UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





x
            QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended June 30, 2009





or





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from
to





Commission
File Number: 333-112246





Morris
Publishing Group, LLC


Morris
Publishing Finance Co.*


(Exact
name of Registrants as specified in their charters)





Georgia
            
            26-2569462Georgia
            
            20-0183044(State
      of organization)
            
            (I.R.S.
      Employer Identification Numbers)





725 Broad Street
            
            30901Augusta,
      Georgia
            
            (Zip
      Code)(Address
      of principal executive offices)





(706)
724-0851


(Registrants’
Telephone Number)





Indicate
by check mark whether the Registrants (1) have filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes ̈Nox





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





Indicate
by check mark whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See the
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Check one:





Large Accelerated
      Filer   ̈
                  Smaller
      Reporting Company  ̈
                  Accelerated
      Filer   ̈
                  Non-Accelerated
      Filer  x





Indicate by check mark whether the
Registrant Morris Publishing Group, LLC is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ̈Nox





Indicate by check mark whether the
Registrant Morris Publishing Finance Co. is a shell company (as defined in Rule
12b-2 of the Exchange Act). YesxNo ̈










MORRIS
PUBLISHING GROUP, LLC


MORRIS
PUBLISHING FINANCE CO.


QUARTERLY
REPORT


FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2009




TABLE OF CONTENTS




PageFORWARD-LOOKING
      STATEMENTS
                        
                        iiiPART
      I.Item 1. Financial
      Statements:Unaudited
      condensed consolidated balance sheets as of June 30, 2009 and December 31,
      2008.
                        
                        1Unaudited
      condensed consolidated statements of (loss) income for the three and
      six-month periods ended June 30, 2009 and
      2008.
                        
                        2Unaudited
      condensed consolidated statements of cash flows for the six-month periods
      ended June 30,2009 and 2008.
                        
                        3Notes to the
      unaudited condensed consolidated financial
      statements.
                        
                        4Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.
                        
                        18Item 3.
      Quantitative and Qualitative Disclosures about Market
      Risk.
                        
                        38Item 4.
      Controls and Procedures.
                        
                        38PART
      II.Item 1.
      Legal Proceedings.
                        
                        39Item 1A.
      Risk Factors.
                        
                        39Item 2.
      Unregistered Sales of Equity Securities and Use of
      Proceeds.
                        
                        40Item 3.
      Defaults Upon Senior
    Securities.
                        
                        40Item 4.
      Submission of Matters to a Vote of Security
      Holders.
                        
                        40Item 5.
      Other Information.
                        
                        40Item 6.
      Exhibits.
                        
                        41




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




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




Morris
Publishing Finance Co., a wholly owned subsidiary of Morris Publishing, was
incorporated in 2003 for the sole purpose of serving as a co-issuer of our 7%
Senior Subordinated Notes due 2013, dated as of August 7, 2003, in order to
facilitate the offering. Morris Publishing Finance Co. does not have any
operations or assets of any kind and will not have any
revenues.


-ii-





FORWARD-LOOKINGSTATEMENTS




This
report contains forward-looking statements. These statements relate to future
periods and include statements regarding our anticipated performance. You may
find discussions containing such forward-looking statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 2 of this report.




Generally,
the words “anticipates,” “believes,” “expects,” “intends,” “estimates,”
“projects,” “plans” and similar expressions identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements or industry results, to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements.




Although
we believe that these statements are based upon reasonable assumptions, we can
give no assurance that these statements will be realized. Given these
uncertainties, investors are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are made as of the
date of this report. We assume no obligation to update or revise them or provide
reasons why actual results may differ. Important factors that could cause our
actual results to differ materially from our expectations include those
described in Part I, Item 1A-Risk Factors included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008, as well as other risks and
factors identified from time to time in other SEC filings.


-iii-






Part I





Morris
      Publishing Group, LLCUnaudited
      condensed consolidated balance sheets(Dollars in thousands)
                                          
                                          June
      30, 2009
                                          
                                          
                                          December
      31, 2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                          
                                          $
                                          17,554
                                          
                                          
                                          $
                                          4,782Accounts
      receivable, net of allowance for doubtful accounts of  $1,596
      and $1,823 at June 30, 2009 and December 31, 2008,
      respectively
                                          
                                          
                                          26,027
                                          
                                          
                                          
                                          36,975Note
      receivable, net of loss reserve of $11,538 and $0 at June 30, 2009 and
      December 31, 2008, respectively
                                          
                                          
                                          -
                                          
                                          
                                          
                                          11,538Inventories
                                          
                                          
                                          2,378
                                          
                                          
                                          
                                          2,706Assets
      held for sale
                                          
                                          
                                          2,025
                                          
                                          
                                          
                                          2,025Current
      portion of deferred income taxes
                                          
                                          
                                          679
                                          
                                          
                                          
                                          -Income
      taxes receivable
                                          
                                          
                                          3,742
                                          
                                          
                                          
                                          -Prepaid
      and other current assets
                                          
                                          
                                          1,870
                                          
                                          
                                          
                                          903Total
      current assets
                                          
                                          
                                          54,275
                                          
                                          
                                          
                                          58,929NET
      PROPERTY AND EQUIPMENT
                                          
                                          
                                          99,854
                                          
                                          
                                          
                                          105,623OTHER
      ASSETS:Intangible
      assets, net of accumulated amortization of $6,959 and $6,453 at June 30,
      2009 and December 31, 2008, respectively
                                          
                                          
                                          7,610
                                          
                                          
                                          
                                          7,956Deferred
      loan costs and other assets, net of accumulated amortization of loan costs
      of $8,375 and $6,822 at June 30, 2009 and
                                            December
      31, 2008, respectively
                                          
                                          
                                          5,893
                                          
                                          
                                          
                                          7,184Total
      other assets
                                          
                                          
                                          13,503
                                          
                                          
                                          
                                          15,140Total
      assets
                                          
                                          $
                                          167,632
                                          
                                          
                                          $
                                          179,692LIABILITIES
      AND MEMBER'S DEFICIENCY IN ASSETSCURRENT
      LIABILITIES:Accounts
      payable
                                          
                                          $
                                          4,910
                                          
                                          
                                          $
                                          5,496Long-term
      debt-current (Note 6)
                                          
                                          
                                          417,228
                                          
                                          
                                          
                                          411,728Accrued
      interest
                                          
                                          
                                          18,051
                                          
                                          
                                          
                                          8,297Current
      portion of deferred income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,326Due
      to Morris Communications
                                          
                                          
                                          2,968
                                          
                                          
                                          
                                          1,772Deferred
      revenues
                                          
                                          
                                          12,958
                                          
                                          
                                          
                                          13,133Accrued
      employee costs
                                          
                                          
                                          3,615
                                          
                                          
                                          
                                          8,252Other
      accrued liabilities
                                          
                                          
                                          1,936
                                          
                                          
                                          
                                          1,153Total
      current liabilities
                                          
                                          
                                          461,666
                                          
                                          
                                          
                                          451,157DEFERRED
      INCOME TAXES, long-term portion
                                          
                                          
                                          11,000
                                          
                                          
                                          
                                          13,568OTHER
      LONG-TERM LIABILITIES
                                          
                                          
                                          2,768
                                          
                                          
                                          
                                          2,882Total
      liabilities
                                          
                                          
                                          475,434
                                          
                                          
                                          
                                          467,607COMMITMENTS
      AND CONTINGENCIES (Note 8)MEMBER'S
      DEFICIENCY IN ASSETSMember's
      deficit
                                          
                                          
                                          (289,580
                                          )
                                          
                                          
                                          (275,705
                                          )Loan
      receivable from Morris Communications, net
                                          
                                          
                                          (18,222
                                          )
                                          
                                          
                                          (12,210
                                          )Total
      member's deficiency in assets
                                          
                                          
                                          (307,802
                                          )
                                          
                                          
                                          (287,915
                                          )Total
      liabilities and member's deficiency in assets
                                          
                                          $
                                          167,632
                                          
                                          
                                          $
                                          179,692See
      notes to unaudited condensed consolidated financial
      statements.





-1-







Morris
      Publishing Group, LLCUnaudited
      condensed consolidated statements of (loss) incomeThree
      months ended June 30,
                                                  
                                                  
                                                  Six
      months ended June 30,2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2008(Dollars in thousands)NET
      OPERATING REVENUES:Advertising
                                                  
                                                  $
                                                  45,812
                                                  
                                                  
                                                  $
                                                  65,192
                                                  
                                                  
                                                  $
                                                  92,056
                                                  
                                                  
                                                  $
                                                  130,509Circulation
                                                  
                                                  
                                                  15,594
                                                  
                                                  
                                                  
                                                  14,751
                                                  
                                                  
                                                  
                                                  31,513
                                                  
                                                  
                                                  
                                                  29,464Other
                                                  
                                                  
                                                  2,087
                                                  
                                                  
                                                  
                                                  2,228
                                                  
                                                  
                                                  
                                                  4,138
                                                  
                                                  
                                                  
                                                  4,906Total
      net operating revenues
                                                  
                                                  
                                                  63,493
                                                  
                                                  
                                                  
                                                  82,171
                                                  
                                                  
                                                  
                                                  127,707
                                                  
                                                  
                                                  
                                                  164,879OPERATING
      EXPENSES:Labor
      and employee benefits
                                                  
                                                  
                                                  24,516
                                                  
                                                  
                                                  
                                                  33,586
                                                  
                                                  
                                                  
                                                  51,757
                                                  
                                                  
                                                  
                                                  67,997Newsprint,
      ink and supplements
                                                  
                                                  
                                                  5,331
                                                  
                                                  
                                                  
                                                  9,657
                                                  
                                                  
                                                  
                                                  12,767
                                                  
                                                  
                                                  
                                                  18,800Other
      operating costs (excluding depreciation and amortization)
                                                  
