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


Table of Contents


MORRIS
PUBLISHING GROUP, LLC


MORRIS
PUBLISHING FINANCE CO.
 QUARTERLY
REPORT
 FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 
 TABLE OF CONTENTS
 
 PageFORWARD LOOKING STATEMENTS
              
              iiiPART
      I.Item 1. Financial Statements:Unaudited  condensed consolidated balance sheets as
      of September 30, 2008 and December 31, 2007
              
              
              1Unaudited condensed consolidated statements of (loss) income
      for the three and nine month periods ended September 30, 2008 and
      2007
              
              
              2Unaudited condensed consolidated statements of cash flows for
      the nine month periods ended September 30, 2008 and
    2007
              
              
              3Notes to unaudited condensed consolidated financial
      statements
              
              
              4Item
      2.Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              13Item
      3.Quantitative
      and Qualitative Disclosures about Market Risk
              
              
              31Item
      4.Controls
      and Procedures
              
              
              31PART
      II.Item
      1.Legal
      Proceedings.
              
              
              32Item
      1A.Risk
      Factors
              
              
              32Item
      2.Unregistered
      Sales of Equity Securities and Use of Proceeds.
              
              
              34Item
      3.Defaults
      Upon Senior Securities.
              
              
              34Item
      4.Submission
      of Matters to a Vote of Security Holders.
              
              
              34Item
      5.Other
      Information
              
              
              34Item
      6.Exhibits
              
              
              34
  Morris
Publishing Group, LLC is a wholly owned subsidiary of Morris Communications
Company, LLC, a privately held media company. Morris Publishing Finance Co., a
wholly owned subsidiary of Morris Publishing Group, LLC, was incorporated in
2003 for the sole purpose of serving as a co-issuer of our senior subordinated
notes in order to facilitate the offering. Morris Publishing Finance Co. does
not have any operations or assets of any kind and will not have any revenues. In
this report, “Morris Publishing,” “we,” “us” and “our” refer to Morris
Publishing Group, LLC and its subsidiaries. “Morris Communications” and “parent”
refers to Morris Communications Company, LLC.
  -ii-
 Table of Contents
  FORWARD LOOKING STATEMENTS
 
 This
report contains forward-looking statements. These statements relate to future
periods and include statements regarding our anticipated performance. You may
find discussions containing such forward-looking statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 2 of this report.
 
 Generally,
the words “anticipates,” “believes,” “expects,” “intends,” “estimates,”
“projects,” “plans” and similar expressions identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements or industry results, to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements.
 
 Although
we believe that these statements are based upon reasonable assumptions, we can
give no assurance that these statements will be realized. Given these
uncertainties, investors are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are made as of the
date of this report. We assume no obligation to update or revise them or provide
reasons why actual results may differ. Important factors that could cause our
actual results to differ materially from our expectations include, without
limitation:
 
 §
              Increases
      in financing, labor, health care and/or other costs, including costs of
      raw materials, such as
newsprint;
 
 §
              Continued
      decreases in advertising
revenues;
 
 §
              Attempts
      to decrease operating expenses may not be successful, or may damage our
      business operations;
 
 §
              General
      economic or business conditions, either nationally, regionally or in the
      individual markets in which we conduct business (and, in particular, the
      Jacksonville, Florida market), may further deteriorate, continuing to have
      an adverse impact on our advertising or circulation revenues or on our
      business strategy;
 
 §
              Attempts
      to refinance our senior debt, which will be required in early to middle
      2009, may result in significantly higher costs of borrowing, or may be
      entirely unsuccessful, either as a result of volatility in U.S. credit
      markets or declines in our revenue or
  earnings;
 
 §
              Our
      ability to access the capital and credit markets, unexpected changes in
      interest rates, or changes in our debt rating could harm our financial
      position.
                
                Recently,
      the capital and credit markets have become increasingly volatile as a
      result of adverse conditions that have caused the failure and near failure
      of a number of large financial services companies. If the capital and
      credit markets continue to experience volatility and the availability of
      funds remains limited, it is possible that our ability to access the
      capital and credit markets may be limited by these or other factors at a
      time when we would like, or need, to do so, which could have an impact on
      our ability to refinance maturing debt and/or react to changing economic
      and business conditions.
                
                Changes
      from our expectations for interest rates can have a material impact on our
      financial results and we may not be able to completely mitigate the effect
      of significant interest rate changes. Changes in our debt rating could
      have a material adverse effect on our interest costs and financing
      sources;
 
 §
              Other
      risk factors and
uncertainties.
 -iii-
 Table of Contents
  Part
I
 
 ITEM 1. FINANCIAL STATEMENTS
 
 Morris
      Publishing Group, LLCUnaudited
      condensed consolidated balance sheets(Dollars in
      thousands)
              
              September 30,
              
              
              December 31,2008
              
              
              2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              8,737
              
              
              $
              4,135Accounts
      receivable, net of allowance for doubtful accounts of  $1,733
      and $2,695 at September 30, 2008 and December 31, 2007,
      respectively
              
              
              39,022
              
              
              
              50,227Note
      receivable
              
              
              10,067
              
              
              
              10,067Inventories
              
              
              3,074
              
              
              
              3,092Due
      from Morris Communications
              
              
              -
              
              
              
              4,384Prepaid
      and other current assets
              
              
              757
              
              
              
              934Total
      current assets
              
              
              61,657
              
              
              
              72,839NET
      PROPERTY AND EQUIPMENT
              
              
              114,954
              
              
              
              123,809OTHER
      ASSETS:Restricted
      cash held in escrow
              
              
              -
              
              
              
              12,392Goodwill
              
              
              -
              
              
              
              170,685Intangible
      assets, net of accumulated amortization of $6,440 and $5,912 at September
      30, 2008 and December 31, 2007, respectively
              
              
              8,127
              
              
              
              8,657Deferred
      loan costs and other assets, net of accumulated amortization of loan costs
      of $6,794 and $6,116 at September 30, 2008and
      December 31, 2007, respectively
              
              
              8,684
              
              
              
              9,836Total
      other assets
              
              
              16,811
              
              
              
              201,570Total
      assets
              
              $
              193,422
              
              
              $
              398,218LIABILITIES
      AND MEMBER'S DEFICIENCY IN ASSETSCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              6,328
              
              
              $
              7,635Current
      maturities of long-term debt
              
              
              145,500
              
              
              
              5,625Accrued
      interest
              
              
              3,396
              
              
              
              9,218Current
      portion of deferred taxes
              
              
              1,353
              
              
              
              688Due
      to Morris Communications
              
              
              6,042
              
              
              
              -Deferred
      revenues
              
              
              13,567
              
              
              
              13,600Accrued
      employee costs
              
              
              7,131
              
              
              
              9,948Current
      portion of post retirement benefits due to Morris
      Communications
              
              
              984
              
              
              
              984Other
      accrued liabilities
              
              
              2,117
              
              
              
              1,397Total
      current liabilities
              
              
              186,418
              
              
              
              49,095LONG-TERM
      DEBT, less current portion
              
              
              278,478
              
              
              
              422,250DEFERRED
      INCOME TAXES, less current portion
              
              
              6,475
              
              
              
              18,628POSTRETIREMENT
      BENEFITS DUE TO MORRIS COMMUNICATIONS
              
              
              22,176
              
              
              
              21,127OTHER
      LONG-TERM LIABILITIES
              
              
              3,656
              
              
              
              3,592Total
      liabilities
              
              
              497,203
              
              
              
              514,692COMMITMENTS
      AND CONTINGENCIES (NOTE 8)MEMBER'S
      DEFICIENCY IN ASSETSMember's
      deficit
              
              
              (290,603
              )
              
              
              (143,712
              )Accumulated
      other comprehensive income
              
              
              1,179
              
              
              
              1,179Loan
      (receivable from) payable to Morris Communications, net
              
              
              (14,357
              )
              
              
              26,059Total
      member's deficiency in assets
              
              
              (303,781
              )
              
              
              (116,474
              )Total
      liabilities and member's deficiency in assets
              
              $
              193,422
              
              
              $
              398,218See
      notes to condensed consolidated financial statements.
  -1-
 Table of Contents
  
 Morris
      Publishing Group, LLCUnaudited condensed consolidated statements of (loss)
      incomeThree
      months ended September 30,
              
              
              Nine
      months ended September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(Dollars in
      thousands)NET
      OPERATING REVENUES:Advertising
              
              $
              60,915
              
              
              $
              75,224
              
              
              $
              191,424
              
              
              $
              229,001Circulation
              
              
              15,293
              
              
              
              14,503
              
              
              
              44,757
              
              
              
              43,050Other
              
              
              2,038
              
              
              
              2,514
              
              
              
              6,944
              
              
              
              7,553Total
      net operating revenues
              
              
              78,246
              
              
              
              92,241
              
              
              
              243,125
              
              
              
              279,604OPERATING
      EXPENSES:Labor
      and employee benefits
              
              
              31,936
              
              
              
              35,566
              
              
              
              99,933
              
              
              
              109,221Newsprint,
      ink and supplements
              
              
              9,191
              
              
              
              9,071
              
              
              
              27,991
              
              
              
              30,153Other
      operating costs (excluding depreciation, amortization, and
      impairment)
              
              
              26,795
              
              
              
              28,233
              
              
              
              81,651
              
              
              
              84,998Write-down
      of intangible assets (Note 6)
              
              
              170,685
              
              
              
              -
              
              
              
              170,685
              
              
              
              -Depreciation
      and amortization expense
              
              
              3,472
              
              
              
              3,564
              
              
              
              10,497
              
              
              
              12,669Total
      operating expenses
              
              
              242,079
              
              
              
              76,434
              
              
              
              390,757
              
              
              
              237,041OPERATING
      (LOSS) INCOME
              
              
              (163,833
              )
              
              
              15,807
              
              
              
              (147,632
              )
              
              
              42,563OTHER
      EXPENSES (INCOME):Interest
      expense, including amortization of debt issuance costs
              
              
              6,776
              
              
              
              9,614
              
              
              
              21,654
              
              
              
              28,370Gains
      on repurchases of debt
              
              
              -
              
              
              
              -
              
              
              
              (9,271
              )
              
              
              -Interest
      income
              
              
              (201
              )
              
              
              (1
              )
              
              
              (671
              )
              
              
              (5
              )Other,
      net
              
              
              (53
              )
              
              
              (75
              )
              
              
              (125
              )
              
              
              (160
              )Total
      other expense, net
              
              
              6,522
              
              
              
              9,538
              
              
              
              11,587
              
              
              
              28,205INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAX (BENEFIT)
      PROVISION
              
              
              (170,355
              )
              
              
              6,269
              
              
              
              (159,219
              )
              
              
              14,358(BENEFIT)
      PROVISION FOR INCOME TAXES
              
              
              (7,154
              )
              
              
              2,357
              
              
              
              (3,650
              )
              
              
              5,683(LOSS)
      INCOME FROM CONTINUING OPERATIONS
              
              
              (163,201
              )
              
              
              3,912
              
              
              
              (155,569
              )
              
              
              8,675DISCONTINUED
      OPERATIONSOperating
      income from discontinued operations
              
              
              -
              
              
              
              1,680
              
              
              
              -
              
              
              
              3,316Provision
      for income taxes from discontinued operations
              
              
              -
              
              
              
              631
              
              
              
              -
              
              
              
              1,295INCOME
      FROM DISCONTINUED OPERATIONS
              
              
              -
              
              
              
              1,049
              
              
              
              -
              
              
              
              2,021NET
      (LOSS) INCOME
              
              $
              (163,201
              )
              
              $
              4,961
              
              
              $
              (155,569
              )
              
              $
              10,696See
      notes to condensed consolidated financial statements.
  -2-
 Table of Contents
 
 Morris
      Publishing Group, LLCUnaudited condensed consolidated statements of cash
      flows(Dollars in
      thousands)
              
              Nine
      months ended September 30,2008
              
              
              2007OPERATING ACTIVITIES:Net
      (loss) income
              
              $
              (155,569
              )
              
              $
              10,696Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
              
              
              10,497
              
              
              
              14,443Deferred
      income taxes
              
              
              (11,489
              )
              
              
              (1,664
              )Amortization
      of debt issuance costs
              
              
              1,373
              
              
              
              1,207Write-down
      of intangible assets
              
              
              170,685
              
              
              
              -(Gain)
      loss on sale of fixed assets, net
              
              
              (112
              )
              
              
              16Capital
      contributions by parent for services rendered
              
              
              8,678
              
              
              
              -Pre-tax
      gains on repurchases of debt
              
              
              (9,271
              )
              
              
              -Changes
      in assets and liabilitiesAccounts
      receivable
              
              
              11,205
              
              
              
              6,811Inventories
              
              
              18
              
              
              
              (1,190
              )Prepaids
      and other current assets
              
              
              179
              
              
              
              (275
              )Other
      assets
              
              
              (221
              )
              
              
              (158
              )Accounts
      payable
              
              
              (1,307
              )
              
              
              (274
              )Accrued
      employee costs
              
              
              (2,817
              )
              
              
              (3,024
              )Accrued
      interest
              
              
              (5,822
              )
              
              
              (5,123
              )Due
      to Morris Communications
              
              
              10,426
              
              
              
              (343
              )Deferred
      revenues and other liabilities
              
              
              687
              
              
              
              2,855Postretirement
      obligations due to Morris Communications
              
              
              1,049
              
              
              
              909Other
      long-term liabilities
              
              
              65
              
              
              
              198Net
      cash provided by operating activities
              
              
              28,254
              
              
              
              25,084INVESTING ACTIVITIES:Capital
      expenditures
              
              
              (1,716
              )
              
              
              (10,071
              )Restricted
      cash released from escrow
              
              
              12,392
              
              
              
              -Net
      proceeds from sale of assets
              
              
              714
              
              
              
              136Net
      cash provided by (used in) investing activities
              
              
              11,390
              
              
              
              (9,935
              )FINANCING ACTIVITIES:Repurchase
      of senior subordinated debt
              
              
              (12,251
              )
              
              
              -Proceeds
      from revolving credit facility
              
              
              74,000
              
              
              
              50,000Repayments
      on revolving credit facility
              
              
              (53,000
              )
              
              
              (48,000
              )Repayments
      on term loan
              
              
              (3,375
              )
              
              
              -Debt
      issuance costs
              
              
              -
              
              
              
              (175
              )Advances
      on loan receivable from Morris Communications
              
              
              (40,416
              )
              
              
              (18,341
              )Net
      cash used in financing activities
              
              
              (35,042
              )
              
              
              (16,516
              )NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS
              
              
              4,602
              
              
              
              (1,367
              )CASH AND CASH EQUIVALENTS, beginning of
      period
              
              
              4,135
              
              
              
              6,964CASH AND CASH EQUIVALENTS, end of
      period
              
              $
              8,737
              
              
              $
              5,597SUPPLEMENTAL DISCLOSURES OF CASH FLOW
      INFORMATIONInterest
      paid
              
              $
              26,101
              
              
              $
              32,287Income
      taxes paid to Morris Communications
              
              $
              34,468
              *
              
              $
              8,611Dividends
      applied against loan receivable from Morris Communications
              
              $
              -
              
              
              $
              40,000See
      notes to condensed consolidated financial statements.*
      Includes $30,505 in income taxes payable to Morris Communications at
      December 31, 2007 on the gain on sale of discontinued
      operations.
 -3-
 Table of Contents
 
 MORRIS
PUBLISHING GROUP, LLC
 Notes to condensed consolidated financial statements
(unaudited)
 (Dollars
in thousands)
 
 1.
              Basis
      of Presentation and Change in Significant Accounting
    Policies
 
 Basis of
presentation–The accompanying unaudited condensed consolidated financial
statements furnished herein reflect all adjustments, which in the opinion of
management, are necessary for the fair presentation of the Company’s financial
position and results of operations. All such adjustments are of a normal
recurring nature. Results of operations for the three-month and nine-month
interim periods in 2008 are not necessarily indicative of results expected for
the full year. While certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been
condensed or omitted, the Company believes that the disclosures herein are
adequate to keep the information presented from being misleading.
 
