed impairment tests on these long-lived assets as of December 31, 2010. The Company's analysis resulted in no impairments of long-lived assets held for future use. Based upon the Company's continued assessment of this area, no impairments were required to be recorded during the nine months ended September 30, 2011.
  Intangible assets acquired (subscriber and advertiser lists, non-compete agreements and other assets) are amortized over their estimated useful lives (from 5 to 20 years).
  Changes in the carrying amounts of goodwill of the Company for the nine months ended September 30, 2011 were as follows:
  GoodwillGross goodwill

$
170,685Accumulated impairment losses


(170,685
)Balance at December 31, 2010


-Gross goodwill


170,685Accumulated impairment losses


(170,685
)Balance at September 30, 2011

$
-
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  Amortization expense of other intangible assets totaled $26 and $88 for the three-month periods ended September 30, 2011 and 2010, respectively, and $216 and $279 for the nine-month periods ended September 30, 2011 and 2010, respectively. The remaining expense for the last three months of 2011 and for the four succeeding years for the existing finite-lived intangible assets is estimated as follows:
  Amortization Expense2011

$
662012


2642013


2542014


1462015


119
  Changes in the carrying amounts of other intangibles of the Company for the nine months ended September 30, 2011 were as follows:
  Other intangible assetsBalance at December 31, 2010

$
5,946Additions


1Amortization expense


(216
)Balance at September 30, 2011

$
5,731
  Other finite-lived and indefinite-lived intangible assets at September 30, 2011 and December 31, 2010 were as follows:
  Cost


Accumulated amortization


Net costSeptember 30, 2011:Finite-lived intangible assetsSubscriber lists

$
4,365


$
2,935


$
1,430Non-compete agreements and other assets


50



50



-Total finite-lived intangible assets


4,415



2,985



1,430Indefinite-lived intangible assetsNewspaper mastheads


5,031



792



4,239Domain names


74



12



62Total indefinite-lived intangible assets


5,105



804



4,301Total other intangible assets

$
9,520


$
3,789


$
5,731December 31, 2010:Finite-lived intangible assetsSubscriber lists

$
4,365


$
2,719


$
1,646Non-compete agreements and other assets


50



50



-Total finite-lived intangible assets


4,415



2,769



1,646Indefinite-lived intangible assetsNewspaper mastheads


5,031



792



4,239Domain names


73



12



61Total indefinite-lived intangible assets


5,104



804



4,300Total other intangible assets

$
9,519


$
3,573


$
5,946
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  6.
Long-Term Debt
 
 Period Summary
  Total Debt—At September 30, 2011, the Company's total debt was $69,708 ($74,103 in aggregate stated principal outstanding on the New Notes less $4,395 of OID). At December 31, 2010, the Company's total debt was $80,115 ($86,508 in aggregate principal outstanding on the New Notes less $6,393 of OID).
  There were no outstanding borrowings against the Working Capital Facility (as described below) at September 30, 2011 or December 31, 2010.
  The current maturities of long-term debt as of September 30, 2011 and December 31, 2010 totaled $10,000 and $13,000, respectively. The current maturities of long-term debt reflect the Company's estimate of required redemptions of New Notes utilizing Excess Free Cash Flow (as described below) within the following twelve-month period.
  The average interest rate on the Company's total aggregate principal amount of debt outstanding, excluding the effective rate of the OID, on the New Notes, was 10% at September 30, 2011 and December 31, 2010.
  New Notes
  Redemptions—The Company is required by the New Indenture to use its monthly positive operating cash flow (if any), net of permitted cash flow adjustments, ("Excess Free Cash Flow") to first repay any amounts outstanding on the Working Capital Facility, and then to redeem (on a pro rata basis) New Notes; provided, however, that no payments or redemptions are required if Excess Free Cash Flow is less than $250 for the month.
  During the third quarter and first nine months of 2011, the Company redeemed $4,008 and $12,405, respectively, in aggregate stated principal amounts outstanding on the New Notes from its Excess Free Cash Flows.
  Subsequent to September 30, 2011, the Company redeemed a total of $1,195 in aggregate stated principal amounts outstanding on the New Notes as a result of the September 2011 Excess Free Cash Flows. The total amount outstanding on the New Notes at October 31, 2011 was $72,908 of stated principal.
  During the twelve months ended December 31, 2010, the Company redeemed $13,492 in aggregate stated principal amounts outstanding on the New Notes from its Excess Free Cash Flows and Available Cash Balances (as described below).
  Interest— Interest expense on the aggregate stated principal amount outstanding on the New Notes totaled $1,929 and $2,292 for the three-month periods ended September 30, 2011 and September 30, 2010, respectively, and $5,989 and $5,542 for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively.
  The accretion on the OID totaled $624 and $772 during the three-month periods ended September 30, 2011 and September 30, 2010, respectively, and $1,999 and $1,853 during the nine-month periods ended September 30, 2011 and September 30, 2010, respectively. The accretion on the OID was recorded as additional interest expense.
  Working Capital Facility
  Under the New Indenture, the Company was permitted to incur "Refinancing Indebtedness", as defined in and contemplated by the New Indenture, within 150 days after March 1, 2010, in order to refinance the Tranche B term loan under the Amended and Restated Credit Agreement, dated as of October 15, 2009 (the "Credit Agreement").
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 During the second quarter of 2010, in connection with, and immediately prior to entering into a working capital facility, the Company repaid the Tranche B term loan in the amount of $6,800 (plus accrued paid in kind ("PIK") interest) with $7,126 of Refinancing Indebtedness from CB&T, a division of Synovus Bank (the "Bank") and the Company entered into a senior, secured Loan and Line of Credit Agreement with the Bank, providing for a revolving line of credit in the amount of $10,000 (the "Working Capital Facility"). As required by the New Indenture, upon entering into a working capital facility, the Company used part of its available cash to fully repay this Refinancing Indebtedness immediately upon its issuance.
  In addition, the Company was required to use part of its remaining cash balance ("Available Cash Balance") upon entering into the Working Capital Facility (as described below) to redeem $1,760 of the aggregate stated principal amounts outstanding on the New Notes.
  On May 13, 2011, the Company entered into an agreement with the Bank extending the maturity of the Working Capital Facility to May 15, 2012 with no other changes to the provisions of the agreement.
  Interest and Deferred Loan Costs—
  Original Notes
  Interest expense on the Original Notes totaled $4,159 during 2010; with the entire amount being cancelled along with the Original Notes on the Effective Date of the Restructuring.
  Credit Agreement
  The interest rates on the Tranche A, Tranche B and Tranche C senior secured debt under the Credit Agreement were 15%, 15%, and 5%, respectively. The interest on both the Tranche B and C term loans was PIK.
  Excluding the $300 prepayment fee, interest expense on the Tranche A term loan totaled $501 during 2010.
  During 2010, PIK interest accrued on the Tranche B and Tranche C term loans totaled $339 and $914, respectively; with the entire amount of PIK interest accrued on the Tranche C term loan being settled as a capital contribution on the Effective Date of the Restructuring.
  Loan Amortization Expense
  During the first quarter of 2010, the Company deferred $593 in loan costs related to the issuance of the New Notes and amortized those costs over the four and one-half year maturity of the New Notes.
  During the second quarter of 2010, the Company deferred the $453 in debt issuance costs associated with the loan and amortized these costs ratably through May 15, 2011, the original maturity date of the Working Capital Facility.
  Loan amortization expense totaled $49 and $86 during the three-month periods ended September 30, 2011 and September 30, 2010, respectively, and $297 and $334 during the nine-month periods ended September 30, 2011 and September 30, 2010, respectively.
  New Indenture
  On March 1, 2010, the Effective Date of the Restructuring, the Company entered into the New Indenture with respect to the New Notes.
  Under the terms of the New Indenture, the New Notes bear 10% interest commencing March 1, 2010 payable in cash quarterly. The New Notes mature on October 1, 2014.
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  The New Notes are secured by a lien on substantially all of the assets of the Company. The New Notes, and the liens securing the New Notes, will be subordinated to any senior debt of the Company, which included the Refinancing Indebtedness and includes the Working Capital Facility.
  Under certain conditions, the New Notes may be redeemed at the option of the Issuers. Upon certain sales or dispositions of assets or events of loss, unless the proceeds are reinvested in accordance with the New Indenture, the Issuers must offer to use proceeds to redeem the New Notes. Upon a change of control of Morris Publishing, the Issuers must offer to repurchase all of the New Notes.
  The New Indenture contains various representations, warranties and covenants generally consistent with the Original Indenture, including requirements to provide reports and to file publicly available reports with the United States Securities and Exchange Commission ("SEC") (unless the SEC will not accept the reports) and limitations on dividends, indebtedness, liens, transactions with affiliates and capital expenditures.
  In addition, the New Indenture contains financial covenants requiring the Company to meet certain financial tests on an on-going basis, including a total leverage ratio and a cash interest coverage ratio, based upon the consolidated financial results of the Company. At September 30, 2011, the Company was in compliance with all financial covenants under the New Indenture.
  In addition, the holders of the New Notes, as permitted by the New Indenture, have appointed an observer to the Board of Directors of the Company and each of its subsidiaries.
  Working Capital Facility
  The parties to the Working Capital Facility are the Company, as borrower, all of its subsidiaries and its parent, as guarantors, and the Bank.
  Interest accrues on outstanding principal at the rate of LIBOR plus 4%, with a minimum rate of 6%.
 The $10,000 borrowing limit under the Working Capital Facility may be reduced by any undrawn amounts under letters of credit issued from time to time on the Company's behalf by the Bank. As of September 30, 2011, the Bank had issued letters of credit for approximately $508 of future liabilities to a vendor, with approximately $30 available to be drawn per month.
  The Working Capital Facility is secured by a first lien on substantially all of the assets of Morris Publishing and its subsidiaries. Liens on such assets were previously granted to the Collateral Agent for the holders of the New Notes pursuant to the New Indenture. Pursuant to the New Indenture and an Intercreditor Agreement between the Collateral Agent and the Bank, the New Notes (and their related liens) are subordinated to the Working Capital Facility. The Working Capital Facility contains various customary representations, warranties and covenants, as well as financial covenants similar to the financial covenants in the New Indenture.
  The Company is permitted by the New Indenture to either renew or replace this Working Capital Facility. If at any time the Company does not have a working capital facility, it would intend to retain cash flow generated from operations in order to maintain cash balances of up to $7,000 to provide liquidity, as permitted by the New Indenture, but the Company would be required to use monthly excess free cash flow to redeem New Notes to the extent its cash balances exceed $7,000.
  The Restructuring:
  ·
The claims of the holders of theOriginal Notes in an aggregate principal amount of $278,478, plus $35,427 in accrued interest, were cancelled in exchange for the issuance of $100,000 in aggregate stated principal amount ofNew Notes. The holders of the Original Notes were the only impaired class of creditors and there was no change in equity ownership interests as a result of the Restructuring.
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  The table below summarizes the non-cash components (excluding the write-off of deferred loan costs related to the Original Notes) of the income from the cancellation of debt during the nine-month period ended September 30, 2010:
  Cancellation of debtCancellation of Original Notes