                                                  
                                                  23,270
                                                  
                                                  
                                                  
                                                  26,836
                                                  
                                                  
                                                  
                                                  48,277
                                                  
                                                  
                                                  
                                                  54,856Debt
      restructuring costs
                                                  
                                                  
                                                  2,618
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,486
                                                  
                                                  
                                                  
                                                  -Depreciation
      and amortization expense
                                                  
                                                  
                                                  3,025
                                                  
                                                  
                                                  
                                                  3,501
                                                  
                                                  
                                                  
                                                  6,144
                                                  
                                                  
                                                  
                                                  7,025Total
      operating expenses
                                                  
                                                  
                                                  58,760
                                                  
                                                  
                                                  
                                                  73,580
                                                  
                                                  
                                                  
                                                  124,431
                                                  
                                                  
                                                  
                                                  148,678OPERATING
      INCOME
                                                  
                                                  
                                                  4,733
                                                  
                                                  
                                                  
                                                  8,591
                                                  
                                                  
                                                  
                                                  3,276
                                                  
                                                  
                                                  
                                                  16,201OTHER
      EXPENSES (INCOME):Interest
      expense, including amortization of debt issuance costs
                                                  
                                                  
                                                  7,007
                                                  
                                                  
                                                  
                                                  6,856
                                                  
                                                  
                                                  
                                                  14,442
                                                  
                                                  
                                                  
                                                  14,878Gains
      on repurchases of debt
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (860
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (9,271
                                                  )Reserve
      for note receivable
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  11,538
                                                  
                                                  
                                                  
                                                  -Interest
      income
                                                  
                                                  
                                                  (230
                                                  )
                                                  
                                                  
                                                  (284
                                                  )
                                                  
                                                  
                                                  (459
                                                  )
                                                  
                                                  
                                                  (470
                                                  )Other,
      net
                                                  
                                                  
                                                  (16
                                                  )
                                                  
                                                  
                                                  (41
                                                  )
                                                  
                                                  
                                                  (64
                                                  )
                                                  
                                                  
                                                  (72
                                                  )Total
      other expense, net
                                                  
                                                  
                                                  6,761
                                                  
                                                  
                                                  
                                                  5,671
                                                  
                                                  
                                                  
                                                  25,457
                                                  
                                                  
                                                  
                                                  5,065(LOSS)
      INCOME BEFORE INCOME TAX (BENEFIT) PROVISION
                                                  
                                                  
                                                  (2,028
                                                  )
                                                  
                                                  
                                                  2,920
                                                  
                                                  
                                                  
                                                  (22,181
                                                  )
                                                  
                                                  
                                                  11,136(BENEFIT)
      PROVISION FOR INCOME TAXES
                                                  
                                                  
                                                  (729
                                                  )
                                                  
                                                  
                                                  933
                                                  
                                                  
                                                  
                                                  (8,306
                                                  )
                                                  
                                                  
                                                  3,504NET
      (LOSS) INCOME
                                                  
                                                  $
                                                  (1,299
                                                  )
                                                  
                                                  $
                                                  1,987
                                                  
                                                  
                                                  $
                                                  (13,875
                                                  )
                                                  
                                                  $
                                                  7,632See
      notes to unaudited condensed consolidated financial
      statements.


-2-





Morris
      Publishing Group, LLCUnaudited
      condensed consolidated statements of cash flowsSix
      months ended June 30,(Dollars in
      thousands)
                                  
                                  2009
                                  
                                  
                                  2008OPERATING
      ACTIVITIES:Net
      (loss) income
                                  
                                  $
                                  (13,875
                                  )
                                  
                                  $
                                  7,632Adjustments
      to reconcile net (loss) income to cash provided by operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  6,144
                                  
                                  
                                  
                                  7,025Deferred
      income taxes
                                  
                                  
                                  (4,573
                                  )
                                  
                                  
                                  (459
                                  )Amortization
      of debt issuance costs
                                  
                                  
                                  2,014
                                  
                                  
                                  
                                  1,048Write-off
      of deferred loan costs
                                  
                                  
                                  199
                                  
                                  
                                  
                                  -Reserve
      on note receivable
                                  
                                  
                                  11,538
                                  
                                  
                                  
                                  -Capital
      contribution by Morris Communications for services
rendered
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,585Loss
      (gain) on sale of fixed assets, net
                                  
                                  
                                  111
                                  
                                  
                                  
                                  (103
                                  )Pre-tax
      gains on repurchases of debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (9,271
                                  )Changes
      in assets and liabilitiesAccounts
      receivable
                                  
                                  
                                  10,948
                                  
                                  
                                  
                                  10,046Inventories
                                  
                                  
                                  328
                                  
                                  
                                  
                                  (187
                                  )Prepaids
      and other current assets
                                  
                                  
                                  (967
                                  )
                                  
                                  
                                  61Other
      assets
                                  
                                  
                                  (193
                                  )
                                  
                                  
                                  (181
                                  )Accounts
      payable
                                  
                                  
                                  (586
                                  )
                                  
                                  
                                  (2,006
                                  )Income
      taxes receivable
                                  
                                  
                                  (3,742
                                  )
                                  
                                  
                                  -Accrued
      employee costs
                                  
                                  
                                  (4,638
                                  )
                                  
                                  
                                  (1,369
                                  )Accrued
      interest expense
                                  
                                  
                                  9,754
                                  
                                  
                                  
                                  (933
                                  )Due
      to Morris Communications
                                  
                                  
                                  1,196
                                  
                                  
                                  
                                  7,166Deferred
      revenues and other liabilities
                                  
                                  
                                  609
                                  
                                  
                                  
                                  859Postretirement
      obligations due to Morris Communications
                                  
                                  
                                  -
                                  
                                  
                                  
                                  699Other
      long-term liabilities
                                  
                                  
                                  (114
                                  )
                                  
                                  
                                  124Net
      cash provided by operating activities
                                  
                                  
                                  14,153
                                  
                                  
                                  
                                  23,736INVESTING
      ACTIVITIES:Capital
      expenditures
                                  
                                  
                                  (255
                                  )
                                  
                                  
                                  (1,480
                                  )Restricted
      cash released from escrow
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,392Net
      proceeds from sale of property and equipment
                                  
                                  
                                  117
                                  
                                  
                                  
                                  696Net
      cash (used in) provided by investing activities
                                  
                                  
                                  (138
                                  )
                                  
                                  
                                  11,608FINANCING
      ACTIVITIES:Repurchase
      of senior subordinated debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (12,251
                                  )Proceeds
      from revolving credit facility
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  55,000Repayments
      on revolving credit facility
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (42,000
                                  )Repayment
      of term loan
                                  
                                  
                                  (4,500
                                  )
                                  
                                  
                                  (2,250
                                  )Payment
      of debt issuance costs
                                  
                                  
                                  (731
                                  )
                                  
                                  
                                  -Advances
      on loan receivable from Morris Communications
                                  
                                  
                                  (6,012
                                  )
                                  
                                  
                                  (33,088
                                  )Net
      cash used in financing activities
                                  
                                  
                                  (1,243
                                  )
                                  
                                  
                                  (34,589
                                  )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  12,772
                                  
                                  
                                  
                                  755CASH
      AND CASH EQUIVALENTS, beginning of period
                                  
                                  
                                  4,782
                                  
                                  
                                  
                                  4,135CASH
      AND CASH EQUIVALENTS, end of period
                                  
                                  $
                                  17,554
                                  
                                  
                                  $
                                  4,890SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
                                  
                                  $
                                  2,475
                                  
                                  
                                  $
                                  14,763Income
      taxes paid to Morris Communications*
                                  
                                  
                                  -
                                  
                                  
                                  
                                  34,468See
      notes to unaudited condensed consolidated financial
      statements.*
      Includes $30,505 in income taxes paid to Morris Communications
      during the six-month period ending June 30, 2008 on the gain on
      sale of publications and commercial printing operations to GateHouse
      Media, LLC during the fourth quarter of 2007.





-3-







MORRIS
PUBLISHING GROUP, LLC


Notes
to condensed consolidated financial statements (unaudited)


(Dollars
in thousands)





1.
            Basis
      of Presentation





The
accompanying condensed consolidated financial statements furnished herein
reflect all adjustments, which in the opinion of management, are necessary for
the fair presentation of Morris Publishing Group, LLC’s (“Morris Publishing”,
“Company”) financial position and results of operations. All such adjustments
are of a normal recurring nature. Results of operations for the first three
and six-month interim periods in 2009 are not necessarily
indicative of results expected for the full year. While certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) have been condensed or omitted, the Company believes that the
disclosures herein are adequate to keep the information presented from being
misleading. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto for the year ended December 31, 2008. The accounting policies that are
employed are the same as those shown in Note 1 to the consolidated financial
statements as of December 31, 2008 and 2007 and for each of three years ended
December 31, 2008.





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





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





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




Fair value of
financial instruments—The Company estimated the fair
values presented below using appropriate valuation methodologies and market
information available as of June 30, 2009. Considerable judgment is required to
develop estimates of fair value, and the estimates presented are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions or estimation
methodologies could have a material effect on the estimated fair values.
Additionally, the fair values were estimated at June 30, 2009, and current
estimates of fair value may differ from the amounts
presented.
  The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
  -4-
   Cash and
equivalents, accounts receivable, and accounts payable. The carrying
amount of these items approximates fair value.
  Note
receivable. In accordance with SFAS No. 114 (as amended), “Accounting by Creditors for
Impairment of a Loan”, the Company reserved all the amount due
on its note receivable during the first quarter of 2009.(see Note
3)
  Long term
debt. To estimate the fair value of our debt issues, which are not quoted
on an exchange, the Company used those interest rates that were
currently available to it for issuance of debt with similar terms and remaining
maturities.
  At
June 30, 2009, the fair value of the $278,478 principal amount of Senior
Subordinated Notes was approximately $13,925. The Tranche A term loan and
the revolving credit facility do not often trade and the fair value of the
$78,750 and $60,000 principal amounts outstanding on
these loans, respectively, was not readily determinable at June
30, 2009.
 2.
                Going
      Concern


Several
factors relating to the Company’s outstanding debt raise significant uncertainty
about its liquidity and ability to continue as a going concern. Specifically,
the Company’s debt exceeds its assets, and the Company’s creditors may have the
right to accelerate the maturity of the debt on or before August 14, 2009, the
Expiration Time of Waiver No. 9 to the Credit Agreement (as described
below).