 These
unaudited condensed consolidated financial statements should be read in
conjunction with the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007. The
accounting policies followed for the interim financial reporting period are the
same as those disclosed in Note 1 of the notes to the financial statements
included in the Company’s Form 10-K, except for the adoption of Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”
and SFAS No. 159,“The Fair
Value Option for Financial Assets and Financial Liabilities-Including an
Amendment of FASB Statement No. 115”.
 
 As
described in the Company’s Form 10-K for the fiscal year ended December 31,
2007, the Company reviews goodwill and certain intangible assets no longer being
amortized for impairment annually, or more frequently if events or changes in
circumstances indicate that an asset may be impaired, in accordance with
Financial Accounting Standards Board (“FASB”) SFAS No. 142, “Goodwill and Other Intangible
Assets”. During 2008, each of the Company’s newspapers has experienced
significant continuing declines in advertising revenues due to a variety of
factors, including weak national and local economic conditions, which has
reduced advertising demand, and increased competition, particularly from on-line
media. Due to the continuing decline in newspaper advertising revenues, the
Company performed an impairment review of goodwill attributable to its newspaper
reporting unit and newspaper masthead intangible assets at the end of the third
quarter of 2008. As a result of the impairment review, the Company recorded a
non-cash pre-tax impairment charge in the third quarter of 2008 of $170,685 to
write down all of its newspaper reporting unit goodwill. These non-cash
impairment charges are reflected as write-downs of intangible assets in the
accompanying unaudited condensed consolidated statements of operations and do
not affect the Company’s operating cash flows or its compliance with its
financial debt covenants (see Note 6).
 
 2.
              Subsequent
      Events
 
 Third amendment to the 2005 Credit Agreement—On October 8,
2008, the Company as borrower, entered into Amendment No. 3 (“Amendment No. 3”),
effective as of September 30, 2008 (“Effective Date”), to the Credit Agreement,
dated as of December 14, 2005 (the “Credit Agreement”). The Credit Agreement
originally provided for $350,000 of senior secured term and revolving credit
facilities.
 
 Prior to
Amendment No. 3, the Credit Agreement provided for revolving credit commitments
of $175,000. Amendment No. 3 reduced the revolving credit commitments to
$100,000. On the Effective Date, $145,500 was outstanding under the Credit
Agreement, with $60,000 outstanding under the revolving credit facility.
  The
Credit Agreement contains financial covenants requiring Morris Publishing to
meet certain financial tests on an on-going basis, including a minimum interest
coverage ratio, a minimum fixed charge ratio, and maximum cash flow ratios,
based upon the consolidated financial results of Morris Communications and its
subsidiaries (including the Company). Amendment No. 3 relaxes these financial
tests as of the Effective Date through the delivery date of Morris
Communications’ financial statements for the quarter ending June 30, 2009 (but
not later than August 29, 2009). With respect to the financial tests, Amendment
No. 3 permits add backs of one-time cash expenses for severance costs of up to
$5,000 in calculating cash flow, excludes term loan principal payments for
specific quarters from the fixed charges, and excludes at all times, taxes
applicable to certain one-time items (asset sales and debt repurchases) from the
fixed charges.
 
 In
addition, Amendment No. 3 reduces the threshold for mandatory prepayments upon
asset sales, now generally requiring prepayments when aggregate net cash
proceeds on dispositions exceed $5,000, and deleting the exception that would
have permitted such proceeds to be reinvested in other assets.
  -4-
 Table of Contents
  Further,
Amendment No. 3 requires Morris Communications and its subsidiaries (including
the Company) to consummate a transaction (or at least sign a letter of intent to
do so) that would generate sufficient funds to be able to prepay all loans under
the Credit Agreement, or to purchase an assignment of all loans and commitments
of the lenders at par (“mandatory transaction”), no later than the delivery date
of Morris Communications’ financial statements for the quarter ending March 31,
2009 (but not later than May 30, 2009). Due to this requirement, the
Company has classified all of the debt outstanding under the Credit
Agreement as of the Effective Date as current maturities of long-term debt
within current liabilities on the condensed consolidated balance
sheet.
 
 Amendment
No. 3 places greater restrictions on the ability of Morris Communications and
its subsidiaries (including the Company) to incur other indebtedness, make other
acquisitions of businesses or investments (other than the Morris Communications’
acquisition obligations in effect on the Amendment No. 3 Effective Date)or to
make restricted payments, as such terms are defined in the Credit Agreement.
Amendment No. 3 does not restrict dividends or restricted payments from the
Company to Morris Communications. Amendment No. 3 prohibits the voluntary
prepayment or purchase of any of the Company’s senior subordinated notes. The
Company had no acquisition obligations in effect on the effective date of the
amendment.
 
 Amendment
No. 3 increases the interest rate on borrowings under the Credit Agreement and
the commitment fee on undrawn amounts under the revolving credit facility.
Interest rates may vary depending upon the consolidated cash flow ratio of
Morris Communications and its subsidiaries. Based upon the current cash flow
ratio, (i) the interest rate on Eurodollar loans will generally increase to the
LIBO rate, plus 2.50% (rather than LIBO rate plus 1.25% prior to Amendment No.
3), and (ii) the interest rate on loans tied to the alternate base rate
(generally the prime rate of JPMorgan Chase Bank, the administrative agent) will
generally increase to prime plus 1.50% (rather than prime plus 0.25% prior to
Amendment No. 3). The applicable interest rates will further increase by another
0.50% after March 31, 2009. The commitment fee increases to 0.5% (up from
0.375%) on undrawn amounts under the revolving credit facility. Amendment No. 3
also provides for an upfront fee of 25.0 basis points (0.25% of the principal
amount) based on the reduced commitment for lenders approving the
amendment.
 
 At
September 30, 2008, the Company could borrow and use for general corporate
purposes approximately $40,000 under the Company’s most restrictive covenants of
the amended senior bank credit facility. The Company was in compliance with all
financial covenants under its amended credit facility arrangements.
 
 The
foregoing summary is a brief description of the terms and conditions of the
Amendment No. 3 that are material to the Company, but does not include all of
the provisions of the amendment. A complete copy of Amendment No. 3 is furnished
as Exhibit 99.1 to the Form 8-K filed with the U.S. Securities and Exchange
Commission on October 8, 2008.
 
 The
impact of the mandatory transaction requirement in Amendment No. 3 will require
the Company to (i) refinance the existing bank debt or seek an amendment of the
terms of the Credit Agreement, either of which could significantly increase the
Company’s costs of borrowing; (ii) generate funds through the sale of assets;
(iii) raise capital from debt or equity transactions with third party lenders or
investors or with its parent or other related entities; or (iv) a combination of
the foregoing, no later than May 30, 2009 (or to at least enter into a letter of
intent to do so by that date). Further, if the mandatory transaction requirement
is waived by the senior lenders, or if such a mandatory transaction fails to
close notwithstanding a timely letter of intent, the Company would likely be
required to take one of such actions no later than August 29, 2009 since the
Company would be unlikely to meet the financial covenants under the Credit
Agreement when it delivers its financial statements for the second quarter of
2009 no later than August 29, 2009 (when the relaxed financial covenants
terminate).
 
 The
senior debt is guaranteed by the Company’s parent, Morris Communications, and
the parent’s other subsidiaries. The mandatory transaction requirement could be
satisfied if a guarantor enters into a transaction that would induce a lender to
refinance the Company’s senior debt, if a guarantor raises sufficient funds to
purchase the loans and commitments from the existing senior creditors, or if a
guarantor raises sufficient funds to refinance the senior debt with a new loan
from the guarantor. The Company does not expect Morris Communications to make
any capital contributions that would enable the Company to reduce its senior
indebtedness, even if the terms of mandatory transaction by a guarantor would
permit such a capital contribution. If a guarantor pays the Company’s senior
debt, the Company would expect the guarantor to step into the shoes of the
senior creditors and become the senior creditor.
 
 In view
of the current and expected future market conditions in the credit markets and
the newspaper industry (as evidenced by the impairment charge to write-off the
Company’s goodwill as discussed in note 6), the Company may be unable to satisfy
the mandatory transaction requirement of Amendment No. 3 on its own. The Company
will likely be dependent on the ability and willingness of its parent and
guarantors to enter into a transaction that would allow the Company to amend or
refinance the senior debt. An amendment or refinancing of the Company’s senior
debt may be on less favorable terms and conditions than the current senior debt.
In absence of an amendment or refinancing of the senior debt, the Company will
likely be in default under the Credit Agreement in late May or August of 2009,
in which event the Company would be unable to borrow on the revolver and may be
required to prepay the entire principal due under the Credit
Agreement.
  -5-
 Table of Contents
  If this
was to occur, it could lead to an event of default under the indenture
governing the notes. In such an event, the Company cannot assure the
bondholders that it would have sufficient assets to pay amounts due on the
notes. As a result, the bondholders may receive less than the full amount they
would be otherwise entitled to receive on the notes.
 
 Specifically,
there is an event of default under the bond indenture if the
Company fails to pay other indebtedness (such as the Senior Credit
Facility) exceeding $5,000 upon final maturity or within 20 days of an
acceleration.
 
 Amendment to Management and Services Agreement—On
October 1, 2008, the Company entered into a Third Amendment (“Third Amendment”)
to Management and Services Agreement, which was designed to reinstate fees
payable by the Company for management and shared services to its parent, Morris
Communications and the parent’s affiliate, MSTAR Solutions, LLC (“MSTAR
Solutions”). The payment of said fees had been suspended by the Second Amendment
to Management and Services Agreement.
 
 Under the
amendment, payment of the management fee and the technology and shared services
fee (see Note 3) will be reinstated beginning October 1, 2008. Prior to the
Third Amendment, the payment of these fees had been suspended for the period
from May 1, 2008 through December 31, 2008. Absent this amendment, the Company
would not have been obligated to pay fees until January 1, 2009.
 
 Termination
ofretiree health
careplan—During
November of 2008, Morris Communications initiated procedures to terminate its
retiree health care plan (see Note 3), effective with respect to claims incurred
on and after January 1, 2009. At that time, the plan will cease to provide
benefits to (1) former employees and their eligible dependents and (2) regular
full time and eligible part time employees upon their separation from
service.
 
 The
Company participates in Morris Communications’ retiree health care plan, with
the expenses and postretirement health benefit obligation related to the
plan being allocated to the Company based on total headcount.
 
 The
Company’s estimate of the total net periodic benefit cost for all of 2008 is
$1,400.
 
 At
September 30, 2008, the postretirement health benefit obligation allocated
to the Company was $23,160. The Company is currently evaluating the
effect that the termination of this obligation will have on its financial
position, results of operations, and cash flows.
 
 3.
              Transactions
      with Morris Communications
 
 Management,
Technology and Shared Services Fees—The Company receives certain
services from, and has entered into certain transactions with its parent, Morris
Communications. The Company has recorded these fees within other operating costs
in the accompanying consolidated financial statements.
 
 Ø      Management
Fee—This fee compensates Morris Communications for corporate services and
costs incurred on behalf of the Company, including executive, legal,
secretarial, tax, internal audit, risk management, employee benefit
administration, airplane usage and other support services. A fee equal to the
greaterof 4.0% of the Company’s annual
total operating revenues or the amount of actual expenses allocable to the
management of the Company’s business by Morris Communications (such allocations
to be based upon time and resources spent on the management of the Company’s
business by Morris Communications) is charged to the Company.
 
 Ø      Technology
and Shared Services Fee—This fee compensates Morris Communications for
certain technology and shared services and is based on the lesserof 2.5% of the Company’s total net
operating revenue or the actual technology costs allocated to Morris Publishing
based upon usage.
 
 On May
16, 2008, the Company entered into a Second
Amendment (“Second Amendment”) to Management and Services Agreement, which
was designed to eliminate the fees payable by Company for management, technology
and shared services to its parent for the period from May 1, 2008 through
December 31, 2008. While the intent of this amendment was to retain cash and to
reduce the Company’s operating expenditures, the elimination of these fees
increased the need for the Company to pay dividends in the future to its parent.
Effective October 1, 2008, the Third Amendment repealed the elimination of these
fees (see Note 2).
 
 Per the
Securities and Exchange Commission’s Staff Accounting Bulletins Official Text
Topic 1B1, “Costs Reflected in
Historical Financial Statements”, the historical income statements of a
registrant should reflect all of its costs of doing business. Therefore, the
Company has recorded the costs of these services based on the percentages above
for the period May 1, 2008 through September 30, 2008 within its other operating
costs, with the cost of these services treated as a capital contribution by
its parent. The total cost of the services contributed by its parent was $5,086
and $8,678 for the three months and nine months ended September 30, 2008,
respectively.
  -6-
 Table of Contents
  The
management fees expensed totaled $3,130 and $3,690 for the three months ended
September 30, 2008 and 2007, respectively, and $9,725 and $11,184 for the nine
months ended September 30, 2008 and 2007, respectively. The management fees from
discontinued operations totaled $688 and $2,028 for the three and nine month
periods ended September 30, 2007, respectively.
 
 The
technology and shared services fees expensed totaled $1,956 and $2,306 for the
three months ended September 30, 2008 and 2007, respectively, and $6,078 and
$6,990 for the nine months ended September 30, 2008 and 2007, respectively. The
technology and shared services fees from discontinued operations totaled $430
and $1,267 for the three and nine month periods ended September 30, 2007,
respectively.
 
 The
Company believes that these fee allocations were made on a reasonable basis, and
approximate all of the material incremental costs it would have incurred had it
been operating on a stand-alone basis; however, there has been no independent
study or any attempt to obtain quotes from third parties to determine what costs
of obtaining such services from third parties would have been.
 
 Due(to) fromMorris
Communications —Due (to) from Morris Communications represents a net
short-term (payable) receivable that resulted from operating activities
between the Company and its parent.
 
 Employees’ 401(k)
plan- The Company participates in Morris Communications’ 401(k) plan.
Under this plan, contributions by employees to the 401(k) plan are matched (up
to 5% of pay) by Morris Communications. Effective July 13, 2008, the Company
indefinitely suspended the employer matching contributions.
 
 Expenses
were allocated to the Company based on specific identification of employer
matching contributions of $143 and $841 for the three months ended September 30,
2008 and 2007, respectively, and $1,778 and $2,633 for the nine months ended
September 30, 2008 and 2007, respectively.
 
 Retiree health
care benefits- The Company participates in Morris Communications’ retiree
health care plan, which provides certain health care benefits for eligible
retired employees and their dependents. The plan requires the Company to be
separately liable for its portion of the postretirement health benefit
obligation. Accordingly, the Company and Morris Communications have completed a
formal actuarial valuation of the postretirement obligation for the Company as
of and for the year ended December 31, 2007.
 
 Under
Morris Communications’ plan, full-time employees who were hired before January
1, 1992 and retire after ten years of service are eligible for these benefits.
Full-time employees hired on or after January 1, 1992 must have 25 years of
service to be eligible. Generally, this plan pays a percentage of most medical
expenses (reduced for any deductible) after payments made by government programs
and other group coverage. This plan is unfunded. Lifetime benefits under the
plan are limited to $100 per employee. Expenses related to this plan have been
allocated to the Company based on total headcount. The expenses allocated to the
Company, net of the related employee contributions recorded, were $350 and $303
for the three months ended September 30, 2008 and 2007, respectively, and $1,049
and $909 for the nine months ended September 30, 2008 and 2007,
respectively.
 
 The
Company was also allocated its portion of the postretirement health benefit
obligation. The amount of post retirement liability allocated to the
Company based on total headcount were $23,160 and $22,111 as of September 30,
2008 and December 31, 2007, respectively.
 
 Upon
adoption of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans”, at the December 31, 2007 measurement date, the Company’s post
retirement liability decreased in the aggregate amount of $1,929 and member’s
deficiency in assets decreased by $1,929, less the $750 income tax
effect.
 