$
278,478Cancellation of interest accrued on Original Notes


35,427313,905Issuance of debtIssuance of New Notes


(100,000
)Original issue discount


9,000(91,000
)Cancellation of debt income-non-cash components

$
222,905
 
 ·
The Morris family, through their affiliated entities, made a non-cash capital contribution to Morris Publishing of $87,244 and settled, in effect as a capital contribution, $24,862 of intercompany indebtedness ($24,500, plus interest at 3.5% from September 30, 2009) to the Company, resulting in the cancellation of $112,106 (including accrued PIK interest) of the Tranche C senior secured debt outstanding under the Credit Agreement.



On March 1, 2010, the $1,138 remaining balance on the intercompany indebtedness was reclassified to a non-interest bearing short-term receivable from Morris Communications and settled through intercompany accounts.
 
 ·
On the Effective Date, the Company repaid from cash on hand, as required under the Indenture to the New Notes, the entire $19,700 principal amount of Tranche A senior secured debt, plus $16 in accrued interest and a $300 prepayment fee, leaving only the $6,800 (plus $25 in accrued PIK interest) Tranche B term loan remaining outstanding on the $136,500 aggregate principal amount originally outstanding under the Credit Agreement. The Tranche B term loan became pari passu with the New Notes as of the Effective Date.



The Company was required to use part of its Available Cash Balance after the repayment of the Tranche A senior secured debt to redeem $3,211 of the aggregate stated principal amounts outstanding on the New Notes and to repay $232 on the Tranche B term loan.
 
 The table below summarizes the effect of the above transactions on the Company's member's (deficiency) interest in assets on the Effective Date of the Restructuring:
 
 Loan receivable-Morris Communications(Dollars in thousands)

Increase to member's deficit

Amount due from            (payable to)

Accumulated unrecognized interest

Loan receivable (payable), net

Increase in member's deficiency in assetsNet income

$222,905

$-

$-

$-

$222,905Capital contribution-settlement of Tranche C debt

87,244

-

-

-

87,244Reclassification of accumulated unrecognized interest
6,825

-

(6,825)

(6,825)

-Settlement of Tranche C debt

-

24,862

-

24,862

24,862Reclassified to short-term non-interest bearing receivable
-

1,138

-

1,138

1,138Advance on loan receivable from Morris Communications
-

(866)

-

(866)

(866)Interest accrued on loan receivable

-

(134)

134

-

-Change, net

$316,974

$25,000

$(6,691)