The
Credit Agreement includes an event of default if the Company, as borrower,
defaults in the payment when due of any principal or interest due on any other
indebtedness having an aggregate principal amount of $5,000 or more (such
as Morris Publishing’s $278,478 of 7% Senior Subordinated Notes due 2013 (the
“Notes”)). Morris Publishing failed to pay the $9,747 interest payment due
February 1, 2009 on the Notes. Amendment No. 6 and Waiver No. 9 (“Waiver No. 9”,
as described in Note 9) waives any default that arose from the failure to make
such interest payment and the default that arose from the Company’s failure to
make the $9,747 interest payment due August 3, 2009 on the Notes until 5:00 p.m.
New York City time on August 14, 2009 (the “Expiration Time”). However, the
waiver will terminate earlier if Amendment No. 6 to the Forbearance Agreement
(as described in Note 9) is terminated or amended prior to such time or upon
other defaults.





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





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





In view
of the current volatility in the credit markets and the market conditions in the
newspaper industry, it is likely that the Company will be dependent on the
ability of Morris Communications or its guarantor subsidiaries to a) enter into
a transaction that would induce a lender to refinance the senior debt, b) raise
sufficient funds to purchase the loans and commitments from the existing senior
creditors, or c) raise sufficient funds to refinance the senior debt with a new
loan from the guarantor. The failure of Morris Communications or its guarantor
subsidiaries to consummate any of the transactions noted above would likely
require the Company to refinance the existing bank debt or seek an amendment of
the terms of the Credit Agreement, either of which could increase its cost of
borrowing, or if such efforts are unsuccessful, the senior creditors could
accelerate the senior debt and foreclose on their security interests in
substantially all of the Company’s assets. In the event
of an acceleration of the senior debt, the Company’s assets may be insufficient
to pay the senior debt in full, and there may be little or no remaining assets
to pay the holders of the Notes.




-5-





Even if
the Company has paid the overdue interest (plus default interest), or amended or
restructured the Notes by the Expiration Time, the Company will be unlikely to
meet the financial covenants under the Credit Agreement when the Company and
Morris Communications deliver their consolidated financial statements for the
second quarter of 2009 no later than August 29, 2009 (when the relaxed financial
covenants under Amendment No. 3 to the Credit Agreement terminate). A failure to
amend or refinance before the relaxed covenants terminate would prevent the
Company from borrowing on the revolving line of credit and it may be required to
prepay the entire principal due under the Credit Agreement.





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





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




As a
result of their efforts, the Company has spent $2,618 and $5,486 in legal,
investment banking and consulting fees during the second quarter and the first
six months of 2009, respectively. These costs are included as debt restructuring
costs within total operating costs on the condensed consolidated statements of
(loss) income.




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





3.
            Reserve
      on Note Receivable





During
the fourth quarter of 2007, the Company completed the sale of fourteen daily
newspapers, three non-daily newspapers, a commercial printing operation and
other related publications to GateHouse (the “GateHouse sale”). The total
purchase price was $115,000 plus reimbursement for the net working capital. The
gain on sale was $49,567, net of the $30,505 provision for income
taxes.





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





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





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


-6-





On May 1,
2009, the Company entered into a second amendment to the note, with GateHouse
agreeing to monthly payments of interest (8.0% per annum) in arrears on the
principal amount then outstanding on the note beginning in January 2009 and
continuing through December 2009 while any part of the note remains unpaid. A
principal payment of $1,500 (the remainder of the net working capital
adjustment) will be due and payable on December 31, 2009. Commencing in January
2010, monthly interest payments of interest in arrears on the principal amount
then outstanding under the note, along with one-tenth of the principal amount of
the note shall be payable on the 15th of each
month. The note shall be due and payable in full on October 15,
2010.





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





4.
            Transactions
      with Parent and Affiliates




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





·
            Management
      Fee—
      This fee compensates Morris Communications for corporate services and
      costs incurred on behalf of the Company, including executive, legal,
      secretarial, tax, internal audit, risk management, employee benefit
      administration, airplane usage and other support services. A fee equal to
      the greater of 4.0% of the Company’s annual total operating revenues or
      the amount of actual expenses allocable to the management of the Company’s
      business by Morris Communications (such allocations to be based upon time
      and resources spent on the management of the Company’s business by Morris
      Communications) is charged to the
Company.





·
            Technology
      and Shared Services Fee—
      This fee compensates Morris Communications for certain technology and
      shared services and is based on the lesser of 2.5% of the Company’s total
      net operating revenue or the actual technology costs allocated to the
      Company based upon usage.





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





Per the
Securities and Exchange Commission’s Staff Accounting Bulletins Official Text
Topic 1B1, “Costs Reflected in
Historical Financial Statements”, the historical income statements of a
registrant should reflect all of its costs of doing business. Therefore, the
Company has recorded the costs of these services based on the percentages above
for the period May 1, 2008 through September 30, 2008 within its other operating
costs, with the cost of these services treated as a capital contribution by its
parent. The total cost of the services contributed by its parent was $3,585 for
the three and six-month period ended June 30, 2008.





These
management fees expensed totaled $2,540 and $3,287 for the three-month periods
ended June 30, 2009 and 2008, respectively, and $5,108 and $6,595 for the
six-month periods ended June 30, 2009 and 2008, respectively.





The
technology and shared services fees expensed totaled $1,587 and $2,054 for the
three-month periods ended June 30, 2009 and 2008, respectively, and $3,193 and
$4,122 for the six-month periods ended June 30, 2009 and 2008,
respectively.




-7-







The
Company believes that these fee allocations were made on a reasonable basis, and
approximate all of the material incremental costs it would have incurred had it
been operating on a stand-alone basis; however, there has been no independent
study or any attempt to obtain quotes from third parties to determine what costs
of obtaining such services from third parties would have been.





Employees’ 401(k)Plan—
The Company participates in Morris Communications’ 401(k) plan. Prior to July
13, 2008 (the “suspension date”), contributions by employees to the 401(k) plan
were matched (up to 5% of pay) by Morris Communications. The Company has
indefinitely suspended the employer matching contributions for employee
contributions made after the suspension date.





Expenses,
allocated to the Company based on specific identification of employer matching
contributions, were $793 and $1,635 for the three and six-month periods ended
June 30, 2008, respectively.





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





Expenses
related to Morris Communications’ plan, allocated to the Company based on total
headcount, were $350 and $699 for the three and six-month periods ended June 30,
2008.





Health and
Disability Plan—
The Company participates in Morris Communications’ health and disability plan
for active employees. Accordingly, Morris Communications has allocated to the
Company certain expenses associated with the payment of current obligations and
the estimated amounts incurred but not yet reported. The expense, allocated to
the Company based on the total headcount, was $1,825 and $2,866 for the
three-month periods ended June 30, 2009 and 2008, respectively, and $3,810 and
$5,270 for the six-month periods ended June 30, 2009 and 2008,
respectively.




The
Company was also allocated its portion of Morris Communications’ health and
disability obligation. The amounts allocated to the Company, based on total
headcount, were $1,879 and $1,974 as of June 30, 2009 and December 31, 2008,
respectively. The Company has recorded this liability within accrued employee
costs in the accompanying financial statements.





Workers’
Compensation Expense—
The Company participates in Morris Communications’ workers’ compensation
self-insurance plan, which is guaranteed and secured by Morris Communications’
parent, Pesto, Inc., through a letter of credit. Accordingly, Morris
Communications has allocated to the Company certain expenses associated with the
payment of current obligations and the estimated amounts incurred but not yet
reported. The expenses allocated to the Company, based on a percentage of total
salaries expense, were $565 and $393 for the three-month periods ended June
30, 2009 and 2008, respectively, and $968 and $1,012 for the six-month
periods ended June 30, 2009 and 2008, respectively.





Loan Receivable
fromMorris
Communications—
Under its debt arrangements, the Company is permitted to loan up to
$40,000 at any one time to Morris Communications or any of its wholly-owned
subsidiaries outside the Publishing Group, solely for purposes of funding its
working capital, capital expenditures and acquisition requirements. The Company
is also permitted to invest in or lend an additional $20,000 at any one
time outstanding to Morris Communications or any other Person(s), as defined in
the debt Indenture.





The
interest-bearing portion of all loans from the Company to Morris Communications
bear the same rate as the borrowings under the Credit Agreement (for the
three-month period ended June 30, 2009, this rate was LIBOR (adjusted to the
nearest 1/16th) + 1.00%). The Company distinguishes between intercompany
transactions incurred in the ordinary course of business and settled on a
monthly basis (which do not bear interest) and those of a more long-term nature
that are subject to an interest accrual. Interest is accrued on the average
outstanding long-term balance each month.




-8-





The
Company accounts for this arrangement as a capital distribution transaction and
classifies such borrowings as contra-equity within member’s deficiency in
assets, given the historical practice of the Company and Morris Communications
settling a significant portion of the outstanding loan receivable balance with a
dividend. In addition, interest accrued on this loan receivable has been
reported as contra-equity within member’s deficiency in assets for the
three-month and six-month periods ended June 30, 2009 and 2008.