 The
following is an estimate of the Company’s net periodic benefit cost for all of
2008:
 
 Service
      cost
              
              $
              352Interest
      cost
              
              
              1,401Unrecognized
      gain from earlier periods
              
              
              -Net
      periodic benefit cost
              
              
              1,753Less:
      estimated employee cash contributions
              
              
              (353
              )Estimated
      net benefit expense
              
              $
              1,400
 
 During
November of 2008, Morris Communications initiated procedures to terminate its
retiree health care plan (see Note 2), effective with
respect to claims incurred on and after January 1, 2009. At that time, the plan
will cease to provide benefits to (1) former employees and their eligible
dependents and (2) regular full time and eligible part time employees upon their
separation from service.
  -7-
 Table of Contents
  Health and
Disability Plan- The Company has participated in Morris Communications’
health and disability plan for active employees. Accordingly, Morris
Communications has allocated to the Company certain expenses associated with the
payment of current obligations and the estimated amounts incurred but not yet
reported. The expense allocated to the Company based on the total headcount, was
$1,731 and $2,156 for the three months ended September 30, 2008 and 2007,
respectively, and $7,002 and $8,397 for the nine months ended September 30, 2008
and 2007, respectively.
 
 The
Company was also allocated its portion of the health and disability obligation.
The amounts allocated to the Company, based on total headcount, were $2,227 and
$2,404 as of September 30, 2008 and December 31, 2007, respectively. The Company
has recorded this liability within accrued employee costs in the accompanying
financial statements.
 
 Workers’
Compensation Expense- The Company participates in Morris Communications’
workers’ compensation self-insurance plan, which is currently guaranteed and
secured by Morris Communications’ parent, Shivers Trading and Operating Company,
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 $181 and
$535 for the three months ended September 30, 2008 and 2007, respectively, and
$1,193 and $1,910 for the nine months ended September 30, 2008 and 2007,
respectively.
 
 Receivable from
Morris Communications - Under the Company’s indenture related to the
senior subordinated notes, the Company is permitted to loan up to $40,000 at any
one time to Morris Communications or any of its wholly owned subsidiaries
outside the Publishing Group, solely for purposes of funding its working
capital, capital expenditures and acquisition requirements. The Company is also
permitted to invest in or lend an additional $20,000 at any one time outstanding
to Morris Communications or any other Person(s), as defined in the debt
indenture.
 
 The
interest-bearing portion of all loans from the Company to Morris Communications
bear the same rate as the borrowings under the Credit Agreement (for the three
month period ended September 30, 2008, this rate was LIBO rate (adjusted to the
nearest 1/16th) + 1.25% (Amendment No. 3 (see Note 2)
increases the rate to LIBO rate + 2.5% effective September 30,2008). The Company
distinguishes between intercompany transactions incurred in the ordinary course
of business and settled on a monthly basis (which do not bear interest) and
those of a more long-term nature that are subject to an interest accrual.
Interest is accrued on the average outstanding long-term balance each
month.
 
 Given the
historical practice of Morris Publishing and Morris Communications settling a
significant portion of the outstanding loan receivable balance with a dividend,
this arrangement is considered in substance a capital distribution transaction
and is classified as contra-equity within member’s deficit. In addition,
interest accrued on this loan receivable is reported as contra-equity within
member’s deficiency in assets for the periods presented. However, because
the consolidated leverage ratio under the senior subordinated debt indenture
exceeds 6.5 to 1.0, the Company is currently prohibited from settling this loan
receivable with a dividend.
 
 The
amount outstanding on the intercompany loan due from Morris Communications was
$14,357, including the $5,643 in accumulated interest accrued on the receivable,
as of September 30, 2008. The amount outstanding on the intercompany loan due
from Morris Communications was $4,446 as of December 31, 2007, offset by $30,505
due to Morris Communications for income taxes payable on the pre-tax gain on the
sale of discontinued operations.
 
 During
the three month periods ended September 30, 2008 and 2007, the Company reported
the $171 and $166, respectively, in accrued loan receivable interest as
contra-equity. The average interest rate for the three month periods ended
September 30, 2008 and 2007 was 3.75% and 6.604%, respectively, on average loan
receivable balances of $17,872 and $7,831, respectively.
 
 During
the nine month periods ended September 30, 2008 and 2007, the Company reported
the $512 and $1,425, respectively, in accrued loan receivable interest as
contra-equity. The average interest rate for the nine month periods ended
September 30, 2008 and 2007 was 4.181% and 6.382%, respectively, on average loan
receivable balances of $16,119 and $28,512, respectively.
 
 Restricted
payments - The Company is permitted under its debt arrangement to make
restricted payments, which include dividends and loans to affiliates in excess
of the permitted limits described above, up to the sum of (1) 100% of the
Company’s cumulative consolidated income before interest, taxes, depreciation
and amortization (“Consolidated EBITDA”, as defined in the indenture) earned
subsequent to the debt’s August 2003 issue date less (2) 140% of the
consolidated interest expense of the Company
for such period. However, because the consolidated leverage ratio under the
senior subordinated debt indenture exceeds 6.5 to 1.0, the Company is currently
prohibited from making any restricted payments.
 
 Restricted cash
released from escrow - The Company elected to have $12,350 of the net
proceeds from the November 30, 2007 sale of the fourteen daily newspapers, three
nondaily newspapers, a commercial printing operation and other related
publications to GateHouse Media Inc. deposited into an escrow account in order
to potentially fund other acquisitions by the Company or parent through a
tax-deferred Section 1031 exchange. Interest earned on the cash balance in the
escrow account totaled $42 in 2007 and $52 during the three month period ended
March 31, 2008.
  -8-
 Table of Contents
  At the
end of the first quarter of 2008, the Company’s parent acquired qualified
replacement property using the $12,444 in the Company’s escrow account. At the
same time, the parent returned the escrow funds by using its cash to pay down
balances due on the Company’s revolving credit facility.
 
 4.
              Recently
      Issued Accounting Standards
 
 In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements; rather, it applies
under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS
No. 157 are effective for the fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, which
delays the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those years for all non-financial
assets and non-financial liabilities, except those that are recognized at fair
value in the financial statements on a recurring basis (at least annually). The
2008 adoption of SFAS No. 157 for the Company’s financial assets and financial
liabilities did not have a material impact on its consolidated financial
statements. The Company is evaluating the effect, if any, that the
implementation of SFAS No. 157 in 2009 for non-financial assets and
non-financial liabilities will have on its financial position, results of
operations, and cash flows.
 
 In
February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115”  (“SFAS No. 159”). SFAS No. 159 provides the
option to report certain financial assets and liabilities at fair value, with
the intent to mitigate volatility in financial reporting that can occur when
related assets and liabilities are recorded on different bases and is effective
for fiscal years beginning after November 15, 2007. The Company’s adoption of
SFAS No. 159 had no effect on its financial position, results of operations, and
cash flows.
 
 In May of
2008, the FASB issued SFAS No.162, “The Hierarchy of Generally Accepted
Accounting Principles”. The pronouncement mandates the GAAP hierarchy
reside in the accounting literature as opposed to the audit literature. This has
the practical impact of elevating FASB Statements of Financial Accounting
Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days
following SEC approval. The Company does not believe this pronouncement will
impact its financial position, results of operations, and cash
flows.
 
 In
October 2008, the FASB issued FSP No. 157-3 “Determining Fair Value of a
Financial Asset in a Market That Is Not Active” (“FSP No. 157-3”). FSP
No. 157-3 clarified the application of SFAS No. 157 in an inactive market. FSP
No.157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of this standard
did not have an impact on the Company’s financial statements.
 
 5.
              Long-Term
      Debt
 
 At
September 30, 2008 and December 31, 2007, total debt was $423,978 and $427,875,
respectively. The average interest rate on the total debt outstanding was
approximately 6.2595% and 6.6932% at September 30, 2008 and December 31, 2007,
respectively.
 
 The
amount outstanding on the revolving credit facility at September 30, 2008 and
December 31, 2007, totaled $60,000 and $39,000, respectively.
 
 During
the three months and nine months ended September 30, 2008, the Company paid
$1,125 and $3,375, respectively, in principal due on the Tranche A term loan and
has another $2,250 in principal payments due by the end of 2008. At September
30, 2008, total outstanding on the term loan was $85,500.
 
 Amendment
No. 3 (see
Note 2) to the Credit Agreement reduced the revolving credit commitments to
$100,000 from $175,000 and increased the interest rate on borrowings and the
commitment fee on undrawn amounts under the revolving credit
facility.
 
 At
September 30, 2008, the interest rate on the term loan (under Amendment No. 3)
was 6.3125% and the weighted average interest rate on the revolver was 5.778%.
The commitment fee on the unborrowed funds available under the revolver was 0.5%
(under Amendment No. 3) at September 30, 2008 and 0.375% at December 31,
2007.
 
 During
the first and second quarter of 2008, the Company repurchased a total of $21,522
of its $300 million 7% senior subordinated notes for a total purchase price,
including accrued interest, of $12,471. The pre-tax gain on these transactions
was $9,271. In addition, the Company wrote off $375 in unamortized loan fees
related to these extinguished bonds. At September 30, 2008, $278,478 was
outstanding on the senior subordinated notes.
  -9-
 Table of Contents
  The
following table summarizes the scheduled principal payments on the debt
outstanding as of September 30, 2008:
 
 Payments
      due by period(Dollars in
      thousands)
              
              Outstanding
              
              
              Last
      three months in 2008
              
              
              2009
              
              
              2013Credit AgreementTranche
      A
              
              $
              85,500
              
              
              $
              2,250
              
              
              $
              83,250
              
              
              $
              -Revolving
      debt
              
              
              60,000
              
              
              
              -
              
              
              
              60,000
              
              
              
              -Current
      maturities of long-term debt
              
              
              145,500
              
              
              
              2,250
              
              
              
              143,250
              
              
              
              -Senior Subordinated
    Indenture
              
              
              278,478
              
              
              
              -
              
              
              
              -
              
              
              
              278,478Total
              
              $
              423,978
              
              
              $
              2,250
              
              
              $
              143,250
              
              
              $
              278,478
 
 The
amended bank credit facility (see Note 2) requires the
Company (or its parent company) to enter into a transaction (or at least a
letter of intent for a transaction) that would result in either the repayment of
the bank credit facilities or the purchase, at par, of the commitments of the
lenders prior to the time the Company’s parent reports its financial
results for the first quarter of 2009. Since it is unlikely that the Company
would be able to enter into such a transaction, the Company will likely be
dependent on the ability of its parent to enter into a transaction that would
allow the Company to amend or refinance the bank credit facilities. As a result,
the Company has classified all of the debt outstanding under the Credit
Agreement as of September 30, 2008 as current maturities of long-term debt
within current liabilities on the condensed consolidated balance
sheet.
 
 The
Company will endeavor to satisfy this requirement of the amended credit
facility, but can provide no assurances that it will be able to do so. Its
parent company and other subsidiaries (which are guarantors of the senior credit
facility) may be able to assist the Company in satisfying this requirement, but
the Company does not expect any capital contributions that would enable it to
reduce or repay the Company’s senior debt.
 
 In
addition, if the capital and credit markets continue to experience the recent
volatility and the availability of funds remains limited, it is possible that
the Company’s ability to access the capital and credit markets may be limited by
these or other factors at a time when it would like, or need, to do so, which
could have an impact on its ability to refinance maturing debt and/or react to
changing economic and business conditions. The need to refinance the Company’s
senior debt may result in higher future borrowing costs associated with its
short-term and long-term debt.
 
 As of the
date these financial statements are available, the Company’s consolidated
leverage ratio, as defined in the indenture governing the senior subordinated
notes, exceeds 6.5 to 1.0. Additional restrictions apply under the Indenture so
long as the Company’s consolidated leverage ratio exceeds 6.5 to 1.0. Most
notably, (i) the Company cannot pay dividends or make other restricted payments
(as defined in the indenture) to its parent, other than permitted tax
distributions to pay its share of the parent’s tax obligations, and (ii) the
Company cannot incur additional indebtedness, other than permitted indebtedness
as defined in the indenture.
 
 The
exception for permitted indebtedness allows the Company to incur indebtedness
under the senior credit facility, to refinance the senior credit facility or
other existing indebtedness, to incur other indebtedness up to $100 million at
any time outstanding, and to incur other specified types of
indebtedness.
 
 The
prohibition on restricted payments generally means that the Company cannot pay
dividends other than permitted tax distributions, purchase capital stock, or
make investments, other than permitted investments as defined in the indenture.
The prohibition on investments generally means that the Company cannot make
loans; however, the exception for permitted investments allows the Company to
make up to $40 million of loans at any time outstanding to subsidiaries of
Morris Communications to fund working capital, capital expenditure and
acquisition requirements, to make up to $20 million of additional loans or
investments at any time outstanding, or to make other specified types of
investments.
 
 6.
              Goodwill
      and Other Intangible Assets
 
 Goodwill
is the excess of the cost of the acquired entity over the fair market value of
tangible net assets acquired. Goodwill is not presently amortized but tested for
impairment annually or when the facts or circumstances at any of the Company’s
reporting units indicate a possible impairment of goodwill as a result of a
continual decline in performance or as a result of fundamental changes in a
market in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets”. Such indicators of impairment may include, but are not limited
to, changes in business climate such as an economic downturn, significant
operating cash flow declines related to the Company’s newspapers or a major
change in the assessment of future operations of the Company’s
newspapers.
  -10-
 Table of Contents
  Other
intangible assets acquired consist primarily of mastheads and licenses on
various acquired properties, customer lists, as well as other assets. Other
intangible assets acquired (mastheads and domain names), which have indefinite
lives and are not currently amortized, are tested for impairment annually and
when facts or circumstances indicate a possible impairment of the intangible
assets as a result of a continual decline in performance or as a result of
fundamental changes in a market.
 
 Certain
other intangible assets acquired (subscriber lists, non-compete agreements and
other assets) are amortized over their estimated useful lives (from 5 to 20
years).
 
 Amortization
expense of other intangible assets totaled $175 and $264 for the three months
ended September 30, 2008 and 2007, respectively, and $525 and $2,715 for the
nine months ended September 30, 2008 and 2007, respectively, with a large
portion of intangible assets becoming fully amortized during the first two
quarters of last year.
 
 Changes
in the carrying amounts of goodwill and other intangible assets of the Company
for the three months ended September 30, 2008 were as follows:
 
 (Dollars
      in thousands)
              
              Goodwill
              
              
              Other
      intangible assetsBalance
      at December 31, 2007
              
              $
              170,685
              
              
              $
              8,657Amortization
      expense
              
              
              -
              
              
              
              (530
              )Write-down
      of intangible assets
              
              
              (170,685
              )
              
              
              -Balance
      at September 30, 2008
              
              $
              -
              
              
              $
              8,127
 
 Other
finite-lived and indefinite-lived intangible assets at September 30, 2008 and
December 31, 2007 were as follows:
 
 ( Dollars in
      thousands)
              
              Cost
              
              
              Accumulated amortization
              
              
              Net costSeptember
      30, 2008:Finite-lived
      intangible assetsSubscriber
      lists
              
              $
              9,354
              
              
              $
              5,583
              
              
              $
              3,771Non-compete
      agreements and other assets
              
              
              51
              
              
              
              51
              
              
              
              -Total
      finite-lived intangible assets
              
              
              9,405
              
              
              
              5,634
              
              
              
              3,771Indefinite-lived
      intangible assetsNewspaper
      mastheads
              
              
              5,031
              
              
              
              792
              
              
              
              4,239Domain
      names
              
              
              132
              
              
              
              15
              
              
              
              117Total
      indefinite-lived intangible assets
              
              
              5,163
              
              
              
              807
              
              
              
              4,356Total
      other intangible assets
              
              $
              14,568
              
              
              $
              6,441
              
              
              $
              8,127December
      31, 2007:Finite-lived
      intangible assetsSubscriber
      lists
              
              $
              9,354
              
              
              $
              5,066
              
              
              $
              4,288Non-compete
      agreements and other assets
              
              
              51
              
              
              
              38
              
              
              
              13Total
      finite-lived intangible assets
              
              
              9,405
              
              
              
              5,104
              
              
              
              4,301Indefinite-lived
      intangible assetsNewspaper
      mastheads
              
              
              5,031
              
              
              
              792
              
              
              
              4,239Domain
      names
              
              
              132
              
              
              
              15
              
              
              
              117Total
      indefinite-lived intangible assets
              
              
              5,163
              
              
              
              807
              
              
              
              4,356Total
      other intangible assets
              
              $
              14,568
              
              
              $
              5,911
              
              
              $
              8,657
 
 The
remaining expense for the last three months of 2008 and for the four succeeding
years for the existing finite-lived intangible assets is as follows (dollars in
thousands):
 
 2008
              
              $
              1752009
              
              
              6812010
              
              
              6652011
              
              
              5362012
              
              
              419
 
 -11-
 Table of Contents
  At December 31, 2007, the Company performed the annual impairment
tests of goodwill and the indefinite-lived intangible assets, with the test
resulting in no impairment. The fair value of the reporting unit was estimated
using both the net present value of future cash flows method and the market
multiple method.
 