$18,309

$335,283
 
 During the first two quarters of 2010, the Company incurred $1,620 in Debt Restructuring Costs. In addition, the Company wrote-off $3,121 in unamortized deferred loan costs associated with the Original Notes on the Effective Date.
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 7.
Income Taxes
  The income tax (benefit) for three-month and nine-month periods ended September 30, 2011 totaled $(404) and $(1,430,) respectively. The income tax (benefit) provision for three-month and nine-month periods ended September 30, 2010 totaled $(170) and $8,462, respectively.
  The Company’s income tax provision has been prepared as if the Company was filing a separate income tax return and the impact of the cancellation of debt on other affiliated parties, if any, has not been recognized. To the extent the terms of the Amended Tax Agreement require the Company to pay less than the amount of taxes that would have been required as a separate corporation (as a result of treating its parent's indebtedness as if it were the Company's indebtedness), such lesser amount will not reduce the Company's tax expense, but will be treated as a capital contribution by its parent. During the third quarter of 2011, the Company received a $1,915 income tax refund under the Amended Tax Agreement, of which $573 was treated as a capital contribution by its parent and $1,342 was treated as an income tax benefit applied against the income tax receivable on the unaudited condensed consolidated balance sheet.
  The difference between the effective rate and statutory rate is primarily attributable to state income and franchise taxes and the non-deductibility of travel and entertainment expenses.
  8.
Commitments and Contingencies
  From time to time, the Company is involved in litigation in the ordinary course of its business. In management's opinion, the outcome of any pending legal proceedings will not have a material adverse impact on the Company's financial position or results of operations.
  The nature of the Company's operations exposes it to certain risks of liabilities and claims with respect to environmental matters. Management does not believe that environmental compliance requirements are likely to have a material effect on the Company. The Company cannot predict what additional environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted, or the amount of future expenditures that may be required in order to comply with these laws. There can be no assurance that future environmental compliance obligations or discovery of new conditions will not arise in connection with its operations or facilities and that these would not have a material adverse effect on the Company's business, financial condition or results of operations.
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  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 nine-month periods ended September 30, 2011 and 2010 and with our consolidated financial statements as of December 31, 2010 and 2009 and for each of three years in the period ended December 31, 2010, filed on Form 10-K with the United States Securities and Exchange Commission("SEC").
  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, www.morris.com, as soon as feasible after such reports are electronically filed with or furnished to the SEC. In addition, information regarding corporate governance at Morris Publishing Group, LLC ("Morris Publishing", "we", "our") and our affiliate, Morris Communications Company, LLC ("Morris Communications"), is also available on this Web site.
  The information on our Web site is not incorporated by reference into, or as part of, the Report on Form 10-Q filed with the SEC.
  Critical accounting policies and estimates
  Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our allowances for bad debts, asset impairments, self-insurance and casualty, management fees, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
  Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
  We believe there have been no significant changes during the nine months ended September 30, 2011 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, 2010 filed on Form 10-K filed with the SEC.
  Extinguishment of debt and original issue discount—On March 1, 2010 (the "Effective Date"), we restructured our debt through the consummation of a plan of reorganization confirmed by the U.S. Bankruptcy Court (the "Restructuring").
  As part of the Restructuring, the claims of the holders of the7% Senior Subordinated Notes due 2013, dated as of August 7, 2003 (the "Original Notes"), in an aggregate principal amount of $278.5 million, plus accrued interest, were cancelled in exchange for the issuance of $100.0 million in aggregate stated principal amount ofthe Floating Rate Secured Notes due 2014 (the “New Notes”).
  Under the accounting guidance for a debt extinguishment, the total maturities of the New Notes were recorded at fair value on the Effective Date of the Restructuring, and interest, as accrued on the aggregate stated principal amount outstanding of New Notes, is recorded as an expense within the consolidated statements of operations. The excess of the stated aggregate principal amount of New Notes over fair value is original issue discount ("OID") and is accreted over the term of the New Notes.
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  Based upon trading activity in the New Notes, the fair value of the New Notes was $91.0 million at issuance. Therefore, we recorded the New Notes as indebtedness of $91.0 million, with $9.0 million of OID to be accreted as additional interest over the life of the New Notes.
  Management, technology and shared services and other costs—Certain expenses, assets and liabilities of Morris Communications have been allocated to Morris Publishing. These allocations were based on estimates of the proportion of corporate expenses, assets and liabilities related to Morris Publishing, utilizing such factors as revenues, number of employees, salaries and wages expenses, and other applicable factors. In the opinion of management, these allocations have been made on a reasonable and consistent basis. The costs of these services charged to us may not reflect the actual costs we would have incurred for similar services as a stand-alone company. Morris Publishing and Morris Communications have executed various agreements with respect to the allocation of assets, liabilities and costs.
  Management fee
  We are a party to a Management Services Agreement (the "Morris Communications Services Agreement") with Morris Communications, pursuant to which we pay a management fee.The management fee compensates Morris Communications for corporate services and costs incurred on behalf of Morris Publishing, including executive, legal, secretarial, tax, internal audit, risk management, employee benefit administration, travel and other support services.
  Prior to March 1, 2010, the Effective Date of the Restructuring, the management fee was the greater of 4.0% of our annual total operating revenues or the amount of actual expenses allocable to the management of our business by Morris Communications (such allocations to be based upon time and resources spent on the management of Morris Publishing's business by Morris Communications).
  On January 6, 2010, we entered into a Fourth Amendment to Management and Services Agreement ("Fourth Amendment"), effective upon the consummation of the Restructuring, changing the fees payable by us to an allocation of the actual amount of costs of providing the services, with the fees, along with the shared services fees (as described below), together, not to exceed $22.0 million in any calendar year.
  We have recorded the management fee within other operating costs in the accompanying condensed consolidated statements of operations.
 Technology and shared services fee
  Pursuant to the Morris Communications Services Agreement, we have paid Morris Communications and its subsidiary MStar Solutions, LLC ("MStar") a technology and shared services fee.
  Prior to March 1, 2010, the Effective Date of the Restructuring, the technology and shared services fee was payable to Morris Communications and was based on the lesser of 2.5% of our total net operating revenue or the actual technology and shared services costs allocated to us based upon usage.
  Subsequent to March 1, 2010 and prior to September 1, 2011, the technology and shared services fee payable to Morris Communications was based on the allocation of the actual amount of costs of Morris Communications providing these services, subject to the dollar limitations under the Fourth Amendment (as described above).
  On July 7, 2011, we entered into a Master Services Agreement (the “NIIT MSA”) with NIIT Media Technologies, LLC ("NIIT Media"), where NIIT Media will provide the services that had historically been provided by Morris Communications' subsidiary, MStar Solutions, LLC (“MStar”), under the Morris Communications Services Agreement.
  Under the Morris Communications Services Agreement, services were provided to us by both Morris Communications and MStar. Generally, under the NIIT MSA, NIIT Media is expected to provide substantially all of the services formerly provided by MStar under the Morris Communications Services Agreement, but Morris Communications is expected to continue providing other services under the Morris Communications Services Agreement.
  -18-
 Table of Contents
  NIIT Technologies Limited, a global information technology services organization headquartered in New Delhi, India, indirectly owns a 60% membership interest in NIIT Media. MStar contributed substantially all of its assets to NIIT Media in return for a 40% membership interest in NIIT Media.
  The "Commencement Date" of the NIIT MSA was September 1, 2011 and has a term of five years from July 7, 2011, with Morris Publishing and Morris Communications having the right to renew the agreement for an additional five-year term. During the first twelve months following the Commencement Date, all services will be performed at a fixed fee of $19.3 million, to be allocated between Morris Publishing and Morris Communications based upon services received.
  Following the first anniversary of the Commencement Date, the NIIT MSA provides for monthly charges based on volume and types of services performed and a fee schedule to be agreed upon, provided that, so long as the current level of services required by Morris Communications and Morris Publishing do not change, the combined fees charged to Morris Publishing and Morris Communications will be subject to annual limits ranging from $16.1 million to $17.1 million during the remainder of the initial five-year term.