During
the three-month periods ended June 30, 2009 and 2008, the Company reported $216
and $119, respectively, in interest accrued on the intercompany loan receivable
as contra-equity. The average interest rate for the three-month periods
ended June 30, 2009 and 2008 was 3.44% and 3.92%, respectively, on average loan
receivable balances of $24,827 and $12,058 (excluding the income taxes payable
on the GateHouse sale), respectively.





During
the six-month periods ended June 30, 2009 and 2008, the Company reported $417
and $341, respectively, in interest accrued on the intercompany loan receivable
as contra-equity. The average interest rate for the six-month periods ended
June 30, 2009 and 2008 was 3.38% and 4.40%, respectively, on average loan
receivable balances of $24,448 and $15,242 (excluding the income taxes payable
on the GateHouse sale), respectively.





At June
30, 2009, the amount outstanding on the intercompany loan due from Morris
Communications was $24,500, and the accumulated interest accrued on the
intercompany loan receivable was $6,278, resulting in a net intercompany
receivable of $18,222. The amount outstanding on the intercompany loan due from
Morris Communications was $12,210 as of December 31, 2008.





Restricted
payments—
The Company is permitted under its debt arrangement to make restricted
payments, which includes dividends and loans to affiliates in excess of the
permitted limits described above, up to the sum of (1) 100% of the Company’s
cumulative consolidated income before interest, taxes, depreciation and
amortization (“Consolidated EBITDA”, as defined in the indenture) earned
subsequent to the debt’s August 2003 issue date less (2) 140% of the
consolidated interest expense of the Company for such
period.


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





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





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





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


-9-





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





5.
            Accounting
      Pronouncements





Recently
Issued Standards





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168
replaces SFAS No. 162,“The
Hierarchy of Generally Accepted Accounting Principles”(“SFAS No. 162”).
SFAS No. 162 identified the sources of accounting principles and the framework
for selecting the principles used in the presentation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
The FASB Accounting Standards CodificationTM (Codification) will become the
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification modifies the
GAAP hierarchy to include only two levels of GAAP: authoritative and
nonauthoritative. SFAS No. 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. There will be no
change to the Company’s consolidated financial statements due to the
implementation of this Statement.


Recently
Adopted Standards





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
No. 165”). SFAS No. 165 establishes general standards of accounting for, and
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It also requires
the disclosure of the date through which subsequent events are evaluated and the
basis for that date, that is, whether that date represents the date the
financial statements are issued or are available to be issued. The effective
date for SFAS No. 165 is for interim or annual periods ending on or after June
15, 2009. The Company adopted the provisions of SFAS No. 165 as of April 1,
2009, which did not have a material impact on the Company’s financial position,
cash flows or results of operations.





In April
2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board ("APB")
No. 28-1, "Interim Disclosures about Fair Value
of Financial Instruments". The FSP amends SFAS
No. 107, "Disclosures about Fair Value of
Financial Instruments" to require an entity to provide disclosures about
fair value of financial instruments in interim financial information. This FSP
is to be applied prospectively and is effective for interim and annual periods
ending after June 15, 2009. The Company adopted this FSP in the quarter ended
June 30, 2009. There was no impact on the unaudited condensed consolidated
financial statements as it relates only to additional disclosures which are
included inthe notes to these financial
statements.




In April
2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP No.
157-4”). This FSP provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset
or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP No.
157-4 is effective for interim and annual reporting periods ending after June
15, 2009, and is applied prospectively. The Company concluded that the adoption
of FSP No. 157-4 as of April 1, 2009 did not have a material impact on its
results of operations, financial position or cash flows.




-10-





In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active”(“FSP FAS
No. 157-3”). FSP FAS No. 157-3 clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP FAS No. 157-3 became
effective immediately upon issuance, and its adoption did not have any effect on
its financial statements. The Company currently determines the fair value of its
long-lived assets when testing for impairment. SFAS No. 157 was effective for
these fair value assessments as of January 1, 2009. The
adoption of SFAS No. 157 on January 1, 2009 had no impact on the Company’s
financial position, cash flows or results of operations.





In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”(“FSP FAS No. 142-3”). FSP FAS No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”). More specifically, FSP FAS No. 142-3
removes the requirement under paragraph 11 of SFAS No. 142 to consider whether
an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions and instead, requires an
entity to consider its own historical experience in renewing similar
arrangements. FSP FAS No. 142-3 also requires expanded disclosure related to the
determination of intangible asset useful lives. The FSP was effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and may impact any intangible assets the Company acquires in future
transactions.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value, and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company adopted the provisions of SFAS No. 159 on January 1, 2008, and have
elected not to measure any of its eligible financial assets or liabilities at
fair value.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,
and in February 2008, the FASB amended SFAS No. 157 by issuing FSP FAS No.
157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13”, and FSP FAS No. 157-2, “Effective Date of FASB Statement
No. 157” (collectively
“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. SFAS No.
157 is applicable to other accounting pronouncements that require or permit fair
value measurements, except those relating to lease accounting, and accordingly
does not require any new fair value measurements. SFAS No. 157 was effective for
financial assets and liabilities in fiscal years beginning after November 15,
2007, and for non-financial assets and liabilities in fiscal years beginning
after November 15, 2008 except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The Company’s
adoption of the provisions of SFAS No. 157 on January 1, 2008, with respect to
financial assets and liabilities measured at fair value, did not have a material
impact on its fair value measurements or its financial statements for the year
ended December 31, 2008.




-11-





6.
            Long-Term
      Debt





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





June
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Credit AgreementTranche
      A
                    
                    $
                    78,750
                    
                    
                    $
                    83,250Revolving
      debt
                    
                    
                    60,000
                    
                    
                    
                    50,000Current
      maturities of long-term debt
                    
                    
                    138,750
                    
                    
                    
                    133,250Senior Subordinated
    Indenture*
                    
                    
                    278,478
                    
                    
                    
                    278,478Total
                    
                    $
                    417,228
                    
                    
                    $
                    411,728*February
      1, 2009 interest payment of $9,747 has not been paid by Company as of June
      30, 2009.





The
weighted average interest rate on the Company’s total debt outstanding was 5.78%
at June 30, 2009 and December 31, 2008. At June 30, 2008, the weighted average
interest rate on the $417,103 total debt outstanding was 5.98%.





At June
30, 2009, the Company had $60,000 outstanding on its revolving line of credit,
up $10,000 from $50,000 at December 31, 2008. At June
30, 2009, the amount available on the revolving line of credit was a maximum of
$70,000, but was limited to $60,000 without the consent of lenders holding a
majority of the commitments under the Credit Agreement. (See Amendment No 4. and
Waiver No. 2 to the Credit Agreement as described below). On July 31,
2009,  the Revolving Credit Commitment was permanently reduced to
$60,000 (See Note 9).


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





At June
30, 2009, the interest rate was 3.3125% on the $78,750 Tranche A term loan and
was 3.3610% on the revolving line of credit. During the three and six-month
periods ended June 30, 2009, the Company paid $2,250 and $4,500 in principal due
on the term loan, respectively, with another $5,625 of principal payments due by
the end of 2009.





At June
30, 2008, the interest rate on the $86,625 Tranche A term loan outstanding was
4.06% and the weighted average interest rate on the $52,000 outstanding on the
revolving line of credit was 3.75%. The commitment fee on the unborrowed funds
available under the revolving line of credit was 0.375%.





During
the three months ended June 30, 2008, the Company paid $1,125 in principal due
on the term loan and repaid the $593 bank swing line loan outstanding at the end
of the first quarter of 2008.





During
the first six months of 2008, the Company repurchased a total of $21,522 of its
$300,000 7% Senior Subordinated Notes for a total purchase price, including
accrued interest, of $12,471. The pre-tax gains on these repurchases was $9,271.
In addition, the Company wrote off $375 in unamortized loan fees related to
these extinguished notes. The amount outstanding on the Notes was $278,478 at
June 30, 2009 and December 31, 2008.


During
the second quarter of 2008, the Company repurchased $2,406 of its Notes for a
total purchase price, including accrued interest, of $1,596. The pre-tax gain on
these repurchases was $860.





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


-12-





Credit
Agreement





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





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





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





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





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





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





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





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





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


Additional
Waiversto the
Credit Agreement—Waivers
No. 3, No. 4, No. 5, No. 6 and No. 7 ultimately extended the original waiver
period from March 3, 2009 until July 14, 2009, or earlier, if upon termination
of the Forbearance Agreement (as described below).


-13-





In
addition, Amendment No. 5 deleted the Mandatory Transaction requirement added by
Amendment No. 3 to the Credit Agreement. Prior to its deletion, the Mandatory
Transaction requirement would have required the Company, Morris
Communications or one or more of their subsidiaries to consummate a
transaction (or at least sign a binding letter of intent to do so) that would
generate sufficient funds to either prepay all loans under the Credit
Agreement or purchase an assignment of all loans and commitments of the lenders
at par, no later than the delivery date of Morris Communications’ financial
statements for the quarter ending March 31, 2009 (but not later than May 30,
2009). Amendment No. 5 also required Morris Communications to provide certain
additional financial and company information to the lenders.





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





Waiver
No. 6 and No. 7 also waived any event of default that may have occurred
consisting solely of the consolidated cash flow ratio of Morris Communications
and Morris Publishing exceeding the applicable amount permitted under Section
6.06(a) of the Credit Agreement ultimately until July 14, 2009.




The July
14, 2009 expiration of the waiver period has subsequently been extended to
August 14, 2009 by Waiver No. 8 and Amendment No. 6 and Waiver No. 9 to the
Credit Agreement (see Note 9).





Senior Subordinated
Notes





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





Amendments
toForbearance
Agreement—
Amendments No. 1, No. 2, No. 3 and No. 4 to the Forbearance Agreement ultimately
extended the Forbearance Period was extended to July 14, 2009.