 At that
time, the Company observed that others within the newspaper industry had
recently recorded impairment charges in response to declines in revenues as well
as lower market capitalization rates. While the Company’s revenues and
profitability have declined in 2008, it should be noted that the Company’s last
major acquisition was in 1995 and the purchase price and associated goodwill
were based on lower cash flows prevailing in that period. This was a factor that
differentiates the Company’s recorded goodwill when compared to that of
competitors’ which have engaged in more recent business
combinations.
 
 However,
since revenue and EBITDA market multiples used in determining fair value have
declined dramatically since December 31, 2007, especially during the third
quarter of 2008, and the facts and circumstances indicating possible impairment
of intangibles assets existed (see Note 1), the Company tested goodwill for
impairment between the annual testing dates. The Company first determined the
fair value of its newspaper reporting unit, and compared this amount with its
carrying amount, including goodwill. Since the carrying amount exceeded the
newspaper reporting unit’s fair value, the second step of the goodwill
impairment test was performed to measure the amount of impairment loss. The
second step of the goodwill impairment test compared the implied fair value of
newspaper reporting unit goodwill with the carrying amount of that goodwill.
Since the carrying amount of newspaper reporting unit goodwill exceeded the
implied fair value of that goodwill, an impairment loss was recognized in an
amount equal to that excess. As a result of this analysis, the Company recorded
a non-cash pre-tax impairment charge to goodwill totaling $170,685 during the
third quarter of 2008. This non-cash impairment charge is reflected as
write-downs of intangible assets and do not affect the Company’s operating cash
flows or the Company’s compliance with its financial debt
covenants.
 
 Newspaper
mastheads (newspaper titles and website domain names) are not subject to
amortization and are tested for impairment annually (at year-end), 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 reporting unit’s mastheads with the carrying amount. The
Company performed impairment tests on newspaper mastheads as of September 30,
2008. No impairment loss was recognized.
 
 Intangible
assets subject to amortization (primarily advertiser and subscriber lists) are
tested for recoverability whenever events or change in circumstances indicate
that their carrying amounts may not be recoverable. The carrying amount of
each asset group is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use of such asset group. The Company
performed impairment tests on its long lived assets (including intangible assets
subject to amortization) as of September 30, 2008. No impairment loss was
recognized on intangible assets subject to amortization.
 
 7.
              Discontinued
      Operations
 
 On
November 30, 2007, the Company completed the sale (“GateHouse sale”) of fourteen
daily newspapers, three nondaily newspapers, a commercial printing operation and
other related publications to GateHouse Media, Inc. ("GateHouse"). The total
purchase price was $115,000 plus a working capital adjustment. One hundred five
million dollars was received at closing in cash, with the remainder payable in
the form of a one-year unsecured $10,000 promissory note bearing interest
at 8% per annum.
 
 In
addition, a preliminary working capital adjustment paid by GateHouse to the
Company at the closing of the transaction totaled $2,500, with the remaining
working capital adjustment recorded at that time within other consolidated
assets on the Company’s consolidated balance sheet. At September 30, 2008, the
recorded working capital adjustment due from GateHouse was $3,914.
 
 At
September 30, 2008, the balance on the on the promissory note receivable was
$10,067, including $67 in accrued interest. During the three and nine month
periods ended September 30, 2008, interest income accrued on these notes totaled
$200 and $600, respectively. The promissory note receivable matures on November
30, 2008, however, GateHouse has requested relief and the Company is
currently negotiating new terms.
 
 In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the results of operations of all
newspapers, publications and businesses included in the GateHouse sale have been
recorded as discontinued operations during the three month and nine month
periods ended September 30, 2007.
 
 During
the third quarter of 2007, income from discontinued operations, net of the $632
provision for income taxes, was $1,048, with total operating revenues of $17,296
and total operating costs of $15,616. During the first nine months of 2007,
income from discontinued operations, net of the $1,296 provision for income
taxes, was $2,020, with total operating revenues of $50,567 and total operating
costs of $47,251.
 
 8.
              Commitments
      and Contingencies
 
 The Company and its subsidiaries are parties to several claims
and lawsuits arising in the course of their normal business activities. Although
the ultimate outcome of these suits cannot be ascertained at this time, it is
the opinion of management that these matters, when resolved, will not have a
material effect on the Company’s condensed consolidated financial
statements.
  -12-
 Table of Contents
  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
 The
following discussion should be read in conjunction with our unaudited condensed consolidated financial statements as of and for
the three-month and nine-month periods ended September 30, 2008 and 2007 and
with our consolidated
financial statements as of December 31, 2007 and 2006 and for each of three
years in the period ended December 31, 2007, filed on Form
10-K.
 
 Information
availability
 
 Our
quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on
Form 8-K and all amendments to those reports are available free of charge on our
Web site, morris.com , as soon as feasible after such reports are electronically
filed with or furnished to the U.S. Securities and Exchange Commission. In
addition, information regarding corporate governance at Morris Publishing and
our parent, Morris Communications Company, LLC (“Morris Communications”), is
also available on our Web site. The information on our Web site is not
incorporated by reference into, or as part of, this Report on Form
10-Q.
 
 Overview
 
 Morris
Publishing currently owns and operates 13 daily newspapers as well as nondaily
newspapers, city magazines and free community publications in the Southeast,
Midwest, Southwest and Alaska. Morris Publishing-owned newspapers include, among
others, The Florida
Times-Union, Jacksonville, The Augusta (Ga.) Chronicle, Savannah (Ga.) Morning News, Lubbock (Texas) Avalanche-Journal, Amarillo (Texas) Globe-News, Athens(Ga.) Banner Herald, and The St. Augustine (Fla.)
Record.
 
 In
addition, we also print and distribute periodical publications and operate
commercial printing operations in conjunction with our newspapers.
 
 Most of
our revenue is generated from print and online advertising, which accounted for
77.9% of our net operating revenue for the third quarter of 2008. Our
advertising revenue consisted of 54.9% in retail, 38.4% in classified and 6.7%
in national.
 
 Classified
advertising has decreased as a percentage of total advertising revenue
particularly in the employment and real estate categories as a result of the
economic slowdown affecting classified advertising and the secular shift in
advertising demand to online. While revenues from retail advertising carried as
part of our newspapers (run-of-press) or in advertising inserts placed in
newspapers (inserts) has decreased period over period, retail advertising has
steadily increased as a percentage of total advertising. National advertising
revenue, which makes up a small percentage of our total advertising revenues,
has remained relatively similar period over period.
 
 All
categories of the advertising revenues above have been growing online, with the
exception of employment classifieds which has been negatively affected by the
downturn in the economy.
 
 The table
below reflects the percentage of total advertising revenue for each medium for
the two periods presented:
 
 Three
      months ended September 30,2008
              
              
              2007Run
      of Press
              
              
              60.5
              %
              
              
              64.5
              %Inserts
              
              
              20.8
              %
              
              
              19.2
              %Specialty
              
              
              4.9
              %
              
              
              4.4
              %Online
              
              
              13.8
              %
              
              
              11.8
              %Total
              
              
              100.0
              %
              
              
              100.0
              %
 
 Linage,
the number of inserts, internet page-views, along with rate and mix of
advertisement are the primary components of advertising revenue. The advertising
rate depends largely on our market reach, primarily through circulation, and
market penetration. The number of copies sold and the amount charged to our
customers are the primary components of circulation revenue. Our other revenue
consists primarily of commercial printing and other online revenue.
 
 Our
advertising results exhibit that from time to time, each individual newspaper
may perform better or worse than our newspaper group as a whole due to certain
local or regional conditions. The material variances in the advertising
categories listed above and at each newspaper are discussed in more detail in
our results of operations, which follows.
 
 Circulation
revenue represented 19.5% of our total net operating revenue.
  -13-
 Table of Contents
  We
continue to see overall declines in circulation at our newspapers which is
consistent with the industry as a whole; however, a portion of our decline also
comes from the discontinuation of unprofitable distribution routes in some of
our markets. We continue to focus on circulation retention efforts through
lengthened subscriptions periods, new payment methods, and increased service
levels.
 
 Employee
and newsprint costs are the primary costs at each newspaper. Our operating
performance is affected by newsprint prices, which historically have fluctuated.
Newsprint costs have represented 10 – 15% of total operating expenses.Historically, newsprint
has been subject to significant price fluctuations from year to year, unrelated
in many cases to general economic trends. Supply and demand has typically
controlled pricing.
 
 Critical
accounting policies and estimates
 
 Summary
 
 Critical
accounting policies are those that are most significant to the portrayal of our
financial position and results of operations and require difficult, subjective
and complex judgments by management in order to make estimates about the effect
of matters that are inherently uncertain. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts in our condensed consolidated financial statements. We evaluate our
estimates on an on-going basis, including those related to our allowances for
bad debts, asset impairments, post-retirement benefits, self-insurance and
casualty, management fees, income taxes and commitments and contingencies. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities.
 
 Although
actual results have historically been reasonably consistent with management’s
expectations, the actual results may differ from these estimates or our
estimates may be affected by different assumptions or conditions.
 
 Other
than our adoption during the first quarter of 2008 of Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” and
SFAS No. 159,“The Fair Value
Option for Financial Assets and Financial Liabilities-Including an Amendment of
FASB Statement No. 115”,we believe there have been no
changes during the first nine months of 2008 to the items that we disclosed
as our critical accounting policies and estimates herein and in the Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
annual report dated December 31, 2007 filed with the U.S. Securities and
Exchange Commission on Form 10-K.
 
 We are
currently evaluating the effect, if any, that the implementation of SFAS No. 157
in 2009 for non-financial assets and non-financial liabilities will have on our
financial position, results of operations, and cash flows. Our adoption of SFAS
No. 159 had no effect on our financial position, results of operations, and cash
flows.
 
 Goodwill and Other
Intangible Assets
 
 Goodwill
is the excess of the cost of the acquired entity over the fair market value of
tangible net assets acquired. Goodwill is not presently amortized but tested for
impairment annually or when the facts or circumstances at any of our reporting
units indicate a possible impairment of goodwill as a result of a continual
decline in performance or as a result of fundamental changes in a market in
accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”). The fair value of the reporting unit is
estimated using both the net present value of future cash flows method and the
market multiple method.
 
 Other
intangible assets acquired consist primarily of mastheads and licenses on
various acquired properties, customer lists, as well as other assets. Other
intangible assets acquired (mastheads and domain names), which have indefinite
lives and are not currently amortized, are tested for impairment annually and
when facts or circumstances indicate a possible impairment of the intangible
assets as a result of a continual decline in performance or as a result of
fundamental changes in a market.
 
 Since
December 31, 2007, we observed that others within the newspaper industry had
recently recorded impairment charges in response to declines in revenues as well
as lower market capitalization rates. While our revenues and profitability have
declined in 2008, it should be noted that our last major acquisition was in 1995
and the purchase price and associated goodwill were based on lower cash flows
prevailing during that period. This is a factor that differentiates our recorded
goodwill when compared to that of competitors’ which have engaged in more recent
business combinations.
 
 However,
since revenue and EBITDA market multiples used in determining fair value have
declined dramatically since December 31, 2007, especially during the third
quarter of 2008, and the facts and circumstances indicating possible impairment
of intangibles assets existed (see the comprehensive discussion of the factors
that affected the September 30, 2008 impairment charge which follows), we
analyzed the carrying value of our net assets as of September 30, 2008, and as a
result, recorded a non-cash pre-tax impairment charge to goodwill totaling
$170.7 million (our total recorded goodwill balance) during the third quarter of
2008. This non-cash impairment charge is reflected as a write-down of
intangible assets and does not affect our operating cash flows or our compliance
with our financial debt covenants.
  -14-
 Table of Contents
  Goodwill impairment
test
 
 The
required two-step approach to test for impairment under SFAS No. 142 requires
the use of accounting judgments and estimates of future operating results. The
first step is the estimation of the fair value of the reporting unit, which is
then compared to its carrying value. If the fair value is less than the carrying
value of the reporting unit then an impairment of goodwill possibly
exists.
 
 Step two
is then performed to determine the amount of the impairment.
 
 In
summary we considered the following factors when conducting our impairment
tests:
   Step
one:




We
operate all of our 13 daily newspapers, as well as nondaily newspapers, city
magazines and free community publications, as a single reporting unit, with the
presentation of our financial condition and performance being consistent with
the way in which our publications are managed.
 
 The fair
value of our single reporting unit was determined using a weighted average of a
discounted cash flow modeland a
market approach, which estimates
fair value using market multiples of various financial measures compared to a
set of comparable public companies in the publishing industry.
  a)Discounted cash flow
model
  Operating
net free cash flows are computed based on operating profit projections through
2017, adjusted for capital expenditures and the tax effects of
depreciation/amortization. Operating cash flows are also adjusted to reflect
additions to working capital, based on our projected needs. The resulting
projected net free cash flows are then restated to their present values as of
September 30, 2008 (“the valuation date”) using the appropriate discount
rate.
 While
these estimates are always inherently subject to risks and uncertainties, the
ability to project future operations (and in particular advertising revenues)
has become more difficult due to the unprecedented declines in print advertising
as discussed below
  The other
major component of the discounted cash flow model is the terminal value, which
represents the cash flows that will be generated beyond the discrete forecast
horizon. Using the Gordon Growth Model, the net free cash flow from the final
year of the projection period was capitalized into perpetuity using a long-term
growth rate of 2%. The terminal value is discounted to present value using the
discount rate based on the factors
described below.
 Discount
rate determination


The rate
at which future earnings are discounted to their present value is influenced by
such factors as the degree of risk associated with the given industry or
specific business entity under consideration, rates of return for alternative
investment opportunities, historical rates of returns earned by comparable
properties and market expectations of future interest rates and investment
returns. The discount rate takes into account such generally available items as
the inflation rate, securities (Treasury Bills), or corporate
bonds.
 
 In our
case, the weighted average cost of
capitalwas based on that of a hypothetical buyer of our company
considering its 1) cost of debt, 2)
cost of equity,and 3) capital structure
(the relative contribution of debt and equity). We estimated that senior debt
would supply 50 percent of total capital structure, followed by equity at 50
percent, based on median industry capital structure and consideration of market
conditions as of the valuation date.
 
 1) Cost of
debt-We used a pretax cost of debt of 12.0%, which was based on
market returns for CCC+ corporate rated bonds as of the valuation date. To
calculate the after-tax cost of debt, we then adjusted the rate for the presence
of federal and state income taxes. We assumed the typical buyer would be a
tax-paying entity. Our after-tax cost of debt was 7.3%.
  -15-
 Table of Contents
  2) Cost of
equity-We used the Capital Asset Pricing Model (“CAPM”) to estimate the
cost of equity. This required consideration be given to current risk free
interest rates available in the marketplace (US Government Bonds); 2) the
returns on small capitalization publicly traded stocks; and 3) relative risks
associated with the stocks of the industries in which we operate relative to the
overall stock market.
 We
selected the 20-Year US Treasury Constant Maturities (with a 4.4% interest rate
at the valuation date) as the risk-free rate to use in the CAPM.
 