  Jointly, Morris Publishing and Morris Communications have agreed to exclusively procure the contemplated services from NIIT Media, and committed to minimum charge commitments totaling $55.3 million over the five years following the Commencement Date, with cumulative annual thresholds that must be met on each anniversary of the Commencement Date. Morris Communications and Morris Publishing will each be responsible to pay for the NIIT MSA services provided to or related to their respective businesses (and their subsidiaries).
  Morris Communications is required to indemnify Morris Publishing or pay NIIT Media for services, or liabilities related to services, provided or attributable to Morris Publishing to the extent that payments for services during any calendar year would otherwise exceed $22.0 million for (i) services under the Morris Communications Services Agreement, plus (ii) NIIT MSA services that were formerly provided under the Morris Communications Services Agreement.
  On July 7, 2011, Morris Publishing, Morris Communications and MStar entered into the Fifth Amendment to Management and Services Agreement (the “Fifth Amendment”). The Fifth Amendment clarifies that services under the Fourth Amendment shall be suspended over time in phases to coincide with the provision of such services by NIIT Media under the NIIT MSA.
  We have recorded all technology and shared services fees within other operating costs in the accompanying condensed consolidated statements of operations.
  Health and disability plan
  We participate in Morris Communications’ health and disability plan for active employees. Prior to the second quarter of 2011, Morris Communications had allocated to us certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. We had also allocated our portion of Morris Communications’ health and disability obligation.
  During the second quarter of 2011, we began recording our actual costs and obligation associated with the Morris Communications' plan. This change did not have a material impact on our financial statements.
  Income taxes—We are a single member limited liability company and are not subject to income taxes, with our results being included in the consolidated federal income tax return of our ultimate parent. However, we are required to provide for our portion of income taxes under a "Tax Consolidation Agreement" with our ultimate parent and other affiliated entities. Accordingly, we recognize an allocation of income taxes in our separate financial statements as if we filed a separate income tax return and remitted taxes for our current tax liability.
  -19-
 Table of Contents
  On January 6, 2010, we entered into an Amended and Restated Tax Consolidation Agreement ("Amended Tax Agreement") with our parent entities, MPG Newspaper Holding, LLC ("MPG Holdings"), Shivers Trading & Operating Company (“Shivers”), and Questo, Inc. ("Questo"), and our affiliated entity, Morris Communications. The amendments in the agreement (1) clarify that we will not be liable for adverse consequences related to specified extraordinary transactions in 2009 primarily relating to our parent entity and other related entities, (2) provide that, in calculating our tax payment obligation, the indebtedness of our parent entity, MPG Holdings, will be treated as if it were our indebtedness and (3) provide that the Trustee of the New Indenture will have an approval right with respect to elections or discretionary positions taken for tax return purposes related to specified transactions or actions taken with respect to the indebtedness of MPG Holdings, if such elections, positions or actions would have an adverse consequence on the New Notes or Morris Publishing. To the extent the terms of the Amended Tax Agreement require us to pay less than the amount of taxes that would have been required under the separate return method; such lesser amount will not reduce our income tax expense, but will be treated as a capital contribution by our parent.
  We account for income taxes under the provisions of the liability method as required by accounting guidance, which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not.
  Recently issued accounting standards
  In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2010-6, "Improving Disclosures about Fair Value Measurements" which discusses the level of disaggregation required for each class of assets and liabilities and for fair value measurements that fall within Level 2 or 3 of the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures concerning purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
  The adoption of this pronouncement did not have a material impact on our financial statements.
  In October 2009, the FASB issued Accounting Standards Update No. 2009-13, "Revenue Recognition—Multiple Deliverable Revenue Arrangements," which amends previous guidance related to the accounting for revenue arrangements with multiple deliverables. The guidance is effective for fiscal years beginning on or after September 15, 2010, and applies to our 2011 financial statements. Under the new guidance, when vendor specific objective evidence or third party evidence of the selling price for a deliverable in a multiple element in an arrangement cannot be determined, a best estimate of the selling price is required to allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing of when revenue is recognized. The adoption of the new guidance did not have a material impact to our financial position, results of operations or cash flows.
  Overview
  Morris Publishing owns and operates 12 daily newspapers as well as non-daily newspapers, city magazines and free community publications in the Southeast, Midwest, Southwest and Alaska. Morris Publishing's  newspapers include, among others,The Florida Times-Union, (Jacksonville, Fla.),The Augusta (Ga.)Chronicle,Savannah (Ga.)Morning News,Lubbock (Texas)Avalanche-Journal,Amarillo (Texas)Globe-News,Athens (Ga.)Banner Herald, Topeka(Kans.) Capital-Journal, andThe St. Augustine (Fla.)Record. The majority of our daily newspapers are usually the primary, and sometimes, the sole provider of comprehensive local market news and information in the communities that we serve.
  -20-
 Table of Contents
  We operate in a single reporting segment, and the presentation of our financial condition and performance is consistent with the way in which our operations are managed. However, from time to time, each individual newspaper may perform better or worse than our newspaper group as a whole due to certain local conditions, particularly within the retail, auto, housing and labor markets.
  Revenue: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.
  ·
Advertising revenue: During the third quarter of 2011 and 2010, advertising revenue, including both print and online media formats, represented 67.4% and 70.5%, respectively, of our total net operating revenue. We categorize advertising as follows:
  Retail*—local retailers, local stores for national retailers, department and furniture stores, grocers, niche shops, local financial institutions, local hospitals, restaurants and other small businesses.
  Classified*—local employment, automotive, real estate and other classified advertising.
  National*—national and major accounts such as wireless communications companies, airlines and hotels.
  *On-line, included in all the categories above—banner, display, classified, behavioral targeting, search and other advertising on Web sites or mobile devices.
  Retail, classified and national advertising revenue represented 59.2%, 34.9% and 5.9%, respectively, of our third quarter of 2011 advertising revenue, compared to 57.7%, 35.9% and 6.4%, respectively, in the third quarter of 2010.
  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 readership.
  Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays, with our second and fourth fiscal quarters being our strongest quarters in terms of revenue. In addition, we have experienced declines in advertising revenue over the past few years, due primarily to the economic recession and secular changes in the industry.
  Circulation revenue: During the third quarter of 2011 and 2010, circulation revenue represented 27.2% and 25.6%, respectively, of our total net operating revenue.
  Circulation revenue is based on the number of newspapers sold and is primarily derived from home delivery sales to subscribers and single copy sales at vending racks and retail stores. We also sell copies through our Newspapers in Education ("NIE") program which is a cooperative effort of newspapers working with local schools to encourage the use of the newspaper as a tool for instruction and to promote literacy.
  Recently, we began implementing a metered online model at some of our newspapers' Web sites, in which users who are not print subscribers are given free access to a limited number local news articles per month, and after that limit are required to have a paid print or online subscription in order to view additional locally produced articles. In addition, we offer paid online subscriptions at most of our newspapers for access to our content through e-reader platforms.
  -21-
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  Subscriptions are sold for one-month, 13-week, 26-week and 52-week terms. We have increased the use of "EZ Pay" (a monthly credit or debit card payment program) programs, door to door sales, kiosks, in-paper and online promotions to increase our circulation. Our call service center has an active stop-loss program for all expiring subscribers.
  ·
Other revenue: Our other revenue consists primarily of commercial printing, periodicals, and other online revenue.
  Printing and distribution: We currently own/lease and operate 11 print facilities with each producing the newspaper and other publications for their respective communities served. The St. Augustine newspaper is currently printed at the Jacksonville facility and Bluffton Today is currently printed at the Savannah facility.
  The distribution of our daily newspapers is typically outsourced to independent, locally based, third-party distributors that also distribute a majority of our weekly newspapers and non-newspaper publications. In addition, certain of our shopper and weekly publications are delivered via the U.S. Postal Service.
  ·
Newsprint: Newsprint, along with employee expenses, is a primary cost at each newspaper.
  We are a member of a consortium which enables us to obtain favorable pricing through the group's reduced negotiated rates. We generally maintain a Company average of 22 to 28 day inventory of newsprint which is a readily available commodity.
  Financial summary for the three months ended September 30, 2011 compared to September 30, 2010
  Financial Summary.The following table summarizes our consolidated financial results for the three-month periods ended September 30, 2011 and 2010:
  Three months ended September 30,(Dollars in thousands)