During
the Forbearance Period, and for up to seven business days thereafter, the
Amended Forbearance Agreement restricts the Company’s ability to enter into any
transaction which would refinance any of its existing senior debt under the
Credit Agreement where any affiliate of the Company would become a holder of
senior debt and limits new liens on its properties, without prior written
consent of holders of more than 66 2/3% of the outstanding
Notes.




The July
14, 2009 expiration of the Forbearance Period has subsequently been
extended to August 14, 2009 by Amendments No. 5 and No. 6 to the Forbearance
Agreement (see Note 9).





7.
            Intangible
      Assets





Intangible
assets acquired consist primarily of mastheads and licenses on various acquired
properties, customer lists, as well as other assets.





-14-






Goodwill and Other Intangible
Assets”


Certain
other intangible assets acquired (subscriber lists, non-compete agreements and
other assets) are amortized over their estimated useful lives (from 5 to 20
years).





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





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





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




Subsequent
to December 31, 2008, there have been no facts and circumstances indicating the
possible impairment of the indefinite-lived or the definite-lived intangible
assets.


Amortization
expense of other intangible assets was $176 and $176 for the three-month periods
ended June 30, 2009 and 2008, respectively, and $348 and $351 for the six-month
periods ended June 30, 2009 and 2008, respectively.





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





Other
      intangible assetsBalance
      at December 31, 2008
                    
                    $
                    7,956Additions
                    
                    
                    2Amortization
      expense
                    
                    
                    (348
                    )Balance
      at June 30, 2009
                    
                    $
                    7,610





-15-







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





Cost
                
                
                Accumulated
      amortization
                
                
                Net
      costJune
      30, 2009:Finite-lived
      intangible assetsSubscriber
      lists
                
                $
                9,195
                
                
                $
                5,944
                
                
                $
                3,251Non-compete
      agreements and other assets
                
                
                50
                
                
                
                50
                
                
                
                -Total
      finite-lived intangible assets
                
                
                9,245
                
                
                
                5,994
                
                
                
                3,251Indefinite-lived
      intangible assetsNewspaper
      mastheads
                
                
                5,031
                
                
                
                792
                
                
                
                4,239Domain
      names
                
                
                135
                
                
                
                15
                
                
                
                120Total
      indefinite-lived intangible assets
                
                
                5,166
                
                
                
                807
                
                
                
                4,359Total
      other intangible assets
                
                $
                14,411
                
                
                $
                6,801
                
                
                $
                7,610





Cost
                
                
                Accumulated amortization
                
                
                Net costDecember
      31, 2008:Finite-lived
      intangible assetsSubscriber
      lists
                
                $
                9,196
                
                
                $
                5,598
                
                
                $
                3,598Non-compete
      agreements and other assets
                
                
                50
                
                
                
                48
                
                
                
                2Total
      finite-lived intangible assets
                
                
                9,246
                
                
                
                5,646
                
                
                
                3,600Indefinite-lived
      intangible assetsNewspaper
      mastheads
                
                
                5,031
                
                
                
                792
                
                
                
                4,239Domain
      names
                
                
                132
                
                
                
                15
                
                
                
                117Total
      indefinite-lived intangible assets
                
                
                5,163
                
                
                
                807
                
                
                
                4,356Total
      other intangible assets
                
                $
                14,409
                
                
                $
                6,453
                
                
                $
                7,956





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





Remainder
      of 2009
                
                $
                3402010
                
                
                6652011
                
                
                5362012
                
                
                4192013
                
                
                3552014
                
                
                176





8.
            Commitments
      and Contingencies





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





9.
            Subsequent
      Events





The
Company evaluated subsequent events through August 12, 2009, which is the date
that the condensed consolidated financial statements were available to be
issued.





-16-






Failure
to make August 3, 2009 interest payment on the Notes





Waivers
to Credit Agreement— Subsequent to June 30, 2009, the Company entered
into Waiver No. 8 and Amendment No. 6 and Waiver No. 9 (“Waiver No. 9”) to the
Credit Agreement which ultimately extended the waiver of cross default that
arose from the failure to make the February 1, 2009 and August 3, 2009
interest payments due on the Notes until August 14, 2009, or earlier, if upon
termination of the Forbearance Agreement.





In
addition, Waiver No. 9 permanently reduced the Revolving Credit Commitment to
$60,000.





Waivers
No. 8 and 9 ultimately extended the waiver of any event of default that may
have occurred consisting solely of the consolidated cash flow ratio of Morris
Communications and Morris Publishing exceeding the applicable amount permitted
under Section 6.06(a) of the Credit Agreement until August 14,
2009.





Amendments
to Forbearance Agreement— Subsequent to June 30, 2009, the Company
entered into Amendments No. 5 and No. 6 to the Forbearance Agreement
ultimately extending the Forbearance Period to August 14, 2009.
The Forbearance Agreement incorporates the Company’s failure to make
the $9,747 interest payment due on August 3, 2009.




Additional
Waivers and Forbearance— The Company is pursuing additional extensions of
the waiver and forbearance periods as it continues to pursue alternative sources
of funds or means of financing to repay or refinance the amounts outstanding on
the Credit Agreement and attempts to refinance or restructure the amounts
outstanding on the Notes. The timing and ultimate outcome of such efforts cannot
be determined at this time.
  -17-





ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The
following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements as of and for the three and six-month periods
ended June 30, 2009 and 2008 and with our consolidated financial statements as of
December 31, 2008 and 2007 and for each of three years in the period ended
December 31, 2008, filedon Form
10-K.





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





Information
availability





Our
quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on
Form 8-K and all amendments to those reports are available free of charge on our
Web site, morris.com, as soon as feasible after such reports are electronically
filed with or furnished to the Securities and Exchange Commission. In addition,
information regarding corporate governance at Morris Publishing Group, LLC
(“Morris Publishing”) is also available on our Web site. The information on our
Web site is not incorporated by reference into, or as part of, this Report on
Form 10-Q.





Critical
accounting policies and estimates





Critical
accounting policies are those that are most significant to the portrayal of our
financial position and results of operations and require difficult, subjective
and complex judgments by management in order to make estimates about the effect
of matters that are inherently uncertain. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts in our condensed consolidated financial statements. We evaluate our
estimates on an on-going basis, including those related to our allowances for
bad debts, asset impairments, self-insurance and casualty, management fees,
income taxes and commitments and contingencies. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities.





Although
actual results have historically been reasonably consistent with management’s
expectations, the actual results may differ from these estimates or our
estimates may be affected by different assumptions or conditions.





We
believe there have been no significant changes during the first six months ended
June 30, 2009 to the items that we disclosed as our critical accounting policies
and estimates herein and in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our annual report dated
December 31, 2008 filed with the Securities and Exchange Commission on Form
10-K.





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





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




-18-


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




Fair value of
financial instruments—We estimated the fair values
presented below using appropriate valuation methodologies and market information
available as of June 30, 2009. Considerable judgment is required to develop
estimates of fair value, and the estimates presented are not necessarily
indicative of the amounts that we could realize in a current market
exchange. The use of different market assumptions or estimation methodologies
could have a material effect on the estimated fair values. Additionally, the
fair values were estimated at June 30, 2009, and current estimates of fair value
may differ from the amounts presented.
  The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
  Cash and
equivalents, accounts receivable, and accounts payable. The carrying
amount of these items approximates fair value.
  Note
receivable. In accordance with SFAS No. 114 (as amended), “Accounting by Creditors for
Impairment of a Loan”, we reserved all the amount due on its note
receivable during the first quarter of 2009.
  Long term
debt. To estimate the fair value of our debt issues, which are not quoted
on an exchange, we used those interest rates that were currently
available to it for issuance of debt with similar terms and remaining
maturities.




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





Reserve on note
receivable—During
the fourth quarter of 2007, we completed the sale of fourteen daily newspapers,
three non-daily newspapers, a commercial printing operation and other related
publications to GateHouse. The total purchase price was $115.0 million plus a
working capital adjustment. The gain on sale was $49.6 million, net of the $30.5
million provision for income taxes.





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


-19-






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





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





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





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


Accounting
pronouncements





Recently
issued standards





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168
replaces SFAS No. 162,“The
Hierarchy of Generally Accepted Accounting Principles”(“SFAS No. 162”).
SFAS No. 162 identified the sources of accounting principles and the framework
for selecting the principles used in the presentation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
The FASB Accounting Standards CodificationTM (Codification) will become the
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification modifies the
GAAP hierarchy to include only two levels of GAAP: authoritative and
nonauthoritative. SFAS No. 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. There will be no
change to the our consolidated financial statements due to the implementation of
this Statement.





Recently
adopted standards





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
No. 165”). SFAS No. 165 establishes general standards of accounting for, and
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It also requires
the disclosure of the date through which subsequent events are evaluated and the
basis for that date, that is, whether that date represents the date the
financial statements are issued or are available to be issued. The effective
date for SFAS No. 165 is for interim or annual periods ending on or after June
15, 2009. We adopted the provisions of SFAS No. 165 as of April 1, 2009, which
did not have a material impact on our financial position, cash flows or results
of operations.





-20-






In April
2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board ("APB")
No. 28-1, "Interim Disclosures about Fair Value
of Financial Instruments". The FSP amends SFAS
No. 107, "Disclosures about Fair Value of
Financial Instruments" to require an entity to provide disclosures about
fair value of financial instruments in interim financial information. This FSP
is to be applied prospectively and is effective for interim and annual periods
ending after June 15, 2009. We adopted this FSP in the quarter ended June
30, 2009. There was no impact on the unaudited condensed consolidated
financial statements as it relates only to additional disclosures which are
included inthe notes to these financial
statements.




In April
2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP No.
157-4”). This FSP provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset
or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP No.
157-4 is effective for interim and annual reporting periods ending after June
15, 2009, and is applied prospectively. We concluded that the adoption of FSP
No. 157-4 as of April 1, 2009 did not have a material impact on our results of
operations, financial position or cash flows.