 We used
available CAPM resources to determine the Equity Risk Premium, the Size Premium
and Company Specific Risk Premium.
 
 Our total
after-tax cost of equity of 18.8% was then discounted by the 50% equity capital
structure factor.
 
 3) Weighted average cost of capital-The
cost of equity and after-tax cost of debt are weighted based on the capital
structure discussed above, to arrive at a weighted average cost of capital at
the valuation date of 12.0% (rounded).




b)
Market Multiple


We used a
weighted average of revenue and EBITDA (earnings before interest, taxes,
depreciation and amortization) market valuation multiples of comparable public
companies (for both the trailing twelve months and the projected twelve months
ended December 31, 2008) to determine our reporting unit’s fair value. The data
for these comparable public companies was taken from each company’s most
recently reported information.
  c)
Risks
  Changes
to our long-term projections of future financial performance and the selection
of appropriate discount rates used to determine the present value of future cash
flows or the use of alternative assumptions could produce significantly
different results.
  d) Step
one results
  Step one
of the impairment test failed, with the total fair value of our assets less than
our book value as of the valuation date. Step two was then performed to
determine the amount of the impairment.


Step
two:




The
estimated fair value (implied value) of our goodwill is determined by
calculating the residual fair value that remains after the total estimated fair
value of our single reporting unit is allocated to our net assets (including
unrecorded intangibles) other than goodwill.




A
goodwill impairment charge is recorded to the extent that the implied goodwill
values are below the book value of goodwill for our single reporting
unit.





(a) Step
two results





Our
implied value of goodwill was zero which resulted in the impairment of all
$170.7 million of the recorded goodwill at the valuation date.






Masthead impairment
test





Newspaper
mastheads (newspaper titles and website domain names) are not subject to
amortization and are tested for impairment annually (at year-end), 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 our single reporting unit’s mastheads with the carrying amount. We
performed impairment tests on newspaper mastheads as of September 30, 2008. No
impairment loss was recognized.





-16-
 Table of Contents





Other intangibles impairment
test





Intangible
assets subject to amortization (primarily advertiser and subscriber lists) are
tested for recoverability whenever events or change in circumstances indicate
that their carrying amounts may not be recoverable. The carrying amount of
each asset group is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use of such asset group. We
performed impairment tests on our long lived assets (including intangible assets
subject to amortization) as of September 30, 2008. No impairment loss was
recognized on intangible assets subject to amortization.





Comprehensive
discussion





A more
comprehensive discussion of the third quarter of 2008 factors that affected the
September 30, 2008 impairment charge follows.





Fair
value is determined using an income approach, which estimates fair value based
upon future revenue, expenses and cash flows discounted to their present value.
The estimated future cash flows projected can vary within a range of outcomes
depending on the assumptions and estimates used. The estimates and judgments
that most significantly affect the fair value calculation are assumptions
related to revenue, and in particular, potential changes in future advertising
(including the impact of economic trends and the speed of conversion of
advertising and readership to online products from traditional print products);
trends in newsprint prices; and other operating expense items. The following are
trends considered by us in developing assumptions and estimates for our
discounted cash flow analysis:




s




s




s




s




While the
impact of these trends and anticipation of restructuring efforts were taken into
account in our discounted cash flow model as of September 30, 2008, assumptions
about their impact on future operations are subject to variability and the
ultimate outcome and specific advertising growth rates are highly
subjective.
 
 Fair
value calculations by their nature require management to make assumptions about
future operating results which can be difficult to predict with certainty. They
are influenced by our view of future advertising trends in the industry, and in
the markets in which we operate newspapers. As discussed above, the variability
in these trends and the difficulty in projecting advertising growth in
particular in each newspaper market are impacted by the unprecedented declines
in advertising.
  -17-
 Table of Contents
  Subsequent
events


Third
amendment to the 2005 Credit Agreement
 
 The
Credit Agreement, dated as of December 14, 2005 (the “Credit Agreement”),
contains financial covenants requiring Morris Publishing to meet certain
financial tests on an on-going basis, including a minimum interest coverage
ratio, a minimum fixed charge ratio, and maximum cash flow ratios, based upon
the consolidated financial results of Morris Communications and its subsidiaries
(including us).
 
 On
October 8, 2008, we, as borrower, entered into Amendment No. 3 (“Amendment No.
3.”), effective as of September 30, 2008 (“Effective Date”), to the Credit
Agreement, which originally provided for $350 million of senior secured term and
revolving credit facilities.
 
 On the
Effective Date, $145.5 million was outstanding under the Credit Agreement, with
$60 million outstanding under the revolving credit facility.
  Amendment
No. 3 relaxes these financial tests as of September 30, 2008 through the
delivery date of Morris Communications’ financial statements for the quarter
ending June 30, 2009 (but not later than August 29, 2009). With respect to the
financial tests, Amendment No. 3 permits add backs of one-time cash expenses for
severance costs of up to $5 million in calculating cash flow, excludes term loan
principal payments for specific quarters from the fixed charges, and excludes at
all times taxes applicable to certain one-time items (asset sales and debt
repurchases) from the fixed charges.
 
 In
addition, Amendment No. 3 reduces the threshold for mandatory prepayments upon
asset sales, now generally requiring prepayments when aggregate net cash
proceeds on dispositions exceed $5 million, and deleting the exception that
would have permitted such proceeds to be reinvested in other
assets.
 
 Further,
Amendment No. 3 requires Morris Communications and its subsidiaries (including
us) to consummate a transaction (or at least sign a letter of intent to do so)
that would generate sufficient funds to be able to prepay all loans under the
Credit Agreement, or to purchase an assignment of all loans and commitments of
the lenders at par, no later than the delivery date of Morris Communications’
financial statements for the quarter ending March 31, 2009 (but not later than
May 30, 2009). Due to this requirement, we have classified all of the debt
outstanding under the Credit Agreement as of the Effective Date as current
maturities of long-term debt within current liabilities on the condensed
consolidated balance sheet.
 
 Amendment
No. 3 places greater restrictions on the ability of Morris Communications and
its subsidiaries (including us) to incur other indebtedness, make other
acquisitions of businesses or investments (other than the Morris Communications’
acquisition obligations in effect on the Amendment No. 3 Effective Date)or to
make restricted payments, as such terms are defined in the Credit Agreement.
Amendment No. 3 does not restrict dividends or restricted payments from us to
Morris Communications. Amendment No. 3 prohibits the voluntary prepayment or
purchase of any of our senior subordinated notes. We had no acquisition
obligations in effect on the effective date of the amendment.
 
 Amendment
No. 3 increases the interest rate on borrowings under the Credit Agreement and
the commitment fee on undrawn amounts under the revolving credit facility.
Interest rates may vary depending upon the consolidated cash flow ratio of
Morris Communications and its subsidiaries. Based upon the current cash flow
ratio, (i) the interest rate on Eurodollar loans will generally increase to the
LIBO rate, plus 2.50% (rather than LIBO rate plus 1.25% prior to Amendment No.
3), and (ii) the interest rate on loans tied to the alternate base rate
(generally the prime rate of JPMorgan Chase Bank, the administrative agent) will
generally increase to prime plus 1.50% (rather than prime plus 0.25% prior to
Amendment No. 3). The applicable interest rates will further increase by another
0.50% after March 31, 2009. The commitment fee increases to 0.50% (up from
0.375%) on undrawn amounts under the revolving credit facility. Amendment No. 3
also provides for an upfront fee of 25.0 basis points (0.25% of the principal
amount) based on the reduced commitment for lenders approving the
amendment.
 
 On the
Effective Date, we could borrow and use for general corporate purposes
approximately $40 million under our most restrictive covenants from the newly
amended senior bank credit facility and were in compliance with all financial
covenants under our amended credit facility arrangements.
 
 The
foregoing summary is a brief description of the terms and conditions of the
Amendment No. 3 that are material to our, but does not include all of the
provisions of the amendment. A complete copy of Amendment No. 3 is furnished as
Exhibit 99.1 to the Form 8-K filed with the U.S. Securities and Exchange
Commission on October 8, 2008.
  -18-
 Table of Contents
  The
impact of the mandatory transaction requirement in Amendment No. 3 will require
us to (i) refinance the existing bank debt or seek an amendment of the terms of
the Credit Agreement, either of which could significantly increase our cost of
borrowing; (ii) generate funds through the sale of assets; (iii) raise capital
from debt or equity transactions with third party lenders or investors or with
our parent or other related entities; or (iv) a combination of the foregoing, no
later than May 30, 2009 (or to at least enter into a letter of intent to do so).
Further, if the mandatory transaction requirement is waived by the senior
lenders, or if such a mandatory transaction fails to close notwithstanding a
timely letter of intent, we would likely be required to take one of such actions
no later than August 29, 2009 since we would be unlikely to meet the financial
covenants under the Credit Agreement when we deliver Morris Communications’
consolidated financial statements for the second quarter of 2009 no later than
August 29, 2009 (when the relaxed financial covenants terminate).
 
 The
senior debt is guaranteed by our parent, Morris Communications, and our parent’s
other subsidiaries. The mandatory transaction requirement could be satisfied if
a guarantor enters into a transaction that would induce a lender to refinance
our senior debt, if a guarantor raises sufficient funds to purchase the loans
and commitments from the existing senior creditors, or if a guarantor raises
sufficient funds to refinance the senior debt with a new loan from the
guarantor. We do not expect Morris Communications to make any capital
contributions that would enable us to reduce our senior indebtedness, even if
the terms of mandatory transaction by a guarantor would permit such a capital
contribution. If a guarantor pays our senior debt, we would expect the guarantor
to step into the shoes of the senior creditors and become the senior
creditor.
 
 In view
of the current and expected future market conditions in the credit markets and
the newspaper industry (as evidenced by the impairment charge to
write-off our goodwill as discussed earlier in this analysis),we may be
unable to satisfy the mandatory transaction requirement of Amendment No. 3 on
our own. We will likely be dependent on the ability and willingness of our
parent and guarantors to enter into a transaction that would allow us to amend
or refinance the senior debt. An amendment or refinancing of our senior debt may
be on less favorable terms and conditions than the current Credit Agreement as
amended. In absence of an amendment or refinancing of the senior debt, we will
likely be in default under the Credit Agreement in late May or August of 2009,
in which event we would be unable to borrow on the revolver and may be required
to prepay the entire principal due under the Credit Agreement.
 
 If this
was to occur, it could lead to an event of default under the indenture
governing the notes. In such an event, we cannot assure the
bondholders that we would have sufficient assets to pay amounts due on the
notes. As a result, the bondholders may receive less than the full amount they
would be otherwise entitled to receive on the notes.
 
 Specifically,
there is an event of default under the bond indenture if we fail to
pay other indebtedness (such as the Senior Credit Facility) exceeding $5 million
upon final maturity or within 20 days of an acceleration.
 
 Amendment
to Management and Services Agreement
 
 On
October 1, 2008, we entered into a Third Amendment to Management and Services
Agreement, which was designed to reinstate fees payable by us for management and
shared services to our parent, Morris Communications and the parent’s affiliate,
MSTAR Solutions, LLC (“MSTAR Solutions”). The payment of said fees had been
suspended by the Second Amendment to Management and Services
Agreement.
 
 Under the
third amendment, payment of the management fee and the technology and shared
services fee will be reinstated beginning October 1, 2008. Prior to the Third
Amendment, the payment of these fees had been suspended for the period from May
1, 2008 through December 31, 2008. Absent this amendment, we would not have been
obligated to pay fees until January 1, 2009.
 
 Termination ofretiree health care
plan
 
 During
November of 2008, Morris Communications initiated procedures to terminate its
retiree health care plan (see Subsequent Events), effective with respect to
claims incurred on and after January 1, 2009. At that time, the plan will cease
to provide benefits to (1) former employees and their eligible dependents and
(2) regular full time and eligible part time employees upon their separation
from service.
 
 We
participate in Morris Communications’ retiree health care plan, with the
expenses and postretirement health benefit obligation related to the plan
being allocated to us based on total headcount.
 
 Our estimate
of the total net periodic benefit cost for all of 2008 is $1.4
million.
 
 At
September 30, 2008, the postretirement health benefit obligation allocated
to us was $23.2 million. We are currently evaluating the effect that
the termination of this obligation will have on our financial position, results
of operations, and cash flows.
  -19-
 Table of Contents
  Financial
summary for the three months ended September 30, 2008 compared to September 30,
2007
 
 Financial Summary.The
following table summarizes our consolidated financial results for the three
months ended September 30, 2008 and 2007:
 
 Three
      months ended September 30,(Dollars in
      millions)
              
              2008
              
              
              2007Total
      net operating revenues
              
              $
              78.2
              
              
              $
              92.2Total
      operating expenses
              
              
              242.0
              
              
              
              76.4Operating
      (loss) income from continuing operations
              
              
              (163.8
              )
              
              
              15.8Other
      expenses, net
              
              
              6.6
              
              
              
              9.5(Loss)
      income from continuing operations before taxes
              
              
              (170.4
              )
              
              
              6.3(Benefit)
      provision for income taxes
              
              
              (7.2
              )
              
              
              2.4(Loss)
      income from continuing operations
              
              
              (163.2
              )
              
              
              3.9Income
      from discontinued operations, net of provision for income
      taxes
              
              
              -
              
              
              
              1.1Net
      (loss) income
              
              $
              (163.2
              )
              
              $
              5.0
 
 Lossfrom continuing
operations
 
 Our loss
from continuing operations for the third quarter was $163.2 million compared to
income from continuing operations of $3.9 million during the same quarter last
year.
  Our
third-quarter operating results included a $170.7 million pre-tax write-down of
all of our goodwill, a non-cash charge that does not affect our operating cash
flows or our compliance with our financial debt covenants. This charge reflects
the continuing and expected future declines in advertising revenues which are
due to weak national and local economic conditions which have reduced
advertising demand, and increased competition, particularly from on-line
media.
 
 The
income tax benefit for continuing operations was $7.2 million, compared to an
income tax provision for continuing operations of $2.4 million last year. The
$170.7 million pre-tax write-down of goodwill resulted in only a small income
tax benefit for financial reporting purposes because most of the goodwill is not
deductible for income tax purposes.
  Excluding
the write-down of intangible assets, income from continuing operations before
taxes was $0.3 million compared to $6.3 million during the third quarter last
year.
 
 Interest
and loan amortization expense totaled $6.8 million, down $2.8 million from $9.6
million last year primarily due to the reduction in our outstanding
debt.
 
 Excluding
the goodwill impairment charge, our operating income was $6.9 million down $8.9
million, or 56.6%, from $15.8 million for the third quarter last
year.
 
 Total net
operating revenues were $78.2 million, down $14.0 million, or 15.2%, from $92.2
million, with both the print advertising decline and the online employment
classified advertising decline accelerating due to the slowing economy and the
secular changes in our industry.
 
 Total
operating expenses, excluding the goodwill impairment charge, were $71.4
million, down $5.0 million, or 6.6%, from $76.4 million, as a result of our
strict efforts to reduce costs.
 
 Total
labor and employee benefit costs were $31.9 million, down $3.6 million, or
10.2%; newsprint ink and supplements costs were $9.2 million, up $0.1 million,
or 1.3%; and other operating costs were $26.8 million, down $1.4 million, or
5.1%. Depreciation and amortization expense was $3.5 million, down $0.1 million,
or 2.7%.
 
 Our
operating expenses were favorably impacted by reductions in head count, employer
401(k) contributions, medical insurance claims and unfavorably impacted by
increased fuel costs and one-time employee severance payments. The significant
increase in average cost per ton of newsprint was only partially offset by the
savings from decreased consumption of newsprint.
 