2011


2010(Restated)Total net operating revenues

$
54,998


$
59,703Total operating expenses


53,396



57,553Operating income


1,602



2,150Interest expense and loan amortization cost


2,606



3,232Other


(29
)


(39
)Other expenses, net


2,577



3,193Loss before taxes


(975
)


(1,043
)Income tax benefit


(404
)


(170
)Net loss

$
(571
)

$
(873
)
  Our operating income was $1.6 million during the third quarter of 2011, down $0.5 million, or 27.6%, from $2.1 million during the same quarter last year.
 
 Compared to the third quarter of 2010, our total net operating revenue was $55.0 million, down $4.7 million, or 7.9%, from $59.7 million, and our total operating expenses were $53.4 million, down $4.2 million, or 7.1%, from $57.6 million.
  -22-
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  Interest and loan amortization expense is summarized in the table below:
  Three months ended September 30,(Dollars in thousands)

2011


2010(Restated)New NotesStated interest @ 10.0%

$
1,928


$
2,292Accretion of original issue discount


624



7722,552



3,064Other


6



82Total interest expense


2,558



3,146Loan amortization


48



86Interest expense, including accretion of original issue discount and amortization of debt issuance costs

$
2,606


$
3,232
  Our loss before taxes was $1.0 million during the third quarter of 2011, essentially unchanged from the third quarter of 2010.
  For the third quarter of 2011 and 2010, our income tax benefit was $0.4 million and $0.2 million, respectively.
  Our net loss was $0.6 million during the third quarter of 2011, compared to a net loss of $0.9 million during same quarter last year.
  Results of operations for the three months ended September 30, 2011 compared to September 30, 2010
  Net operating revenue.The table below presents the total net operating revenue for the three-month periods ended September 30, 2011 and 2010:
  (Dollars in thousands)

Three months ended September 30,


Percentage change2011


2010


2011 vs. 2010Net operating revenuesAdvertisingRetail

$
21,968


$
24,291



(9.6
%)National


2,179



2,697



(19.2
%)Classified


12,942



15,101



(14.3
%)Total advertising revenues


37,089



42,089



(11.9
%)Circulation


14,942



15,254



(2.0
%)Other


2,967



2,360



25.7
%Total net operating revenues

$
54,998


$
59,703



(7.9
%)
  Advertising revenue.Advertising revenue was $37.1 million, a decrease of $5.0 million, or 11.9%, from $42.1 million during the third quarter of 2010.
  Print and online advertising revenue totaled $26.2 million, down $3.6 million, or 12.2%, from $29.8 million during the same quarter last year. Compared to the third quarter of 2010, total online page-views were 166.8 million, down 1.9 million, or 1.1%, and unique online visitors were 20.5 million, up 1.6 million, or 8.3%, reflecting our customers’ migration to the Internet platform.
  In addition, insert advertising revenue was $9.2 million, down $1.1 million, or 11.1%, from $10.3 million in the third quarter of 2010 and advertising revenue from specialty products printed by us, but not a part of main newspaper product, was $1.7 million, down $0.3 million, or 10.7%, from $2.0 million last year.
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  Compared to the third quarter of 2010, advertising revenue from our 12 daily newspapers was down $4.4 million, or 11.8%. During the third quarter of 2011, we converted Bluffton Today, our free distribution newspaper, to a non-daily newspaper (Wednesday and Sunday editions) and began charging for their single copy editions.
  Advertising revenue from Jacksonville was down $1.2 million, or 11.7%, and St. Augustine was down $0.2 million, or 16.7%. Augusta was down $0.8 million, or 17.6%, Savannah was down $0.6 million, or 15.1%, Lubbock was down $0.5 million, or 11.8%, Topeka was down $0.2 million, or 6.6%, Athens was down $0.1 million, or 7.9%, and Amarillo was down $0.4 million, or 9.5%.
  Our non-daily publications were down $0.5 million, or 12.6%.
  Retail advertising revenue:
  Retail advertising revenue was $22.0 million, down $2.3 million, or 9.6%, from $24.3 million during the third quarter of the prior year, with significant declines from our seven largest daily newspapers.
  Insert retail advertising revenue was $8.4 million, down $1.0 million, or 10.2%, from $9.4 million, while print and online retail advertising revenue was $12.0 million, down $1.1 million, or 8.9%, from $13.1 million during 2010. Retail advertising revenue from specialty products printed by us, but not a part of main newspaper product, was $1.6 million, down $0.2 million, or 11.2%, from $1.8 million in the third quarter of 2010.
  Classified advertising revenue:
  Total classified advertising revenue was $12.9 million, down $2.2 million, or 14.3%, from $15.1 million in 2010.
  Jacksonville was down $0.8 million, or 20.8%, contributing approximately 35% of the net decrease.
  National advertising revenue:
  Total national advertising revenue was $2.2 million, down $0.5 million, or 19.2%, from $2.7 million last year, with Jacksonville contributing approximately 54% of the net decrease.
  Circulation revenue.Circulation revenue was $14.9 million, down $0.4 million, or 2.1%, from $15.3 million during the third quarter of 2010, with the price increases in many of our markets being offset by the decrease in circulation volume.
  Average daily and Sunday circulation volume, excluding the NIE editions, was down 8.8% and 3.3%, respectively, with Jacksonville contributing about 31% of the weekly circulation decline. During 2010, we converted most of our NIE print editions to lower priced electronic editions, resulting in a significant increase in NIE circulation volume.
  Other revenue. Other income was $3.0 million, up $0.6 million, or 25.8%, from $2.4 million during the third quarter of 2010 primarily due to the increase in other online revenues.
  Net operating expenses.The table below presents the total operating expenses for the three-month periods ended September 30, 2011 and 2010:
  (Dollars in thousands)

Three months ended September 30,


Percentage change2011


2010


2011 vs. 2010Operating expensesLabor and employee benefits

$
21,760


$
24,129



(9.8
%)Newsprint, ink and supplements


5,338



6,518



(18.1
%)Other operating costs


24,237



24,541



(1.2
%)Depreciation and amortization


2,061



2,365



(12.9
%)Total operating expenses

$
53,396


$
57,553



(7.2
%)
  Labor and employee benefits. Total labor and employee benefit costs were $21.8 million, down $2.3 million, or 9.8%, from $24.1 million during 2010, with these costs being favorably impacted by reductions in head count. Compared to 2010, our salaries and wages, including severance costs, totaled $16.4 million, down $1.4 million, or 7.7%, from $17.8 million. Severance costs were $0.6 million and $0.4 million for the third quarter of 2011 and 2010, respectively.
 -24-
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  Our average full time equivalents ("FTE") were down 225, or 11.4%, and our average pay rate, excluding severance costs, was up 2.9%.
  Commissions and bonuses were $2.2 million, down $0.7 million, or 23.6%, from $2.9 million during 2010, primarily due to the decline in advertising revenues.
  Employee medical insurance cost was $1.7 million, down $0.2 million, or 9.6%, from $1.9 million during the third quarter last year.
  Newsprint, ink and supplements cost.Newsprint, ink and supplements costs were $5.3 million, down $1.2 million, or 18.1%, from $6.5 million during 2010.
  Compared to 2010, total newsprint expense was $4.6 million, down $1.2 million, or 20.0%, from $5.8 million, with a 1.0% decrease in the average cost per ton of newsprint and a 19.0% decrease in newsprint consumption.
  Supplements and ink expense totaled $0.7 million, unchanged from the third quarter of 2010.
  Other operating costs. Other operating costs were $24.2 million, down $0.4 million, or 1.1%, from $24.6 million in 2010.
  The management fee paid to Morris Communications totaled $2.1 million and $2.2 million for the three-month periods ended September 30, 2011 and 2010, respectively.
  The technology and shared services fee paid to Morris Communications totaled $2.1 million and $3.1 million for the three-month periods ended September 30, 2011 and 2010, respectively, and the fees paid to NIIT Media under the NIIT MSA totaled $1.2 million for the three-month period ended September 30, 2011. In total, the technology and shared services fees totaled $3.2 million for the three-month period ended September 30, 2011.
  The combined technology and shared services fees from Morris Communications and NIIT Media and the management fee charged by Morris Communications under the Morris Communications Services Agreement totaled $5.3 million, unchanged from the third quarter of 2010, with the combined fees not to exceed $22.0 million in any calendar year.
  Professional fees totaled $3.5 million, up $0.6 million, or 21.1%, from $2.9 million during the same three-month period last year.
  Depreciation and amortization. Depreciation and amortization expense was $2.1 million, down $0.3 million, or 12.9%, from $2.4 million in 2010.
  -25-
 Table of Contents
  Financial summary for the nine months ended September 30, 2011 compared to September 30, 2010
  Financial Summary.The following table summarizes our consolidated financial results for the nine-month periods ended September 30, 2011 and 2010:
  Nine months ended September 30,(Dollars in thousands)

2011


2010(Restated)Total net operating revenues

$
165,633


$
179,522Total operating expenses


161,777



171,291Operating income


3,856



8,231Interest expense and loan amortization cost


8,313



14,001Income from cancellation of debt, net


-



(218,164
)Other


(67
)


(110
)Other expenses (income), net


8,246



(204,273
)(Loss) income before taxes


(4,390
)


212,504Income tax (benefit) provision


(1,430
)


8,462Net (loss) income

$
(2,960
)

$
204,042
  Our operating income was $3.9 million during the first nine months of 2011, down $4.3 million, or 54.5%, from $8.2 million during the same period last year.
 