In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active”(“FSP FAS
No. 157-3”). FSP FAS No. 157-3 clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP FAS No. 157-3 became
effective immediately upon issuance, and its adoption did not have any effect on
our financial statements. We currently determines the fair value of our
long-lived assets when testing for impairment. SFAS No. 157 was effective for
these fair value assessments as of January 1, 2009.





In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”(“FSP FAS No. 142-3”). FSP FAS No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”). More specifically, FSP FAS No. 142-3
removes the requirement under paragraph 11 of SFAS No. 142 to consider whether
an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions and instead, requires an
entity to consider its own historical experience in renewing similar
arrangements. FSP FAS No. 142-3 also requires expanded disclosure related to the
determination of intangible asset useful lives. The FSP was effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and may impact any intangible assets we acquire in future
transactions.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value, and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. We adopted
the provisions of SFAS No. 159 on January 1, 2008, and have elected not to
measure any of our current eligible financial assets or liabilities at fair
value.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,
and in February 2008, the FASB amended SFAS No. 157 by issuing FSP FAS No.
157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13”, and FSP FAS No. 157-2, “Effective Date of FASB Statement
No. 157” (collectively “SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure of fair
value measurements. SFAS No. 157 is applicable to other accounting pronouncements
that require or permit fair value measurements, except those relating to lease
accounting, and accordingly does not require any new fair value measurements.
SFAS No. 157 was effective for financial assets and liabilities in fiscal years
beginning after November 15, 2007, and for non-financial assets and liabilities
in fiscal years beginning after November 15, 2008 except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. Our adoption of the provisions of SFAS No. 157 on January 1, 2008, with
respect to financial assets and liabilities measured at fair value, did not have
a material impact on our fair value measurements or our financial statements for
the year ended December 31, 2008.




-21-





Overview





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





While
most of our revenue is generated from advertising and circulation from our
newspaper operations, we also print and distribute periodical publications and
operate commercial printing operations in conjunction with our
newspapers.





During
the second quarter of 2009, advertising revenue represented 72.2% of our total
net operating revenue. Our advertising revenue consisted of 58.0% in retail,
34.7% in classified and 7.3% in national, compared to 53.8%, 39.6%, and 6.6%,
respectively, last year.





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





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





In
addition, our advertising results exhibit that from time to time, each
individual newspaper may perform better or worse than our newspaper group as a
whole due to certain local or regional conditions.





Linage,
the number of inserts, Internet page views, along with rate and mix of
advertisement are the primary components of advertising revenue. The advertising
rate depends largely on our market reach, primarily through circulation, and
market penetration. The number of copies sold and the amount charged to our
customers are the primary components of circulation revenue. Our other revenue
consists primarily of commercial printing and other online revenue.





Circulation
revenue represented 24.6% of our total net operating revenue during the second
quarter of 2009, compared to 18.0% during the same period last year, with the
increase due to price increases and the change in the way we sell home delivery
subscriptions in Florida.





Employee
and newsprint costs are the primary costs at each newspaper. Our operating
performance is affected by newsprint prices, which historically have fluctuated.
Newsprint costs have represented 10 – 15% of total operating expenses.Historically, newsprint
has been subject to significant price fluctuations from year to year, unrelated
in many cases to general economic trends. Supply and demand has typically
controlled pricing.




-22-





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





Financial
Summary.The following table summarizes our consolidated financial
results for the three months ended June 30, 2009 and 2008:





Three
      months ended June 30,(Dollars in millions)
                  
                  2009
                  
                  
                  2008Total
      net operating revenues
                  
                  $
                  63.5
                  
                  
                  $
                  82.2Total
      operating expenses
                  
                  
                  58.8
                  
                  
                  
                  73.6Operating
      income
                  
                  
                  4.7
                  
                  
                  
                  8.6Interest
      expense and loan amortization cost
                  
                  
                  7.0
                  
                  
                  
                  6.9Gains
      on repurchases of debt
                  
                  
                  -
                  
                  
                  
                  (0.9
                  )Other
      income, net
                  
                  
                  (0.3
                  )
                  
                  
                  (0.3
                  )Other
      expenses, net
                  
                  
                  6.7
                  
                  
                  
                  5.7(Loss)
      income before taxes
                  
                  
                  (2.0
                  )
                  
                  
                  2.9(Benefit)
      provision for income taxes
                  
                  
                  (0.7
                  )
                  
                  
                  0.9Net
      (loss) income
                  
                  $
                  (1.3
                  )
                  
                  $
                  2.0





Compared
to the second quarter of 2008, total net operating revenues were $63.5 million,
down $18.7 million, or 22.7%, and total operating expenses were $58.8 million,
down $14.8 million, or 20.1%. Included in our 2009 operating expenses were $2.6
million in legal and consultant costs directly related to the restructuring of
our debt.





Our
operating income was $4.7 million for the second quarter of 2009, down $3.9
million, or 44.9%, from $8.6 million last year.





Interest
and loan amortization expense totaled $7.0 million, up $0.2 million from last
year.





During
the second quarter of 2008, we repurchased $2.4 million of our $300 million 7%
senior subordinated notes for a total purchase price, including accrued
interest, of $1.5 million. The pre-tax gain on these transactions was $0.9
million.





Our loss
before taxes was $2.0 million, compared to income before taxes of $2.9 million
last year.





Our
income tax benefit was $0.7 million in 2009, compared to an income tax provision
of $0.9 million last year. Our effective tax rate increased from 32.0% to 33.7%
in 2009.





Our net
loss was $1.3 million compared to net income of $2.0 million during the second
quarter last year.


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





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





(Dollars in millions)
                          
                          Three
      months ended June 30,
                          
                          
                          Percentage
      change2009
                          
                          
                          2008
                          
                          
                          2009
      vs. 2008Net
      operating revenuesAdvertisingRetail
                          
                          $
                          26.6
                          
                          
                          $
                          35.1
                          
                          
                          
                          (24.2
                          %)Classified
                          
                          
                          15.9
                          
                          
                          
                          25.8
                          
                          
                          
                          (38.3
                          %)National
                          
                          
                          3.3
                          
                          
                          
                          4.3
                          
                          
                          
                          (23.2
                          %)Total
      advertising revenues
                          
                          
                          45.8
                          
                          
                          
                          65.2
                          
                          
                          
                          (29.7
                          %)Circulation
                          
                          
                          15.6
                          
                          
                          
                          14.8
                          
                          
                          
                          5.7
                          %Other
                          
                          
                          2.1
                          
                          
                          
                          2.2
                          
                          
                          
                          (6.3
                          %)Total
      net operating revenues
                          
                          $
                          63.5
                          
                          
                          $
                          82.2
                          
                          
                          
                          (22.7
                          %)





-23-






Advertising revenue.Advertising revenue was $45.8 million, a decrease of $19.4 million, or
29.7%, from last year. This year’s quarter over quarter comparisons were
favorably impacted by one extra Sunday and by Easter Sunday occurring during
April compared to March last year.





Retail,
national and classified advertising categories were down 24.2%, 38.3% and 23.2%,
respectively.





Compared
to last year, run of press advertising revenue was $26.6 million, down $13.8
million, or 34.2%, and insert advertising revenue was $11.0 million, down $2.2
million, or 16.4%. Advertising revenue from specialty products printed by us,
but not a part of main newspaper product, was $1.7 million, down $1.2 million,
or 39.8%.





Online
advertising revenue, summarized in the table below, was $6.5 million, down $2.2
million, or 25.7%, from last year. Compared to last year, total page-views were
169.7 million, up 5.0 million, or 3.0% while unique page-views were 14.3
million, up $2.7 million, or 23.0%.





(Dollars in millions)
                      
                      Three
      months ended June 30,
                      
                      
                      Percentage
      Change2009
                      
                      
                      2008
                      
                      
                      2009
      vs. 2008Retail
                      
                      $
                      2.5
                      
                      
                      $
                      2.7
                      
                      
                      
                      (8.6
                      %)National
                      
                      
                      0.3
                      
                      
                      
                      0.4
                      
                      
                      
                      (23.6
                      %)Classified
                      
                      
                      3.7
                      
                      
                      
                      5.6
                      
                      
                      
                      (33.9
                      %)Auto
                      
                      
                      0.5
                      
                      
                      
                      0.6
                      
                      
                      
                      (15.7
                      %)Employment
                      
                      
                      1.6
                      
                      
                      
                      3.1
                      
                      
                      
                      (48.9
                      %)Real
      Estate
                      
                      
                      0.7
                      
                      
                      
                      1.0
                      
                      
                      
                      (23.1
                      %)Other
                      
                      
                      0.9
                      
                      
                      
                      0.9
                      
                      
                      
                      (6.3
                      %)$
                      6.5
                      
                      
                      $
                      8.7
                      
                      
                      
                      (25.7
                      %)





Our
existing Florida newspapers and publications, which account for 33.2% of our
total advertising revenues, contributed 38.1% of our entire net decline in
advertising revenue.





Advertising
revenue in Jacksonville was down $6.5 million, or 34.2%, and St. Augustine was
down $0.5 million, or 24.7%.





Augusta
was down $2.2 million, or 29.0%, Savannah was down $1.6 million, or 28.5%,
Lubbock was down $1.7 million, or 28.0%, Amarillo was down $1.3 million, or
23.3%, Topeka was down $1.2 million, or 26.8%, and Athens was down $0.9 million,
or 33.7%.





Our other
daily newspapers were, together, down $1.4 million, or 23.2%. Our non-dailies
were down $2.1 million, or 33.3%, with significant declines from Skirt! magazines,
Jacksonville’s non-dailies and our four city magazines.


Retail advertising
revenue:





Retail
advertising revenue was $26.6 million, down $8.5 million, or 24.2%, from the
prior year.