 In
addition, we recently eliminated the unprofitable niche products and
publications at many of our newspapers or implemented various programs to reduce
their costs, which included reducing distribution frequency or quantity,
discontinuing distribution to unprofitable locales, closing bureau offices, and
eliminating FTE’s associated with these products.
  -20-
 Table of Contents
  Discontinued operations and
net income
 
 On
November 30, 2007, we completed the sale (“GateHouse sale”) of fourteen daily
newspapers, three nondaily newspapers, a commercial printing operation and other
related publications to GateHouse Media, Inc. ("GateHouse"). The total purchase
price was $115 million plus a working capital adjustment. One hundred five
million dollars was received at closing in cash, with the remainder payable in
the form of a one-year unsecured $10.0 million promissory note bearing interest
at 8% per annum.
 
 In
addition, a preliminary working capital adjustment paid by GateHouse to us at
the closing of the transaction totaled $2.5 million with the remaining working
capital adjustment recorded at that time within other consolidated assets on our
consolidated balance sheet.
 
 At
September 30, 2008, the balance on the note receivable was $10.1 million,
including $0.1 million in accrued interest. During the three and nine month
periods ended September 30, 2008, interest income accrued on these notes totaled
$0.2 million and $0.6 million, respectively.
 
 The
results of operations of all newspapers, publications and businesses included in
the sale to GateHouse have been recorded as discontinued operations during the
three and nine month periods ended September 30, 2007.
 
 During
the third quarter of 2007, the income from discontinued operations, net of the
$0.6 million income tax provision, was $1.0 million, with total operating
revenues of $17.3 million and total operating costs of $15.6
million.
 
 Net
income during the third quarter of 2007 was $5.0 million.
 
 Net operating revenue. The
table below presents the total net operating revenue from continuing operations
and related statistics for the three months ended September 30, 2008 compared to
September 30, 2007:
 
 (Dollars in
      millions)
              
              Three months ended September
      30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Net
      operating revenuesAdvertisingRetail
              
              $
              33.5
              
              
              $
              38.0
              
              
              
              (12.0
              %)Classified
              
              
              23.4
              
              
              
              32.8
              
              
              
              (28.7
              %)National
              
              
              4.0
              
              
              
              4.4
              
              
              
              (7.5
              %)Total
      advertising revenues
              
              
              60.9
              
              
              
              75.2
              
              
              
              (19.0
              %)Circulation
              
              
              15.3
              
              
              
              14.5
              
              
              
              5.4
              %Other
              
              
              2.0
              
              
              
              2.5
              
              
              
              (18.9
              %)Total
      net operating revenues
              
              $
              78.2
              
              
              $
              92.2
              
              
              
              (15.2
              %)
 
 Advertising
revenue:
 
 Total
advertising revenue was $60.9 million, a decrease of $14.3 million, or 19.0%,
from last year, with continued losses in the recruitment, real estate, auto, and
majors accounts. Retail, national and classified advertising categories were
down 12.0%, 7.5% and 28.7%, respectively. The third quarter of 2008 included
thirteen Sundays compared to fourteen last year, having an unfavorable impact on
this year’s quarter over quarter comparisons, as Sundays usually generate more
print advertising revenue than the other six days of the week.
 
 In
addition, our third-quarter results continue to reflect the industry’s shift
from print and insert advertising to online advertising. Compared to the third
quarter of 2007, run of press advertising revenue was $36.8 million, down $11.7
million, or 24.1%. Insert advertising revenue was $12.7 million, down $1.7
million, or 12.1%, and advertising revenue from specialty products printed by
us, but not a part of main newspaper product, was $3.0 million, down $0.4
million, or 11.3%.
 
 Online
advertising revenue was $8.4 million, down $0.5 million, or 5.3%, from last year
due to the shift in online employee classified advertising to national
third party Web sites and the reduction in employment opportunities. Excluding
the employment classified category, online advertising revenue was up
10.7%.
 
 Compared
to the third quarter of last year, total page-views were 161.6 million, up 12.4
million, or 8.3%, and unique page-views were 12.1 million, up 2.8 million, or
30.2%, reflecting our long-term strategy of becoming an increasingly digital
media operation.
  -21-
 Table of Contents
  Our
existing Florida newspapers and publications, which account for 34.7% of our
total advertising revenues, contributed 45.9% of our entire net decline in
advertising revenue. Advertising revenue in Jacksonville was down $5.8
million, or 24.6%, and St. Augustine was down $0.5 million, or
18.7%.
 
 As for
our other larger daily newspapers, Augusta was down $2.0 million, or 22.5%,
Savannah was down $1.7 million, or  24.9%, Lubbock was down $1.2
million, or 17.3%, Amarillo was down $0.9 million, or 14.4%, Topeka was down
$0.8 million, or 16.3%, and Athens was down $0.6 million, or 17.8%.
 
 Retail advertising
revenue:
 
 Retail
advertising revenue was $33.5 million, down $4.6 million, or 12.0%, from the
prior year, with significant declines from all majors which include department,
discount, grocery, electronics, home improvement and out of business stores, and
from hospitals, telecommunications, office supply, pharmacies, and
banks.
 
 Insert
retail revenue was $11.4 million, down $1.6 million, or 12.4%, while print
retail advertising revenue was $16.7 million, down $3.0 million, or 15.2%, from
the third quarter of last year. Retail advertising revenue from specialty
products printed by us, but not a part of main newspaper product, was $2.8
million, down $0.3 million, or 9.6%, from last year. Retail online revenue was
$2.6 million, up $0.3 million, or 14.4%, from the third quarter of last
year.
 
 Jacksonville’s
retail advertising revenue was down $0.6 million, or 6.0%, compared to the third
quarter of 2007; an improvement over the 2007 quarter over quarter decline.
Jacksonville’s retail advertising revenue was down $2.9 million, or 23.6%, in
third quarter of 2007 compared to 2006.
 
 In
addition, Augusta was down $1.1 million, or 21.5%, Savannah was down $0.7
million, or 19.6%, and Lubbock was down $0.7 million, or 17.9%.
 
 Classified advertising
revenue:
 
 Total
classified advertising revenue was $23.4 million, down $9.4 million, or 28.7%,
from the third quarter of 2007, with large declines in the print and online
recruitment category.
 
 Classified
run of press advertising revenue was $17.7 million, down $8.3 million, or 32.0%,
and online classified revenue was $5.4 million, down $1.0 million, or 15.4%,
from the third quarter of last year. Excluding the employment category, online
classified revenue was unchanged from last year.
 
 Our
Jacksonville newspaper’s classified advertising revenue was down $4.7 million,
or 41.6%, and our St. Augustine newspaper was down $0.4 million, or
33.8%.
 
 As for
our other larger daily newspapers, Savannah was down $1.0 million, or 31.5%,
Augusta was down $0.8 million, or 23.6%. Lubbock, Amarillo, Topeka and Athens
were each down $0.5 million, or 18.7%, 18.8%, 20.8%, and 34.2%,
respectively.
 
 National advertising
revenue:
 
 Total
national advertising revenue was $4.0 million, down $0.4 million, or 7.5%, from
the third quarter last year, with Jacksonville contributing most of the net
decrease.
 
 Circulation
revenue:
 
 During
the third quarter, circulation revenue was $15.3 million, up $0.8 million, or
5.4%, from the same quarter last year, primarily due to the change in the way we
sell home delivery subscriptions in Florida.
 
 In prior
years, we sold home delivery newspapers in Jacksonville and St. Augustine
directly to the carriers and derived our revenue from the wholesale rate to the
carrier. During the first quarter of 2008 we began selling these copies directly
to the subscribers and paying our carriers a delivery fee, in effect, favorably
impacting our circulation revenue while increasing our other operating costs.
Adjusting the $1.2 million in incremental carrier delivery costs at our two
Florida newspapers from our circulation revenue; our total circulation revenue
was down 3.1% from last year.
 
 Daily and
Sunday circulation volume was down 7.7% and 8.1%, respectively, with
Jacksonville contributing nearly 43% of each decline.
 
 While
some of these declines were the direct result of our cutting of distribution in
unprofitable areas, the high cost of fuel is impacting the sales and retention
efforts at many of our newspapers.
  -22-
 Table of Contents
  In
addition, we have eliminated expensive third-party circulation programs that
many advertisers believe have limited value, and recent price increases have
caused some loss in circulation.
 
 With the
exception of Brainerd and our two Alaska newspapers, daily single copy prices
were raised from 50 cents to 75 cents at the beginning of October 2008. In
addition, Bluffton is converting from a free to a paid distribution newspaper as
of December 31, 2008.
 
 We have
purchased a software license agreement to replace the print edition newspaper in
education (“NIE”) copies at all of our newspapers with electronic editions in
order to reduce our net production costs. In addition, we anticipate marketing
electronic edition only copies to new subscribers and providing print
subscribers free access to these electronic editions during the first six months
of 2009.
 
 Other
Income:
 
 Other
income was $2.0 million, down $0.5 million, or 18.9%, from last
year.
 
 Net operating expense.. The
table below presents the total operating expenses from continuing operations and
related statistics for the newspaper operations for three months ended September
30, 2008 compared to September 30, 2007:
 
 (Dollars in
      millions)
              
              Three months ended
    September30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Operating
      expensesLabor
      and employee benefits
              
              $
              31.9
              
              
              $
              35.6
              
              
              
              (10.2
              %)Newsprint,
      ink and supplements
              
              
              9.2
              
              
              
              9.1
              
              
              
              1.3
              %Other
      operating costs
              
              
              26.8
              
              
              
              28.2
              
              
              
              (5.1
              %)Write-down
      of intangible assets
              
              
              170.7
              
              
              
              -
              
              
              
              -Depreciation
      and amortization
              
              
              3.5
              
              
              
              3.5
              
              
              
              (2.6
              %)Total
      operating expenses
              
              $
              242.1
              
              
              $
              76.4
              
              
              
              216.7
              %
 
 As
previously stated, the change in the way we pay our newspaper carriers in our
Florida markets distorts the full impact of our cost saving efforts. Adjusting
for the $1.2 million in incremental carrier costs, our total operating costs,
excluding the $170.7 million in write-downs of intangible assets, were down $6.2
million, or 8.2%.
 
 Labor and employee
benefits:
 
 Our
salaries and wages totaled $24.1 million, down $1.7 million, or 6.5%. Average
FTE’s (or full time equivalents) were down 309, or 10.8%. Excluding the $0.9
million in severance payments and the $0.3 million in salaries and wages paid to
terminated employees in the third quarter of 2008, our average pay rate was down
0.4%.
 
 Jacksonville’s
average FTE’s were down 143, or 18.1%, contributing 46.3% of our average total
net decrease.
 
 Commissions
and bonuses were $3.7 million, down $0.6 million, or 13.6%, from last year due
to the decline in advertising revenue.
 
 Employee
medical insurance cost was $1.7 million, down $0.4 million, or 19.7%, due to the
decline in claims and the number of plan participants.
 
 Post
retirement benefit cost was $0.3 million, up 15.3% from the same quarter last
year.
 
 Employer
matching contributions to the 401(k) plan were $0.1 million, down $0.7 million
from $0.8 million during the third quarter last year due to the suspension of
employer matching contributions.
 
 Newsprint, ink and
supplements cost:
 
 Compared
to last year, total newsprint expense was $8.0 million, up $0.4 million, or
5.2%, with the 41.8% increase in the average cost per ton of newsprint offset
somewhat by the 25.8% decrease in newsprint consumption.
 
 During
the last part of 2008, we expect additional newsprint cost increases. In
addition, the daily page count maximums and percentages that we have established
at our larger newspapers should help sustain our reduced
consumption.
  -23-
 Table of Contents
  Supplements
and ink expense decreased 3.4% and 18.4%, respectively.
 
 Other operating
costs:
 
 The
combined technology and shared services fee from our parent and management fee
charged by our parent under the management agreement totaled $5.1 million, down
$0.9 million, or 15.3%, from last year. These fees for the third quarter of 2008
were not actually paid as a result of a temporary amendment of our Management
Agreement, but was treated as if paid by us with a capital contribution from our
parent. The payment of these fees have been reinstated for the fourth quarter of
2008 (see Subsequent Events).
 
 Excluding
these fees and the $1.2 million in incremental carrier costs at our Florida
newspapers, other operating costs were down 7.8%.
 
 Financial
summary for the nine months ended September 30, 2008 compared to September 30,
2007
 
 Financial Summary.The
following table summarizes our consolidated financial results for the nine
months ended September 30, 2008 and 2007:
 
 Nine
      months ended September 30,(Dollars in
      millions)
              
              2008
              
              
              2007Total
      net operating revenues
              
              $
              243.1
              
              
              $
              279.6Total
      operating expenses
              
              
              390.7
              
              
              
              237.0Operating
      income from continuing operations
              
              
              (147.6
              )
              
              
              42.6Interest
      expense
              
              
              21.7
              
              
              
              28.4Pre-tax
      gain on repurchases of debt
              
              
              (9.3
              )
              
              
              -Other
              
              
              (0.8
              )
              
              
              (0.2
              )Other
      expenses, net
              
              
              11.6
              
              
              
              28.2(Loss)
      income from continuing operations before taxes
              
              
              (159.2
              )
              
              
              14.4(Benefit)
      provision for income taxes
              
              
              (3.6
              )
              
              
              5.7(Loss)
      income from continuing operations
              
              
              (155.6
              )
              
              
              8.7Income
      from discontinued operations, net of provision for income
      taxes
              
              
              -
              
              
              
              2.0Net
      (loss) income
              
              $
              (155.6
              )
              
              $
              10.7
 
 Loss from continuing
operations
 
 Our loss
from continuing operations for the first nine months of 2008 was $155.6 million
compared to income from continuing operations of $8.7 million during the same
period last year.
  Our
third-quarter of 2008 operating results included a write-down of intangible
assets; a non-cash charge that does not affect our operating cash flows or our
compliance with our financial debt covenants.
 
 The
income tax benefit from continuing operations was $3.6 million, compared to an
income tax provision from continuing operations of $5.7 million for the first
nine months last year. The $170.7 million pre-tax write-down of goodwill
resulted in only a small income tax benefit for financial reporting purposes
because most of the goodwill is not deductible for income tax purposes. Our
effective tax rate for income from continuing operations was 39.6% for the first
nine months of 2007.
 
 In
addition, during the first two quarters of 2008, we repurchased $21.5 million of
our $300 million 7% senior subordinated notes for a total purchase price,
including accrued interest, of $12.5 million. The pre-tax gains on these
transactions was $9.3 million.
 
 Excluding
the write-down of intangible assets and the pre-tax gains on repurchases of
debt, income from continuing operations before taxes was $2.2 million, down
$12.2 million, or 84.7%, from $14.4 million last year.
 
 Interest
and loan amortization expense totaled $21.7 million, down $6.7 million from
$28.4 million last year primarily due to the reduction in our outstanding
debt.
 
 Excluding
the goodwill impairment charge, our operating income was $23.1 million, down
$19.5 million, or 45.8%, from $42.6 million last year.
  -24-
 Table of Contents
  Total net
operating revenues were $243.1 million, down $36.5 million, or 13.0%, and total
operating expenses, excluding the goodwill impairment charge, were $220.1
million, down $17.0 million, or 7.2%.
 
 Total
labor and employee benefit costs were $99.9 million, down $9.3 million, or 8.5%;
newsprint, ink and supplements costs were $28.0 million, down $2.1 million, or
7.2%; and other operating costs were $81.7 million, down $3.3 million, or 3.9%.
Depreciation and amortization expense was $10.5 million, down $2.2 million, or
17.1%, with a large portion of intangible assets becoming fully
amortized.
 
 More
specifically, our operating costs were favorably impacted by reductions in
employee health insurance costs, employer 401(k) contributions, and newspaper
head count and unfavorably impacted by increased fuel costs and employee
severance payments.
 
 Discontinued operations and
net income
 
 During
the first nine months of 2007, income from discontinued operations, net of the
$1.3 million provision for income taxes, was $2.0
million, with total operating revenues of $50.6 million and total operating
costs of $47.3 million.
 
 Net
income during the first nine months of 2007 was $10.7 million.
 