 Compared to the first nine months of 2010, our total net operating revenue was $165.6 million, down $13.9 million, or 7.7%, from $179.5 million and our total operating expenses were $161.7 million, down $9.6 million, or 5.5%, from $171.3 million.
  On the Effective Date of the Restructuring, we wrote-off $3.1 million in unamortized deferred loan costs associated with the Original Notes. In addition, we incurred $1.6 million in Debt Restructuring Costs during the first two quarters of 2010.
  The table below summarizes the components (*cash and non-cash) of our cancellation of debt income ("COD" income) during the first nine months of 2010: (Dollars in thousands)
  Cancellation of debtCancellation of Original Notes

$
278,478Cancellation of interest accrued on Original Notes


35,427313,905Issuance of debtIssuance of New Notes


(100,000
)Original issue discount


9,000(91,000
)Other costsDebt Restructuring Costs-1/1/2010 through 6/30/2010*


(1,620
)Write-off of deferred loan costs


(3,121
)(4,741
)Income from cancellation of debt, net

$
218,164  -26-
 Table of Contents
  Interest and loan amortization expense is summarized in the table below:
  (Dollars in thousands)

Nine months ended September 30,2011


2010Original Notes(1)Stated interest @ 7.0%

$
-


$
3,249Default Interest @ 1% compounded


-



910-



4,159New NotesStated interest @ 10.0%


5,989



5,542Accretion of original issue discount


1,999



1,8537,988



7,395Credit AgreementTranche A, including $300 prepayment penalty


-



801Tranche B (PIK) (2)


-



339Tranche C (PIK) (3)


-



914-



2,054Other, net


28



59Total interest expense


8,016



13,667Loan amortization


297



334Interest expense, including accretion of original issue discount and amortization of debt issuance costs

$
8,313


$
14,001(1) Cancelled along with Original Notes on Effective Date of Restructuring.(2) Repaid $232 of the PIK interest upon repayment of Tranche A term loan on the Effective Date of the Restructuring. The remaining PIK interest was repaid with the Refinancing Indebtedness during the second quarter of 2010.(3) The entire amount of PIK interest accrued on the Tranche C term loan was settled as a capital contribution on the Effective Date of the Restructuring.
  Our loss before taxes was $4.4 million during the first nine months of 2011, compared to income before taxes of $212.5 million during the same period last year. Excluding the $218.2 million in COD income, our loss before taxes was $5.7 million during the first nine months of 2010.
  For the first nine months of 2011 and 2010, our income tax (benefit) provision was ($1.4) million and $8.5 million, respectively.
  Our net loss was $3.0 million during the first nine months of 2011, compared to net income of $204.0 million during same period last year.
  -27-
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  Results of operations for the nine months ended September 30, 2011 compared to September 30, 2010
  Net operating revenue.The table below presents the total net operating revenue for the nine-month periods ended September 30, 2011 and 2010:
  (Dollars in thousands)

Nine months ended September 30,


Percentage change2011


2010


2011 vs. 2010Net operating revenuesAdvertisingRetail

$
66,150


$
73,577



(10.1
%)National


7,074



8,803



(19.6
%)Classified


39,493



44,565



(11.4
%)Total advertising revenues


112,717



126,945



(11.2
%)Circulation


45,252



46,388



(2.4
%)Other


7,664



6,189



23.8
%Total net operating revenues

$
165,633


$
179,522



(7.7
%)
  Advertising revenue.Advertising revenue was $112.7 million, a decrease of $14.2 million, or 11.2%, from $126.9 million during the first nine months of 2010.
  During the first nine months of 2011 and 2010, advertising revenue, including both print and online media formats, represented 68.1% and 70.7%, respectively, of our total net operating revenue. Retail, classified and national advertising revenue represented 58.7%, 35.0% and 6.3%, respectively, of our third quarter of 2011 advertising revenue, compared to 58.0%, 35.1% and 6.9%, respectively, in the third quarter of 2010.
  Print and online advertising revenue totaled $79.1 million, down $11.3 million, or 12.5%, from $90.4 million during the same nine-month period last year. Compared to the first nine months of 2010, total online page-views were 513.5 million, down 5.7 million, or 1.1%, and unique online visitors were 60.2 million, up 6.1 million, or 11.2%, reflecting our customers’ migration to the Internet platform.
  In addition, insert advertising revenue was $28.2 million, down $2.6 million, or 8.4%, from $30.8 million in the first nine months of 2010 and advertising revenue from specialty products printed by us, but not a part of main newspaper product, was $5.4 million, down $0.3 million, or 6.0%, from $5.7 million last year.
  Compared to the first nine months of 2010, advertising revenue from our 12 daily newspapers was down $12.9 million, or 11.4%. During the third quarter of 2011, we converted Bluffton Today, our free distribution newspaper, to a non-daily newspaper (Wednesday and Sunday editions) and began charging for their single copy editions.
  Advertising revenue from Jacksonville was down $4.3 million, or 12.7%, and St. Augustine was down $0.8 million, or 18.4%. Augusta was down $1.9 million, or 12.9%, Savannah was down $1.8 million, or 15.2%, Lubbock was down $1.3 million, or 10.5%, Topeka was down $0.7 million, or 7.1%, Athens was down $0.6 million, or 12.5%, and Amarillo was down $1.1 million, or 9.2%.
  Our non-daily publications were down $0.7 million, or 7.2%.
  Retail advertising revenue:
  Retail advertising revenue was $66.1 million, down $7.5 million, or 10.1%, from $73.6 million the nine months ended September 30, 2010, with significant declines from our seven largest daily newspapers.
  Insert retail advertising revenue was $25.7 million, down $2.1 million, or 7.4%, from $27.8 million, while print and online retail advertising revenue was $35.5 million, down $4.9 million, or 12.3%, from $40.4 million during 2010. Retail advertising revenue from specialty products printed by us, but not a part of main newspaper product, was $4.9 million, down $0.5 million, or 7.4%, from $5.4 million in 2010.
  -28-
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  Classified advertising revenue:
  Total classified advertising revenue was $39.5 million, down $5.0 million, or 11.4%, from $44.5 million in 2010.
  Jacksonville was down $1.9 million, or 17.8%; contributing approximately 38% of the net decrease.
  National advertising revenue:
  Total national advertising revenue was $7.1 million, down $1.7 million, or 19.6%, from $8.8 million during 2010 with Jacksonville down $1.3 million, or 26.4%.
  Circulation revenue.Circulation revenue was $45.3 million, down $1.1 million, or 2.4%, from $46.4 million in 2010, with the price increases in many of our markets being offset by the decrease in circulation volume.
  Other revenue. Other income was $7.7 million, up $1.5 million, or 23.8%, from $6.2 million during the same period last year primarily due to the increase in other online revenues.
  Net operating expenses.The table below presents the total operating expenses for the nine-month periods ended September 30, 2011 and 2010:
  (Dollars in thousands)