Insert
retail revenue was $9.9 million, down $1.9 million, or 15.9%, while print retail
advertising revenue was $12.6 million, down $5.3 million, or 29.7%, from last
year. Retail advertising revenue from specialty products printed by us, but not
a part of main newspaper product, was $1.6 million, down $1.1 million, or 39.9%,
from last year. Retail online revenue was $2.5 million, down $0.2 million, or
8.6%, from last year.





Jacksonville
was down $2.2 million, or 25.1%, Augusta was down $1.1 million, or 24.9%,
Savannah was down $0.8 million, or 24.4%, Lubbock was down $0.9 million, or
26.0%, Amarillo was down $0.3 million, or 11.9%, Topeka was down $0.4 million,
or 16.3%, and Athens was down $0.5 million, or 29.9%.




-24-





Our other
daily newspapers were, together, down $0.8 million, or 19.8%, with significant
declines in St. Augustine, Brainerd and Bluffton.





Our
non-daily publications were down $1.5 million, or 33.7%, with significant
declines at Skirt! and
our Savannah and Waters Edge city magazines.





Classified advertising
revenue:





Total
classified advertising revenue was $15.9 million, down $9.9 million, or 38.3%,
from 2008.





Print
classified advertising revenue was $12.1 million, down $7.9 million, or 39.3%,
and online classified advertising revenue was $3.7 million, down $1.9 million,
or 33.9%, from last year. Excluding the employment category, online classified
advertising revenue was down 15.2% from last year.





Our
Jacksonville newspaper’s classified advertising revenue was down $3.6 million,
or 46.0%, contributing 36.2% of our total net decline.





Augusta
was down $1.1 million, or 38.1%, Savannah was down $0.9 million, or 36.0%,
Lubbock was down $0.9 million, or 34.8%, Amarillo was down $1.0 million, or
38.3%, Topeka was down $0.7 million, or 36.7%, and Athens was down $0.4 million,
or 40.7%.





Our other
daily newspapers were, together, down $0.8 million, or 27.4%, with a significant
decline in St. Augustine.





Our
non-daily publications were down $0.5 million, or 25.9%, with a significant
decline in Jacksonville’s Sun non-daily publications.





National advertising
revenue:





Total
national advertising revenue was $3.3 million, down $1.0 million, or 23.2%, from
last year, with Jacksonville contributing 75.5% of the net decrease.
Jacksonville was down $0.8 million, or 29.8%.





Circulation revenue.During
the second quarter of 2009, circulation revenue was $15.6 million, up $0.8
million, or 5.7%, from the same quarter last year, primarily due to price
increases and the change in the way we sell home delivery subscriptions in
Florida.





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


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





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





Average
daily and Sunday circulation volume was down 12.9% and 10.4%, respectively, with
Jacksonville contributing approximately 45% of each category’s
decline.





Other revenue. Other revenue
was $2.1 million, down $0.1 million, or 6.3%, from $2.2 million in 2008
primarily due to the reduction in Skirt! third party licensing
fees.




-25-





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





(Dollars in millions)
                      
                      Three
      months ended June 30,
                      
                      
                      Percentage
      change2009
                      
                      
                      2008
                      
                      
                      2009
      vs. 2008Operating
      expensesLabor
      and employee benefits
                      
                      $
                      24.5
                      
                      
                      $
                      33.6
                      
                      
                      
                      (27.0
                      %)Newsprint,
      ink and supplements
                      
                      
                      5.3
                      
                      
                      
                      9.7
                      
                      
                      
                      (44.8
                      %)Other
      operating costs
                      
                      
                      23.4
                      
                      
                      
                      26.8
                      
                      
                      
                      (13.3
                      %)Debt
      restructuring costs
                      
                      
                      2.6
                      
                      
                      
                      -
                      
                      
                      
                      -Depreciation
      and amortization
                      
                      
                      3.0
                      
                      
                      
                      3.5
                      
                      
                      
                      (13.6
                      %)Total
      operating expenses
                      
                      $
                      58.8
                      
                      
                      $
                      73.6
                      
                      
                      
                      (20.1
                      %)





Labor and employee
benefits. Total labor and employee benefit costs were $24.5 million,
down $9.1 million, or 27.0%, being favorably impacted by reductions in head
count, the employee pay cuts, the suspension of employer 401(k) contributions
during the second quarter of last year and the termination of the post
retirement plan at the end of 2008.





Our
salaries and wages totaled $18.5 million, down $5.4 million, or 22.5%. Average
full time employee equivalents (“FTE’s”) were down 558, or 20.8%, and the
average pay rate was down 2.2%.





Effective
April 1, 2009, we reduced employee wages by 5 to 10 percent, with the pay cuts
designed to preserve jobs in a difficult economic environment. Wage reductions
will be 10 percent for those earning $50,000 or more.





Commissions
and bonuses were $2.5 million, down $0.9 million, or 26.1%, from last
year.





Employee
medical insurance cost was $1.8 million, down $1.0 million, or 36.3%, primarily
due to the reduction in plan participants.





Post
retirement benefit costs and employer matching contributions to the 401(k) plan
were $0.3 million and $0.8 million during the second quarter of 2008,
respectively.





Other
employee costs totaled $1.7 million, down $0.7 million, or 27.0%, primarily due
to the reduction in payroll taxes and employee relocation expense.





Newsprint, ink and supplements
cost. Newsprint, ink and
supplements costs were $5.3 million, down $4.4 million, or 44.8%.





Compared
to last year, total newsprint expense was $4.6 million, down $3.8 million, or
45.4%, due to a 35.5% decrease in newsprint consumption and a 15.3% decrease in
the average cost per ton of newsprint.


Supplements
expense decreased $0.4 million, or 53.8%, to $0.3 million, and ink expense
decreased $0.1 million, or 24.5%, to $0.4 million.





Other operating costs. Other operating costs
were $23.4 million, down $3.4 million, or 13.3%.





The
combined technology and shared services fee from Morris Communications and
management fee charged by Morris Communications under the management agreement
totaled $4.1 million, down $1.2 million, or 22.7%, from $5.3 million in the
second quarter last year.





The
combined technology and shared services fees during the second quarter of last
year included $3.6 million of non-cash charges resulting from the suspension of
the management fee from May 1, 2008 through September 30, 2008. We treated these
as expenses incurred on our behalf by our parent, and as a capital
contribution.





-26-






Debt restructuring costs.We are currently pursuing
alternative sources of funds or means of financing to repay or refinance the
amounts outstanding on the Credit Agreement and are attempting to refinance or
restructure the amounts outstanding on the Notes. As a result of our efforts, we
have spent a total of $2.6 million in legal, investment banking and consulting
fees during the second quarter of 2009, including fees paid to advisors and
consultants of our senior creditors and certain of our note
holders.





Depreciation and
amortization. Depreciation and
amortization expense was $3.0 million, down $0.5 million, or 13.6%.





Financial
summary for the six months ended June 30, 2009 compared to June 30,
2008





Financial
Summary.The following table summarizes our consolidated financial
results for the six months ended June 30, 2009 and 2008:





Six
      months ended June 30,(Dollars in millions)
                  
                  2009
                  
                  
                  2008Total
      net operating revenues
                  
                  $
                  127.7
                  
                  
                  $
                  164.9Total
      operating expenses
                  
                  
                  124.4
                  
                  
                  
                  148.7Operating
      income
                  
                  
                  3.3
                  
                  
                  
                  16.2Interest
      expense and loan amortization cost
                  
                  
                  14.4
                  
                  
                  
                  14.9Reserve
      on note receivable
                  
                  
                  11.5
                  
                  
                  
                  -Gains
      on repurchases of debt
                  
                  
                  -
                  
                  
                  
                  (9.3
                  )Other
                  
                  
                  (0.4
                  )
                  
                  
                  (0.5
                  )Other
      expenses, net
                  
                  
                  25.5
                  
                  
                  
                  5.1(Loss)
      income before taxes
                  
                  
                  (22.2
                  )
                  
                  
                  11.1(Benefit)
      provision for income taxes
                  
                  
                  (8.3
                  )
                  
                  
                  3.5Net
      (loss) income
                  
                  $
                  (13.9
                  )
                  
                  $
                  7.6





Compared
to the first six months of 2008, total net operating revenues were $127.7
million, down $37.2 million, or 22.5%, and total operating expenses were $124.4
million, down $24.2 million, or 16.3%. Included in our 2009 operating expenses
were $5.5 million in legal and consultant costs directly related to the
restructuring of our debt.





Operating
income was $3.3 million for the first six months of 2009 compared to $16.2
million for the same period last year.





Interest
and loan amortization expense totaled $14.4 million, down $0.5 million from
$14.9 million last year.





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


During
the first six months of 2008, we repurchased $21.5 million of our $300 million
7% senior subordinated notes for a total purchase price, including accrued
interest, of $12.2 million. The pre-tax gain on these transactions was $9.3
million.





Our loss
before taxes was $22.2 million, compared to income before taxes of $11.1 million
last year





Our
income tax benefit was $8.3 million in 2009, compared to an income tax provision
of $3.5 million last year. Our effective tax rate increased from 31.5% to 37.2%
in 2009.





Our net
loss was $13.9 million compared to net income of $7.6 million during the first
six months last year.




-27-





Results
of operations for the six months ended June 30, 2009 compared to June 30,
2008





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





(Dollars in millions)
                      
                      Six
      months ended June 30,
                      
                      
                      Percentage
      change2009
                      
                      
                      2008
                      
                      
                      2009
      vs. 2008Net
      operating revenuesAdvertisingRetail
                      
                      $
                      53.3
                      
                      
                      $
                      68.9
                      
                      
                      
                      (22.7
                      %)Classified
                      
                      
                      31.7
                      
                      
                      
                      52.2
                      
                      
                      
                      (39.3
                      %)National
                      
                      
                      7.1
                      
                      
                      
                      9.4
                      
                      
                      
                      (24.9
                      %)Total
      advertising revenues
                      
                      
                      92.1
                      
                      
                      
                      130.5
                      
                      
                      
                      (29.5
                      %)Circulation
                      
                      
                      31.5
                      
                      
                      
                      29.5
                      
                      
                      
                      7.0
                      %Other
                      
                      
                      4.1
                      
                      
                      
                      4.9
                      
                      
                      
                      (15.7
                      %)Total
      net operating revenues
                      
                      $
                      127.7
                      
                      
                      $
                      164.9
                      
                      
                      
                      (22.5
                      %)





Advertising revenue.Advertising revenue was $92.1 million, a decrease of $38.5 million, or
29.5%, from last year.