 Net operating
revenue.The table below presents the total net operating revenue from
continuing operations and related statistics for the nine months ended September
30, 2008 compared to September 30, 2007:
 
 (Dollars in
      millions)
              
              Nine months ended September
    30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Net
      operating revenuesAdvertisingRetail
              
              $
              102.4
              
              
              $
              115.0
              
              
              
              (10.9
              %)Classified
              
              
              75.5
              
              
              
              99.5
              
              
              
              (24.1
              %)National
              
              
              13.5
              
              
              
              14.5
              
              
              
              (7.0
              %)Total
      advertising revenues
              
              
              191.4
              
              
              
              229.0
              
              
              
              (16.4
              %)Circulation
              
              
              44.8
              
              
              
              43.1
              
              
              
              4.0
              %Other
              
              
              6.9
              
              
              
              7.5
              
              
              
              (8.1
              %)Total
      net operating revenues
              
              $
              243.1
              
              
              $
              279.6
              
              
              
              (13.0
              %)
 
 Advertising
revenue:
 
 Advertising
revenue was $191.4 million, a decrease of $37.6 million, or 16.4%, from last
year. Retail, national and classified advertising categories were down 10.9%,
7.0% and 24.1%, respectively.
 
 Advertising
revenue represented 78.7% of our total net operating revenue. Our advertising
revenue consisted of 53.5% in retail, 39.5% in classified and 7.0% in national.
Online advertising revenue, included in all advertising categories above, was
13.6% of our total advertising revenue, up from 11.1% last year.
 
 Print
advertising continued to be soft during the first nine months, particularly in
the classified categories. Compared to the first nine months of 2007, run of
press advertising revenue was $117.7 million, down $33.0 million, or 21.9%, and
insert advertising revenue was $38.3 million, down $4.7 million, or 10.9%.
Advertising revenue from specialty products printed by us, but not a part of
main newspaper product, was $9.4 million, down $0.6 million, or
6.2%.
 
 Online
advertising revenue was $26.0 million, up $0.7 million, or 2.7%, from last year.
Excluding the employment classified category, online advertising revenue was up
13.1%.
 
 Compared
to the first nine month last year, total page-views were 484.8 million, up 56.8
million, or 13.3%, and unique page-views were 35.2 million, up 7.7 million, or
28.1%, reflecting our customers’ migration to the internet
platform.
 
 Our
existing Florida newspapers and publications, which accounted for 35.3% of our
total advertising revenues, contributed 57.2% of our entire net decline in
advertising revenue. Advertising revenue in Jacksonville was down $18.9
million, or 25.2%, and St. Augustine was down $1.2 million, or
16.2%.
 
 As for
our other larger daily newspapers, Augusta was down $4.5 million, or 16.9%,
Savannah was down $3.7 million, or 18.3%, Lubbock was down $2.6 million, or
12.6%, Amarillo was down $2.0 million, or 11.4%, Topeka was down $1.6 million,
or 10.6% and Athens was down $1.3 million, or 13.3%.
  -25-
 Table of Contents
  Retail advertising
revenue:
 
 Retail
advertising revenue was $102.4 million, down $12.6 million, or 10.9%, from the
first nine months last year. Insert retail revenue was $34.3 million, down
$4.2 million, or 11.0%, while print retail advertising revenue was $51.2
million, down $9.3 million, or 15.4%, from last year. Retail advertising revenue
from specialty products printed by us, but not a part of main newspaper product,
was $8.9 million, down $0.5 million, or 4.7%, from last year. Retail online
revenue was $8.0 million, up $1.4 million, or 22.0%, from the first nine months
of last year.
 
 Jacksonville’s
retail advertising was down $4.1 million, or 13.6%.
 
 As for
our other larger daily newspapers, Augusta was down $2.5 million, or 16.4%,
Lubbock was down $1.6 million, or 14.4%, Savannah was down $1.0 million, or
9.9%, Amarillo was down $1.1 million, or 12.0%, and Topeka was down $0.8
million, or 10.9%.
 
 Our other
daily newspapers, with the exception of Kenai and Bluffton, were, together, down
$1.1 million, or 7.0% from last year. Bluffton was up $0.3 million, or 18.1% and
Kenai was up $0.1 million, or 6.2%.
 
 Retail
advertising revenue from our other non-dailies were, together, down $0.8
million, or 5.4%.
 
 Classified advertising
revenue:
 
 Total
classified advertising revenue was $75.5 million, down $24.0 million, or 24.1%,
from the first nine months last year.
 
 Classified
run of press advertising revenue was $57.9 million, down $22.3 million, or
27.8%, and online classified advertising revenue was $16.8 million, down $1.4
million, or 7.5%, from last year. Excluding the employment classified category,
online classified advertising revenue was down $0.1 million, or
1.4%.
 
 Our
Jacksonville newspaper’s classified advertising revenue was down $13.5 million,
or 37.4%, and our St. Augustine newspaper was down $1.2 million, or
29.1%.
 
 As for
our other daily newspapers, Savannah was down $2.6 million, or 26.2%, Augusta
was down $1.7 million, or 15.9%, Athens was down $1.1 million, or 27.3%,
Amarillo was down $1.1 million, or 12.5%, Lubbock was down $1.1 million, or
12.3%, and Topeka was down $0.8 million, or 12.7%.
 
 Total
combined classified advertising revenue from our other five daily newspapers was
down $0.8 million, or 12.1%.
 
 National advertising
revenue:
 
 Total
national advertising revenue was $13.5 million, down $1.0 million, or 7.0%, from
the first nine months last year, with Jacksonville contributing all of the net
decline.
 
 Circulation
revenue:
 
 During
the first nine months of 2008, circulation revenue was $44.8 million, up $1.7
million, or 4.0%, from the same period last year, primarily due to the change in
the way we sell home delivery subscriptions in Florida.
 
 In prior
years, we sold home delivery newspapers in Jacksonville and St. Augustine
directly to the carriers and derived our revenue from the wholesale rate to the
carrier. Adjusting the $2.5 million in incremental carrier delivery costs at our
two Florida newspapers from our circulation revenue; our total circulation
revenue was down 1.8% from last year.
 
 Other
Income:
 
 Other
income was $6.9 million, down $0.6 million, or 8.1%, from the same period last
year, with the $0.8 million increase in Skirt! magazine license and
royalty fee income being more than offset by the reduction in commercial
printing revenue, direct mail and other income.
  -26-
 Table of Contents
  Net operating
expense. The table below presents the total operating expenses from
continuing operations and related statistics for the newspaper operations for
the nine months ended September 30, 2008 compared to September 30,
2007:
 
 (Dollars in
      millions)
              
              Nine months ended September
    30,
              
              
              Percentage change2008
              
              
              2007
              
              
              2008 vs. 2007Operating
      expensesLabor
      and employee benefits
              
              $
              99.9
              
              
              $
              109.2
              
              
              
              (8.5
              %)Newsprint,
      ink and supplements
              
              
              28.0
              
              
              
              30.1
              
              
              
              (7.2
              %)Other
      operating costs
              
              
              81.7
              
              
              
              85.0
              
              
              
              (3.9
              %)Write-downs
      of intangible assets
              
              
              170.7
              
              
              
              -
              
              
              
              0.0
              %Depreciation
      and amortization
              
              
              10.5
              
              
              
              12.7
              
              
              
              (17.1
              %)Total
      operating expenses
              
              $
              390.8
              
              
              $
              237.0
              
              
              
              64.8
              %
 
 As stated
above, the change in the way we pay our newspaper carriers in our Florida
markets distorts the full impact of our cost saving efforts. Adjusting the $2.5
million in incremental carrier costs, our total operating costs, excluding the
$170.7 million write-downs of intangible assets, were down $19.4 million, or
8.2%. These decreases are due mainly to head count reductions, newsprint
conservation measures, and other cost reduction initiatives put into place
during the year. Adjusting for one-time costs such as severance pay, we expect
total operating costs for all of 2009 to be lower by at least another
7.0%.
 
 Labor and employee benefits
from continuing operations:
 
 Our
salaries and wages totaled $72.2 million, down $5.0 million, or 6.5%, from last
year. Average FTE’s (or full time equivalents) were down 289, or 9.8%. Excluding
the $1.7 million in severance payments and the $2.1 million in salaries and
wages paid to terminated employees in 2008, our average pay rate was down
1.8%.
 
 Jacksonville’s
average FTE’s were down 143, or 16.8%, contributing 49.5% of our average total
net decrease.
 
 Commissions
and bonuses were $11.3 million, down $2.0 million, or 14.7%, from last year, due
to the decrease in advertising sales.
 
 Employee
medical insurance cost was $7.0 million, down $1.4 million, or 16.6%, due to the
decrease in plan participants and the reduction in claims
experience.
 
 Compared
to the first nine months of last year, post retirement benefit cost was $1.0
million, up $0.1 million, or 15.3%.
 
 Effective
July 13, 2008, we suspended indefinitely the employer 401(k) plan matching
contributions, with matching contributions totaling $1.8 million for the first
nine months this year, down $0.9 million from $2.6 million last year. On
September 30, 2008, the plan included 1,209 participants. The total
employer match during the fourth quarter of last year was $0.9 million on an
average of 1,792 plan participants.
 
 Newsprint, ink and
supplements cost from continuing operations:
 
 Compared
to last year, total newsprint expense was $24.4 million, down $1.1 million, or
4.2%, from last year, with the 20.4% increase in the average cost per ton of
newsprint offset by the 20.5% decrease in newsprint consumption. During the last
quarter of 2008, we expect additional newsprint cost increases and continued
decreases in consumption.
 
 Supplements
expense decreased $0.6 million, or 24.2%, and ink expense decreased $0.2
million, or 10.7%.
 
 Other operating
costs:
 
 The
combined technology and shared services fee and management fee charged to
continuing operations by our parent under the management agreement totaled $15.8
million, down $2.4 million, or 13.0%, from $18.2 million last year.
Approximately $8.7 million of these fees were not actually paid as a result of a
temporary amendment of our Management Agreement, but was treated as if paid by
us with a capital contribution from our parent. The payment of these fees have
been reinstated for the fourth quarter of 2008 (see Subsequent
Events).
 
 Excluding
these fees and the incremental carrier costs at our Florida newspapers, other
operating costs were down $4.1 million, or 6.0%.
  -27-
 Table of Contents
  Liquidity
and capital resources
 
 Cash was
$8.7 million at September 30, 2008, up $4.6 million from $4.1 million at
December 31, 2007.
 
 Our
primary source of liquidity is the cash flow generated from operations and our
primary needs for cash are funding operating expense, debt service on our bank
credit facilities and the senior subordinated notes, capital expenditures,
income taxes, dividends and loans to affiliates, and working
capital.
 
 Mandatory transaction required by
Amendment No. 3 to our Credit Agreement.The impact of the mandatory
transaction requirement in Amendment No. 3 to our Credit Agreement (see
Subsequent Events) will likely require us to refinance the existing bank debt or
seek an amendment of the terms of the Credit Agreement, either of which could
significantly increase our cost of borrowing, no later than May 30, 2009 (or to
at least enter into a letter of intent to do so). Further, if the mandatory
transaction requirement is waived by the senior lenders, or if such a mandatory
transaction fails to close notwithstanding a timely letter of intent, we would
likely be required to amend or refinance the senior credit facilities no later
than August 29, 2009, since we would be unlikely to meet the financial covenants
under the Credit Agreement when we deliver Morris Communications’ consolidated
financial statements for the second quarter of 2009 no later than August 29,
2009 (when the relaxed financial covenants terminate).
 
 The
senior debt is guaranteed by our parent, Morris Communications, and our parent’s
other subsidiaries. The mandatory transaction requirement could be satisfied if
a guarantor enters into a transaction that would induce a lender to refinance
our senior debt, if a guarantor raises sufficient funds to purchase the loans
and commitments from the existing senior creditors, or if a guarantor raises
sufficient funds to refinance the senior debt with a new loan from the
guarantor. We do not expect Morris Communications to make any capital
contributions that would enable us to reduce our senior indebtedness, even if
the terms of mandatory transaction by a guarantor would permit such a capital
contribution. If a guarantor pays our senior debt, we would expect the guarantor
to step into the shoes of the senior creditors and become the senior
creditor.
 
 In view
of the current and expected future market conditions in the credit markets and
the newspaper industry (as evidenced by the impairment charge to write-off our
goodwill as discussed earlier in this analysis), we may be unable to satisfy the
mandatory transaction requirement of Amendment No. 3 on our own. We will likely
be dependent on the ability and willingness of our parent and guarantors to
enter into a transaction that would allow us to amend or refinance the senior
debt. An amendment or refinancing of our senior debt may be on less favorable
terms and conditions than the current Credit Agreement as amended. In absence of
an amendment or refinancing of the senior debt, we will likely be in default
under the Credit Agreement in late May or August of 2009, in which event we
would be unable to borrow on the revolver and may be required to prepay the
entire principal due under the Credit Agreement.
 
 If this
was to occur, it could lead to an event of default under the indenture governing
the notes. Specifically, there is an event of default under the bond indenture
if we fail to pay other indebtedness (such as the Senior Credit Facility)
exceeding $5 million upon final maturity or within 20 days of an acceleration.
In such an event, we cannot assure the bondholders that we would have sufficient
assets to pay amounts due on the notes. As a result, the bondholders may receive
less than the full amount they would be otherwise entitled to receive on the
notes.
 
 Recent
developments inthe capital and
credit markets.Recently, the capital and credit markets have become
increasingly volatile as a result of adverse conditions that have caused the
failure and near failure of a number of large financial services
companies.
 
 In the
current credit environment, we believe that our principal sources of liquidity,
which are existing cash and cash equivalents, cash flows provided from operating
activities, and the borrowing capacity under the amended bank credit facilities
(see Subsequent Events), will be sufficient to meet our ongoing operating needs
through the end of May 2009.
 
 However,
if the capital and credit markets continue to experience volatility and the
availability of funds remains limited, it is possible that our ability to access
the capital and credit markets may be limited by these or other factors at a
time when we would like, or need, to do so, which could have an impact on our
ability to refinance maturing debt and/or react to changing economic and
business conditions. While not significant to us thus far, continued disruptions
in the credit markets may also result in higher future borrowing costs
associated with our short-term and long-term debt.
 
 Operating
activities. Net cash provided by operations was $28.3 million for
the first nine months of 2008, up $3.2 million from $25.1 million for the same
period in 2007.
 
 Current
assets were $61.7 million and current liabilities were $49.3 million as of
September 30, 2008 as compared to current assets of $72.8 million and current
liabilities of $49.1 million as of December 31, 2007.
  -28-
 Table of Contents
  We manage
our working capital through the utilization of our revolving credit facility.
However, due to the March 31, 2009 mandatory loan repayment transaction
deadline included in Amendment No. 3 to the Credit Agreement, Morris
Communications (including us) has classified all of the debt outstanding under
the Credit Agreement as of the Effective Date as current maturities of long-term
debt within current liabilities on the condensed consolidated balance sheet.
However, because this mandatory transaction could involve a refinancing or an
assignment of the interests of the current creditors in the Credit Agreement to
new/other creditors, it may not necessarily result in a reduction of our
outstanding debt.
 
 We
amended our management and service agreement with Morris Communications to
temporarily eliminate the management fee and technology and shared services fee
payable by us to our parent for the period from May 1, 2008 through September
30, 2008. The intent of this amendment was to retain cash and reduce our
operating expenditures. The payment of the management fee and the technology and
shared services fee were reinstated beginning October 1, 2008 (see Subsequent
Events).
 
 While the
required payment of these fees had been eliminated, our other operating costs
continued to reflect all of the costs of the management and technology and
shared services incurred by our parent, with the $8.7 million in total costs for
the period May 1, 2008 through September 30, 2008 being recorded as capital
contributions from our parent. The elimination of the fee had the effect of
increasing net cash provided by operations in 2008 by this $8.7
million.
 
 At
September 30, 2008, the recorded working capital adjustment due from GateHouse
was $3.9 million. We are currently negotiating with GateHouse to settle the
amount and payment terms of this receivable.
 