Nine months ended September 30,


Percentage change2011


2010


2011 vs. 2010Operating expensesLabor and employee benefits

$
67,406


$
73,007



(7.7
%)Newsprint, ink and supplements


16,749



18,691



(10.4
%)Other operating costs


71,315



72,366



(1.5
%)Depreciation and amortization


6,307



7,227



(12.7
%)Total operating expenses

$
161,777


$
171,291



(5.6
%)
  Labor and employee benefits.Total labor and employee benefit costs, including severance payments, were $67.4 million, down $5.6 million, or 7.7%, from $73.0 million during 2010, with these costs being favorably impacted by reductions in head count.
  Compared to 2010, our salaries and wages, including severance payments, totaled $50.0 million, down $2.8 million, or 6.7%, from $52.8 million. Severance costs were $1.1 million and $0.6 million for the first nine months of 2011 and 2010, respectively.
  Our average FTE was down 200, or 9.9%, and our average pay rate, excluding severance costs, was up 3.9%.
  Commissions and bonuses were $6.8 million, down $2.3 million, or 25.6%, from $9.1 million during 2010, primarily due to the decline in advertising revenues.
  Employee medical insurance cost was $5.8 million, unchanged from the first nine months of 2010.
  Payroll tax expense and other employee costs totaled $4.8 million, down $0.5 million, or 9.8%, from $5.3 million during 2010.
  Newsprint, ink and supplements cost.Newsprint, ink and supplements costs were $16.7 million, down $2.0 million, or 10.4%, from $18.7 million during 2010.
  -29-
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  Compared to 2010, total newsprint expense was $14.6 million, down $2.0 million, or 11.5%, from $16.6 million, with a 4.0% increase in the average cost per ton of newsprint and a 15.5% decrease in newsprint consumption.
  Supplements and ink expense totaled $2.1 million, unchanged from the first nine months of 2010.
  Other operating costs. Other operating costs were $71.3 million, down $1.1 million, or 1.5%, from $72.4 million in 2010.
  The combined technology and shared services fee from Morris Communications and NIIT Media and the management fee charged by Morris Communications under the management agreement totaled $15.7 million, up $0.7 million, or 5.3%, from $15.0 million in last year with the combined fees not to exceed $22.0 million in any calendar year.
  Depreciation and amortization. Depreciation and amortization expense was $6.3 million, down $0.9 million, or 12.7%, from $7.2 million in 2010.
  -30-
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 Liquidity and capital resources
  Our cash and cash equivalents balance was $5.3 million at September 30, 2011, compared with $2.6 million at December 31, 2010.
 
 At September 30, 2011, our sources of liquidity were the cash flow generated from operations, our cash balances and a $10.0 million senior secured Working Capital Facility (as described below) of which $0 was outstanding. Our primary short term needs for cash were funding operating expenses, capital expenditures, working capital and the quarterly interest payments and any required monthly Excess Free Cash Flow redemptions on the New Notes.
 
 As permitted by the New Indenture, we intend to maintain a $10.0 million senior secured Working Capital Facility for the foreseeable future. Going forward, we intend to continue to renew or replace this Working Capital Facility from time to time. If at any time we do not have a Working Capital Facility, we would intend to retain cash flow generated from operations in order to maintain cash balances of up to $7.0 million to provide liquidity, as permitted by the New Indenture, but we would be required to use our Monthly Excess Free Cash Flow (as described below) to redeem New Notes to the extent our cash balances exceed $7.0 million.
 
 Operating activities. Net cash provided by operations was $17.6 million for the first nine months of 2011, up $0.5 million from $17.1 million for the same period in 2010.
 
 Excluding current maturities of long-term debt, current assets were $33.5 million and current liabilities were $30.2 million as of September 30, 2011 compared to current assets of $36.7 million and current liabilities of $23.1 million as of December 31, 2010.
 
 Investment activities. Net cash used in investing activities was $3.1 million for the first nine months of 2011, compared to $0.6 million used in investing activities for the first nine months of 2010.
 
 During the first nine months in 2011 and 2010, we spent $3.2 million and $0.7 million on property, plant and equipment, respectively. We anticipate our total capital expenditures to range from $4.0 million to $5.0 million during 2011.
 
 Financing activities.Net cash used in financing activities was $11.8 million for the first nine months of 2011, compared to $39.0 million used in financing activities ($19.7 million and $7.4 million of which was used to repay our Tranche A and Tranche B indebtedness) for the same period in 2010.
 
 Under the Tax Consolidation Agreement, our income tax provision is prepared as if we were filing a separate income tax return. To the extent the terms of the Amended Tax Agreement require us to pay less than the amount of taxes that would have been required as a separate corporation (as a result of treating our parent's indebtedness as if it were our indebtedness), such lesser amount does not reduce our tax expense, but is treated as a capital contribution by our parent. During the third quarter of 2011, we received a $1.9 million income tax refund, of which $0.6 million was treated as a capital contribution by our parent and the remainder was treated as an income tax benefit and applied against the income tax receivable on the unaudited condensed consolidated balance sheet.
 
 Period Summary
 
 Total Debt—At September 30, 2011, our total debt was $69.7 million ($74.1 million in aggregate stated principal outstanding on the New Notes less $4.4 million of OID). At December 31, 2010, our total debt was $80.1 million ($86.5 million in aggregate principal outstanding on the New Notes less $6.4 million of OID).
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  There were no outstanding borrowings against the Working Capital Facility at September 30, 2011 or December 31, 2010. The current maturities of long-term debt as of September 30, 2011 and December 31, 2010 totaled $10.0 million and $13.0 million, respectively. The current maturities of long-term debt reflect our estimate of required redemptions of New Notes utilizing Excess Free Cash Flow within the following twelve-month period.
 
 The average interest rate on our total aggregate principal amount of debt outstanding, excluding effective rate of the OID, on the New Notes, was 10% at September 30, 2011 and December 31, 2010.
 
 New Notes
 
 We are required by the New Indenture to use our monthly positive operating cash flow (if any), net of permitted cash flow adjustments, ("Excess Free Cash Flow") to first repay any amounts outstanding on the Working Capital Facility, and then to redeem (on a pro rata basis) New Notes; provided, however, that no payments or redemptions are required if Excess Free Cash Flow is less than $250,000.
 
 During the third quarter and first nine months of 2011, we redeemed $4.0 million and $12.4 million, respectively, in aggregate stated principal amounts outstanding on the New Notes from our Excess Free Cash Flows.
 
 Subsequent to September 30, 2011, we redeemed a total of $1.1 million in aggregate stated principal amounts outstanding on the New Notes as a result of the September 2011 Excess Free Cash Flows. The total amount outstanding on the New Notes at October 31, 2011 was $72.9 million of stated principal.
 
 During the twelve months ended December 31, 2010, we redeemed $13.5 million in aggregate stated principal amounts outstanding on the New Notes from our Excess Free Cash Flows and Available Cash Balances (as described below).
 
 During the first quarter of 2010, we deferred $0.6 million in loan costs related to the issuance of the New Notes and are amortizing those costs over the four and one-half year term of the New Notes.
 
 Working Capital Facility
 
 Under the New Indenture(as described below), we were permitted to incur "Refinancing Indebtedness", as defined in and contemplated by the New Indenture, within 150 days after March 1, 2010, in order to refinance the Tranche B term loan under the Amended and Restated Credit Agreement, dated as of October 15, 2009 (the "Credit Agreement") .
 
 During the second quarter of 2010, in connection with, and immediately prior to entering into a working capital facility, we repaid the Tranche B term loan under the Credit Agreement in the amount of $6.8 million (plus accrued paid in kind ("PIK") interest) with $7.1 million of Refinancing Indebtedness from CB&T, a division of Synovus Bank (the "Bank") and we entered into a senior, secured Loan and Line of Credit Agreement with the Bank, providing for a revolving line of credit in the amount of $10.0 million (the "Working Capital Facility"). As required by the New Indenture, upon entering into a working capital facility, we used part of our available cash to fully repay this Refinancing Indebtedness immediately upon its issuance.
 