 Investment
activities. Net cash provided by investing activities was $11.4 million
for the first nine months of 2008 compared to $9.9 million used by investing
activities for the same period in 2007.
 
 At the
close of the GateHouse sale during the fourth quarter last year, we elected to
have $12.4 million of the net proceeds deposited into an escrow account in order
to fund other acquisitions by ourselves or our parent through a tax-deferred
Section 1031 exchange.
 
 At the
end of the first quarter of 2008, our parent acquired qualified replacement
property using the $12.4 million in our escrow account. At the same time, our
parent returned the escrow funds by using its cash to pay down balances due on
our revolving credit facility.
 
 For the
first nine months in 2008 and 2007, we spent $1.7 million and $10.1 million on
property, plant and equipment, respectively. For 2008, we expect our total
capital expenditures to be between $2.0 million and $5.0 million.
 
 The $10
million promissory note receivable from GateHouse Media matures on November 30,
2008, however, GateHouse has requested relief and we are currently negotiating
new terms.
 
 Financing
activities. Net cash used in financing activities was $35.0 million for
the first nine months of 2008 compared to $16.5 million for the same period in
2007.
 
 Period end debt
summary:
 
 Total
debt was $424.0 million at September 30, 2008, down from $427.9 million at
December 31, 2007. The average interest rate on our total debt outstanding was
approximately 6.2595% and 6.6932% at September 30, 2008 and December 31, 2007,
respectively.
 
 As of
September 30, 2007, our total debt was $526.0 million, with $51.0 million
outstanding on the then $175 million revolving credit facility.
 
 The
amount outstanding on the revolving credit facility at September 30, 2008 and
December 31, 2007, totaled $60 million and $39 million,
respectively.
 
 During
the three months and nine months ended September 30, 2008, we paid $1.1 million
and $3.4 million, respectively in principal due on the Tranche A term loan and
have another $2.3 million in principal payments due by the end of 2008. At
September 30, 2008, total outstanding on the term loan was $85.5
million.
 
 At
September 30, 2008, the interest rate on the term loan (under Amendment No. 3,
see Subsequent Events) was 6.3125% and the weighted average interest rate on the
revolver was 5.778%. The commitment fee on the unborrowed funds available under
the revolver was .50% (under Amendment No. 3) at September 30, 2008 and .375% at
December 31, 2007.
 
 Amendment
No. 3 to the Credit Agreement reduced the revolving credit commitments to $100
million from $175 million and increased the interest rate on borrowings and the
commitment fee on undrawn amounts under the revolving credit
facility.
  -29-
 Table of Contents
  During
the first and second quarter of 2008, we repurchased a total of $21.5 million of
our $300 million 7% senior subordinated notes for a total purchase price,
including accrued interest, of $12.5 million. The pre-tax gain on these
transactions was $9.3 million. In addition, we wrote off $0.4 million in
unamortized loan fees related to these extinguished bonds. At September 30,
2008, $278.5 million was outstanding on the senior subordinated
notes.
 
 Leverage ratio under notes
indenture:
 
 As of the
date of this quarterly report on Form 10-Q, our consolidated leverage ratio, as
defined in the indenture governing the senior subordinated notes, exceeds 6.5 to
1.0. Additional restrictions apply under the Indenture so long as our
consolidated leverage ratio exceeds 6.5 to 1. Most notably, (i) we cannot pay
dividends or make other restricted payments (as defined in the indenture) to our
parent, other than permitted tax distributions to pay our share of our parent’s
tax obligations, and (ii) we cannot incur additional indebtedness, other than
permitted indebtedness as defined in the indenture.
 
 The
exception for permitted indebtedness allows us to incur indebtedness under the
senior credit facility, to refinance the senior credit facility or other
existing indebtedness, to incur other indebtedness up to $100 million at any
time outstanding, and to incur other specified types of
indebtedness.
 
 The
prohibition on restricted payments generally means that we cannot pay dividends
other than permitted tax distributions, purchase capital stock, or make
investments, other than permitted investments as defined in the indenture. The
prohibition on investments generally means that we cannot make loans; however,
the exception for permitted investments allows us to make up to $40 million of
loans at any time outstanding to subsidiaries of Morris Communications to fund
working capital, capital expenditure and acquisition requirements, to make up to
$20 million of additional loans or investments at any time outstanding, or to
make other specified types of investments.
 
 Loan receivable(to) fromMorris
Communications:
 
 Our
indenture, with certain restrictions described in Note 3 of our financial
statements, allows us to make loans both to and from Morris
Communications.
 
 The
interest-bearing portion of all loans from us to our parent bear the same rate
as the borrowings under the Credit Agreement (currently, this rate is LIBO rate
(adjusted to the nearest 1/16th) + 2.50%).We distinguish between
intercompany transactions incurred in the ordinary course of business and
settled on a monthly basis (which do not bear interest) and those of a more
long-term nature that are subject to an interest accrual. Interest is accrued on
the average outstanding long-term balance each month.
 
 Given the
historical practice of us and our parent settling a significant portion of the
outstanding loan receivable balance with a dividend, this arrangement is
considered in substance a capital distribution transaction and is classified as
contra-equity within member’s deficit. In addition, interest accrued on this
loan receivable is reported as contra-equity within member’s deficiency in
assets for the periods presented. However, because the consolidated leverage
ratio under the senior subordinated debt indenture exceeds 6.5 to 1.0, we
are currently prohibited from settling this loan receivable with a
dividend.
 
 The
amount outstanding on the intercompany loan receivable from Morris
Communications was $14.4 million as of September 30, 2008. The amount
outstanding on the intercompany loan receivable due from Morris Communications
was $4.4 million as of December 31, 2007 offset by $30.5 million loan payable to
Morris Communications for income taxes payable on the GateHouse
sale.
 
 During
the nine month periods ended September 30, 2008 and 2007, we reported the $0.5
million and $1.4 million, respectively, in accrued loan receivable interest as
contra-equity. As of September 30, 2008, the total accumulated interest accrued
on the loan receivable was $5.6 million.
 
 The
average interest rate for the nine month periods ended September 30, 2008 and
2007 was 4.181% and 6.382%, respectively, on average loan receivable balances of
$16.1 million and $28.5 million, respectively.
 
 Dividends:
 
 We, with
certain restrictions under our indenture, may make dividend payments to our
parent to fund its cash needs for general business purposes, capital
expenditures and acquisitions. However, because the consolidated leverage ratio
under the senior subordinated debt indenture exceeds 6.5 to 1.0, we are
currently prohibited from making any restricted payments at this
time.
 
 Morris
Publishing Finance Co. overview
 
 Morris
Publishing Finance Co., a wholly-owned subsidiary of Morris Publishing Group,
LLC, was incorporated in 2003 for the sole purpose of serving as a co-issuer of
our senior subordinated notes in order to facilitate the offering. Morris
Publishing Finance Co. does not have any operations or assets of any kind and
will not have any revenue.
  -30-
 Table of Contents
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 There
have been no material changes regarding the registrants’ market risk position
from the information provided in our annual report dated December 31, 2007 filed
with the U.S. Securities and Exchange Commission on Form 10-K.
 
 Although
some of our outstanding debt is at a fixed rate, increases in the interest rates
applicable to borrowings under our bank credit facilities would result in
increased interest expense and a reduction in our net income. (See the
quantitative and qualitative disclosures about market risk are discussed under
the caption “Market Risk” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations in said annual report regarding long-term
debt).
 
 Based on
our $145.5 million of variable rate debt at September 30, 2008, a 1.0% increase
or decrease in interest rates on this variable-rate debt would decrease or
increase annual interest expense by $1.5 million and net income by $0.9
million.
  ITEM
4. CONTROLS AND PROCEDURES
 
 Our
management carried out an evaluation, with the participation of our chief
executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures as of September 30, 2008. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the U.S.
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, 2008, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
  -31-
 Table of Contents
  Part
II
 
 Item 1. Legal Proceedings.
 
 None.
 
 
 Item
1A. Risk Factors.
 
 ·
              We may be unable to refinance
      our senior bank debt when required in early to middle
      2009.
 
 The
mandatory transaction requirement of Amendment No. 3 to our Credit Agreement
requires Morris Communications and its restricted subsidiaries (including us) to
consummate a transaction (or at least sign a letter of intent to do so) that
would generate sufficient funds to be able to prepay all loans under the Credit
Agreement, or to purchase an assignment of all loans and commitments of the
lenders at par, no later than the delivery date of Morris Communications’
financial statements for the quarter ending March 31, 2009 (but not later than
May 30, 2009). The impact of the mandatory transaction requirement in Amendment
No. 3 will likely require us to refinance the existing bank debt or seek an
amendment of the terms of the Credit Agreement, either of which could
significantly increase our cost of borrowing, no later than May 30, 2009 (or to
at least enter into a letter of intent to do so). Further, if the mandatory
transaction requirement is waived by the senior lenders, or if such a mandatory
transaction fails to close notwithstanding a timely letter of intent, we would
likely be required to amend or refinance the senior credit facilities no later
than August 29, 2009, since we would be unlikely to meet the financial covenants
under the Credit Agreement when we deliver Morris Communications’ consolidated
financial statements for the second quarter of 2009 no later than August
29, 2009 (when the relaxed financial covenants terminate).
 
 In view
of the current and expected future market conditions in the credit markets and
the newspaper industry, we may be unable to satisfy the mandatory transaction
requirement of Amendment No. 3 on our own. We will likely be dependent on the
ability and willingness of our parent and guarantors to enter into a transaction
that would allow us to amend or refinance the senior debt. An amendment or
refinancing of our senior debt may be on less favorable terms and conditions
than the current Credit Agreement as amended. In absence of an amendment or
refinancing of the senior debt, we will likely be in default under the Credit
Agreement in late May or August of 2009, in which event we would be unable to
borrow on the revolver and may be required to prepay the entire principal due
under the Credit Agreement.
 
 If this
was to occur, it could lead to an event of default under the indenture governing
the notes. Specifically, there is an event of default under the bond indenture
if we fail to pay other indebtedness (such as the Senior Credit Facility)
exceeding $5 million upon final maturity or within 20 days of an acceleration.
In such an event, we cannot assure the bondholders that we would have sufficient
assets to pay amounts due on the notes. As a result, the bondholders may receive
less than the full amount they would be otherwise entitled to receive on the
notes.
 
 ·
              The guarantors of our senior
      bank debt may be unable or unwilling to raise funds or otherwise help us
      refinance or amend our senior bank credit
  facility.
 
 The
senior bank debt is guaranteed by our parent, Morris Communications, and our
parent’s other subsidiaries. The mandatory transaction requirement to repay or
could be satisfied if a guarantor enters into a transaction that would induce a
lender to refinance our senior debt, if a guarantor raises sufficient funds to
purchase the loans and commitments from the existing senior creditors, or if a
guarantor raises sufficient funds to refinance the senior debt with a new loan
from the guarantor. We do not expect Morris Communications to make any capital
contributions that would enable us to reduce our senior indebtedness, even if
the terms of mandatory transaction by a guarantor would permit such a capital
contribution. If a guarantor pays our senior debt, we would expect the guarantor
to step into the shoes of the senior creditors and become the senior
creditor.
  -32-
 Table of Contents
 ·
                Our ability to access the
      capital and credit markets, unexpected changes in interest rates, or
      changes in our debt rating could harm our financial
      position.
  Recently,
the capital and credit markets have become increasingly volatile as a result of
adverse conditions that have caused the failure and near failure of a number of
large financial services companies. If the capital and credit markets continue
to experience volatility and the availability of funds remains limited, it is
possible that our ability to access the capital and credit markets may be
limited by these or other factors at a time when we would like, or need, to do
so, which could have an impact on our ability to refinance maturing debt and/or
react to changing economic and business conditions.
 
 Changes
from our expectations for interest rates can have a material impact on our
financial results and we may not be able to completely mitigate the effect of
significant interest rate changes. Changes in our debt rating could have a
material adverse effect on our interest costs and financing
sources.
 
 ·
              The value of our business may
      be less than the amount of our
debt.
 
 Our
business, and the newspaper industry in general, has suffered dramatic declines
in advertising revenue, at a time of weak general economic conditions and tight
capital markets, and in the midst of a secular shift in readership and
advertisers with the continued growth of the internet. The market value of
newspaper companies have declined dramatically in the past several years,
especially in 2008. These factors, as reflected in our write-off of the $170.7
million of goodwill remaining on our balance sheet, have resulted in a decrease
in the current value of our newspaper business. Our current debt is greater than
the fair value of our business as determined in our impairment analysis using a
weighted average of a discounted cash flow model and a market approach, which
estimates fair value using market multiples of various financial measures
compared to a set of comparable public companies in the publishing industry.
Even if we are able to refinance our senior debt in 2009, we may be unable to
pay all of our long-term debt when it comes due, unless our business or the
valuation metrics improve.
 
 ·
              Our attempts to cut costs may
      not be successful or may harm our
  business.
 
 We plan
to continue to aggressively cut operating costs in order to increase or preserve
our cash provided by operations. These efforts may not be successful, or may
harm our business by decreasing our ability to attract advertisers and/or
hurting the quality of our product and our market penetration.
 
 ·
              We may not be able to increase,
      or stop the decline, in advertising
  revenue.
 
 Beginning
in the third quarter of 2006, advertising declined as the real-estate boom began
to unwind and our newspapers in Florida, which experienced the largest run up in
real estate values, experienced advertising revenue declines. However, since the
end of 2007, the real-estate-led downturn has subsequently spread to other
sectors in the economy and across our other markets. As a result, the
advertising decline has worsened in 2008, with the decline accelerating during
the third quarter of 2008. Further, advertising has been moving to the internet,
with this shift in advertiser preferences accelerated as the economy slowed.
While much of this advertising, with the exception of the employment classified
category, was retained by our newspapers’ Web sites, low cost to entry and the
searchable internet format gave rise to more competition online than in print,
most of which is in the classified advertising category. During the third
quarter of 2008 our online employment classified was down $1.0 million, or
26.7%. To be successful, we will need to increase advertising
revenues.
  We plan
to focus on new and different revenue programs to help our advertising
customers, both in print and online. We are arming our sales force with new
tools through extensive training programs and we have reorganized our sales
force to reflect the importance of the online category now and into the future.
We are focused on growing our online audience and positioning ourselves as the
primary provider of local online information in all of our markets. These
efforts may not be successful, or even successful increases in online revenue
may not fully offset declines in print revenue.
  -33-
 Table of Contents
  Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
 
 None.
 
 
 Item
3. Defaults Upon Senior Securities.
 
 None.
 
 
 Item
4. Submission of Matters to a Vote of Security Holders.
 
 None.
 
 
 Item
5. Other Information.
 
 None.
 
 
 Item 6. Exhibits.
 
 10.1
              
              Third
      Amendment to Management and Services Agreement between Morris Publishing
      Group, LLC, Morris Communications Company, LLC and MSTAR Solutions, LLC
      dated October 1, 2008 (filed as an exhibit to the Form 8-K of Morris
      Publishing Group filed October 7, 2008, which is incorporated by
      reference).10.2
              
              Amendment
      No. 3, effective as of September 30, 2008, to Credit Agreement dated
      December 14, 2005, by and between Morris Publishing Group, LLC, Morris
      Communications, various lenders and JPMorgan Chase Bank, N.A. as
      Administrative Agent, for $350 million of senior secured term and
      revolving credit facilities (filed as an exhibit to the Form 8-K of Morris
      Publishing Group filed October 8, 2008, which is incorporated by
      reference).31.1
              
              Rule 13a-14(a)
      Certifications31.2
              
              Rule 13a-14(a)
      Certifications32.1
              
              Section 1350
      Certifications
  -34-
 Table of Contents
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 MORRIS
      PUBLISHING GROUP, LLCDate: November 14, 2008
              
              By:
              
              /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
                and
      as its Principal Financial
Officer)
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  MORRIS
      PUBLISHING FINANCE CO.Date: November
14, 2008
              
              By:
              
              /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
                and
      as its Principal Financial
Officer)
 
 -35-