 During the second quarter of 2010, we deferred the $0.5 million in debt issuance costs associated with the loan and amortized these costs ratably through May 15, 2011, the original maturity date of the Working Capital Facility.
 
 In addition, we were required to use part of our remaining cash balance ("Available Cash Balance") upon entering into the Working Capital Facility to redeem $1.8 million of the aggregate stated principal amounts outstanding on the New Notes.
 
 On May 13, 2011, we entered into an agreement with the Bank extending the maturity of the Working Capital Facility to May 15, 2012 with no other changes to the provisions of the agreement.
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  New Indenture
 
 On March 1, 2010, the Effective Date of the Restructuring, we entered into Indenture with respect to the New Notes (the "New Indenture").
 
 Under the terms of the New Indenture, the New Notes bear 10% interest commencing March 1, 2010 and payable in cash quarterly. The New Notes mature on October 1, 2014.
 
 The New Notes are secured by a lien on substantially all of our assets. The New Notes, and the liens securing the New Notes, will be subordinated to any of our senior debt, which included the Refinancing Indebtedness and includes the Working Capital Facility.
 
 Under certain conditions, the New Notes may be redeemed at the option of the Issuers. Upon certain sales or dispositions of assets or events of loss unless the proceeds are reinvested in accordance with the New Indenture, the Issuers must offer to use proceeds to redeem the Notes. Upon a change of control of Morris Publishing, the Issuers must offer to repurchase all of the New Notes.
 
 The New Indenture contains various representations, warranties and covenants generally consistent with the Original Indenture, including requirements to provide reports and to file publicly available reports with the United States Securities and Exchange Commission ("SEC") (unless the SEC will not accept the reports) and limitations on dividends, indebtedness, liens, transactions with affiliates and capital expenditures.
 
 In addition, the New Indenture contains financial covenants requiring us to meet certain financial tests on an on-going basis, including a total leverage ratio and a cash interest coverage ratio, based upon our consolidated financial results. At September 30, 2011, we were in compliance with all financial covenants under the New Indenture.
 
 In addition, the holders of the New Notes, as permitted by the New Indenture, appointed an observer to our Board of Directors and each of our subsidiaries.
 
 Working Capital Facility
 
 The parties to the Working Capital Facility are Morris Publishing, as borrower, all of its subsidiaries and its parent, as guarantors, and the Bank.
 
 Interest accrues on outstanding principal at the rate of LIBOR plus 4%, with a minimum rate of 6%.
 The $10.0 million borrowing limit under the Working Capital Facility may be reduced by any undrawn amounts under letters of credit issued from time to time on our behalf by the Bank. As of September 30, 2011, the Bank had issued letters of credit for approximately $0.5 million of future liabilities to a vendor, with approximately $30 thousand available to be drawn per month.
 
 The Working Capital Facility is secured by a first lien on substantially all of the assets of Morris Publishing and its subsidiaries. Liens on such assets were previously granted to the Collateral Agent for the holders of the New Notes pursuant to the New Indenture. Pursuant to the New Indenture and an Intercreditor Agreement between the Collateral Agent and the Bank, the New Notes (and their related liens) are subordinated to the Working Capital Facility. The Working Capital Facility contains various customary representations, warranties and covenants, as well as financial covenants similar to the financial covenants in the New Indenture.
 
 Restructuring:
 
 ·
The claims of the holders of theOriginal Notes in an aggregate principal amount of $278.5 million, plus $35.4 million in accrued interest, were cancelled in exchange for the issuance of $100.0 million in aggregate stated principal amount ofNew Notes. The holders of the Original Notes were the only impaired class of creditors and there was no change in equity ownership interests as a result of the Restructuring.
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  The table below summarizes the non-cash components (excluding the write-off of deferred loan costs related to the Original Notes) of the income from the cancellation of debt during the nine-month period ended September 30, 2010: (Dollars in thousands)
 
 Cancellation of debtCancellation of Original Notes

$
278,478Cancellation of interest accrued on Original Notes


35,427313,905Issuance of debtIssuance of New Notes


(100,000
)Original issue discount


9,000(91,000
)Cancellation of debt income-non-cash components

$
222,905
 
 ·
The Morris family, through their affiliated entities, made a non-cash capital contribution to Morris Publishing of $87.2 million and settled, in effect as a capital contribution, $24.9 million of intercompany indebtedness ($24.5 million, plus interest at 3.5% from September 30, 2009) to Morris Publishing, resulting in the cancellation of $112.1 million (including accrued PIK interest) of the Tranche C senior secured debt outstanding under the Credit Agreement.

On March 1, 2010, the $1.1 million remaining balance on the intercompany indebtedness was reclassified to a non-interest bearing short-term receivable from Morris Communications and settled through intercompany accounts.
 
 ·
On the Effective Date, we repaid from cash on hand, as required under the Indenture to the New Notes, the entire $19.7 million principal amount of Tranche A senior secured debt, plus accrued interest and a $0.3 million prepayment fee, leaving only the $6.8 million (plus accrued PIK interest) Tranche B term loan remaining outstanding on the $136.5 million aggregate principal amount originally outstanding under the Credit Agreement.



The Tranche B term loan became pari passu with the New Notes as of the Effective Date.
 
 We were required to use part of our Available Cash Balance after the repayment of the Tranche A senior secured debt to redeem $3.2 million of the aggregate stated principal amounts outstanding on the New Notes and to repay $0.2 million on the Tranche B term loan.
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  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 There have been no material changes regarding the registrant's market risk position from the information provided in our annual report dated December 31, 2010 filed with the Securities and Exchange Commission on Form 10-K.
 
 We are not exposed to the impact of interest rate fluctuations since all of our outstanding debt is at a fixed rate.
 
 To estimate the fair value of the $74.1 million aggregate stated principal amount outstanding of Floating Rate Secured Notes due 2014 dated as of March 1, 2011 (the "New Notes"), we used the average price of the corporate bond trades reported on or around September 30, 2011. At September 30, 2011, the fair value of the New Notes was approximately $57.1 million.
 
 ITEM 4. CONTROLS AND PROCEDURES
 
 Our management carried out an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2011. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
 
 There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13A-15(d) under the Exchange Act that occurred during the three-month period ended September 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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  Part II
 
 Item 1. Legal Proceedings.
 
 None.
 
 Item 1A. Risk Factors.
 
 Important factors that could cause our actual results to differ materially from our expectations include those described in Part I, Item 1A-Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as other risks and factors identified from time to time in other United States Securities and Exchange Commission filings.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
 None.
 
 Item 3. Defaults Upon Senior Securities.
 
 None.
 
 Item 4. Reserved.
 
 Item 5. Other Information.
 
 None.
 
 Item 6. Exhibits.
 
 10.1

Master Services Agreement with NIIT Media Technologies, LLC, dated July 7, 2011 ("NIIT Master Services Agreement").10.2

Letter Agreement with Morris Communications, dated July 7, 2011, regarding allocation and limitation of fees under the NIIT Master Services Agreement.10.3

Fifth Amendment to Management and Services Agreement with Morris Communications, dated July 7, 2011.10.4

Amendment to Loan and Line of Credit Agreement, dated September 16, 2011, with CB&T, a division of Synovus Bank.31.1

Rule 13a-14(a) Certifications31.2

Rule 13a-14(a) Certifications
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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:November 11, 2011

By:

/s/ Steve K. StoneSteve K. StoneChief Financial Officer(On behalf of the Registrant,

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