During
the first six months of 2009, advertising revenue represented 72.1% of our total
net operating revenue. Our advertising revenue consisted of 57.9% in retail,
34.4% in classified and 7.7% in national, compared to 52.8%, 40.0%, and 7.2%,
respectively, last year.





The
retail, national and classified advertising categories were down 22.7%, 24.9%
and 39.3%, respectively.





Compared
to last year, run of press advertising revenue was $53.5 million, down $27.4
million, or 33.8%, and insert advertising revenue was $21.5 million, down $4.1
million, or 16.1%. Advertising revenue from specialty products printed by us,
but not a part of main newspaper product, was $4.2 million, down $2.3 million,
or 35.4%.





Online
advertising revenue, summarized in the table below, was $12.9 million, down $4.7
million, or 26.8%, from last year. Compared to last year, total page-views were
324.1 million, up 0.9 million, or 0.3% while unique page-views were 27.6
million, up 4.4 million, or 18.9%.





(Dollars in millions)
                        
                        Six
      months ended June 30,
                        
                        
                        Percentage
      Change2009
                        
                        
                        2008
                        
                        
                        2009
      vs. 2008Retail
                        
                        $
                        4.9
                        
                        
                        $
                        5.4
                        
                        
                        
                        (9.0
                        %)National
                        
                        
                        0.7
                        
                        
                        
                        0.8
                        
                        
                        
                        (23.7
                        %)Classified
                        
                        
                        7.3
                        
                        
                        
                        11.4
                        
                        
                        
                        (35.4
                        %)Auto
                        
                        
                        1.0
                        
                        
                        
                        1.2
                        
                        
                        
                        (23.7
                        %)Employment
                        
                        
                        3.3
                        
                        
                        
                        6.5
                        
                        
                        
                        (49.3
                        %)Real
      Estate
                        
                        
                        1.5
                        
                        
                        
                        1.9
                        
                        
                        
                        (21.5
                        %)Other
                        
                        
                        1.5
                        
                        
                        
                        1.8
                        
                        
                        
                        (8.3
                        %)$
                        12.9
                        
                        
                        $
                        17.6
                        
                        
                        
                        (26.8
                        %)




Our
existing Florida newspapers and publications, which accounted for 34.2% of our
total advertising revenues, contributed 38.6% of our entire net decline in
advertising revenue. Advertising revenue in Jacksonville was down $12.4 million,
or 31.9%, and St. Augustine was down $1.1 million, or 26.0%.





As for
our other larger daily newspapers, Augusta was down $5.1 million, or 32.6%,
Savannah was down $3.4 million, or 29.2%, Lubbock was down $3.5 million, or
29.1%, Amarillo was down $2.4 million, or 22.5%, Topeka was down $2.5 million,
or 27.3% and Athens was down $1.9 million, or 33.7%.





Our other
daily newspapers were, together, down $2.4 million, or 22.7%, with significant
declines at each newspaper.





Our
non-daily publications were down $3.8 million, or 31.0%, with significant
declines at Skirt!
and our city magazines.





-28-






Retail advertising
revenue:





Retail
advertising revenue was $53.3 million, down $15.6 million, or 22.7%, from the
prior year.





Insert
retail revenue was $19.2 million, down $3.6 million, or 15.8%, while print
retail advertising revenue was $25.2 million, down $9.4 million, or 27.2%, from
last year. Retail advertising revenue from specialty products printed by us, but
not a part of main newspaper product, was $4.0 million, down $2.1 million, or
34.9%, from last year. Retail online revenue was $4.9 million, down $0.5
million, or 9.0%, from last year.





Jacksonville
was down $3.2 million, or 18.8%, Augusta was down $2.5 million, or 28.0%,
Savannah was down $1.6 million, or 25.3%, Lubbock was down $1.7 million, or
27.0%, Amarillo was down $0.7 million, or 12.8%, Topeka was down $0.8 million,
or 16.9%, and Athens was down $0.9 million, or 28.3%.





Our other
daily newspapers were, together, down $1.4 million, or 17.4%, with significant
declines in St. Augustine, Brainerd and Bluffton.





Our
non-daily publications were down $2.8 million, or 30.6%, with significant
declines at Skirt! and
our Savannah and Waters Edge city magazines.





Classified advertising
revenue:





Total
classified advertising revenue was $31.7 million, down $20.5 million, or 39.3%,
from 2008.





Print
classified advertising revenue was $24.1 million, down $16.1 million, or 40.1%,
and online classified advertising revenue was $7.3 million, down $4.0 million,
or 35.4%, from last year. Excluding the employment category, online classified
advertising revenue was down 16.5% from last year.





Our
Jacksonville newspaper’s classified advertising revenue was down $7.5 million,
or 46.8%, contributing 36.8% of our total net decline.





Augusta
was down $2.5 million, or 41.7%, Savannah was down $1.8 million, or 35.4%,
Lubbock was down $1.8 million, or 35.7%, Amarillo was down $1.8 million, or
35.8%, Topeka was down $1.5 million, or 38.0%, and Athens was down $0.9 million,
or 43.3%.





Our other
daily newspapers were, together, down $1.8 million, or 29.3%, with a $0.8
million decline in St. Augustine.





Our
non-daily publications were down $0.9 million, or 30.8%, with a significant
decline in Jacksonville’s Sun non-daily publications.


National advertising
revenue:





Total
national advertising revenue was $7.1 million, down $2.3 million, or 24.9%, from
last year, with Jacksonville contributing 69.7% of the net decrease.
Jacksonville was down $1.6 million, or 29.1%.





Circulation revenue.Circulation revenue was $31.5 million, up $2.0 million, or 7.0%, from
last year due to price increases in Jacksonville and the change in the way we
sell home delivery subscriptions in Jacksonville.





Bluffton
converted from a free to a paid distribution newspaper as of December 1, 2008
and reported total circulation revenue of $0.2 million for the first six months
of 2009.




-29-






Average
daily and Sunday circulation volume was down 9.7% and 7.7%, respectively, with
Jacksonville contributing approximately 50% of each category’s
decline.





Other revenue. Other revenue
was $4.1 million, down $0.7 million, or 15.7%, from $4.9 million in 2008, with
$0.6 million of the net decline due to the reduction in Skirt! third party licensing
fees.





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





(Dollars in millions)
                  
                  Six
      months ended June 30,
                  
                  
                  Percentage
      change2009
                  
                  
                  2008
                  
                  
                  2009
      vs. 2008Operating
      expensesLabor
      and employee benefits
                  
                  $
                  51.7
                  
                  
                  $
                  68.0
                  
                  
                  
                  (23.9
                  %)Newsprint,
      ink and supplements
                  
                  
                  12.8
                  
                  
                  
                  18.8
                  
                  
                  
                  (32.1
                  %)Other
      operating costs
                  
                  
                  48.3
                  
                  
                  
                  54.9
                  
                  
                  
                  (12.0
                  %)Debt
      restructuring costs
                  
                  
                  5.5
                  
                  
                  
                  -
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  6.1
                  
                  
                  
                  7.0
                  
                  
                  
                  (12.5
                  %)Total
      operating expenses
                  
                  $
                  124.4
                  
                  
                  $
                  148.7
                  
                  
                  
                  (16.3
                  %)





Labor and employee
benefits. Total labor and
employee benefit costs were $51.7 million, down $16.2 million, or 23.9%,
being favorably impacted by reductions in head count, the employee pay cuts
effective April 1, 2009, the suspension of employer 401(k) contributions during
the first six months of last year and the termination of the post retirement
plan at the end of 2008.





Our
salaries and wages totaled $38.6 million, down $9.5 million, or 19.8%. Average
full time employee equivalents (“FTE’s”) were down 540, or 19.9%, and the
average pay rate, excluding $0.8 million and $1.0 million in severance payments
during the first six months of 2008 and 2009, respectively, was
unchanged.





Commissions
and bonuses were $5.5 million, down $2.0 million, or 27.0%, from last
year.





Employee
medical insurance cost was $3.8 million, down $1.5 million, or 27.7%, primarily
due to the reduction in plan participants.





Post
retirement benefit costs and employer matching contributions to the 401(k) plan
were $0.7 million and $1.6 million during the first six months of
2008.





Other
employee costs totaled $3.8 million, down $0.9 million, or 19.5%, primarily due
to the reduction in payroll taxes.





Newsprint, ink and supplements
cost.Newsprint,
ink and supplements costs were $12.8 million, down $6.0 million, or 32.1%; with
the increase in average cost per ton of newsprint being more than offset by the
savings from decreased consumption of newsprint.


Compared
to last year, total newsprint expense was $11.1 million, down $5.3 million, or
32.2%, due to a 32.8% decrease in newsprint consumption offset somewhat by a
0.9% increase in the average cost per ton of newsprint.





Supplements
expense decreased $0.4 million, or 33.7%, to $0.9 million, and ink expense
decreased $0.3 million, or 27.9%, to $0.8 million.





Other operating costs. Other operating costs
were $48.3 million, down $6.6 million, or 12.0%.





The
combined technology and shared services fee from Morris Communications and
management fee charged by Morris Communications under the management agreement
totaled $8.3 million, down $2.4 million, or 22.5%, from $10.7 million in the
first six months last year.




-30-






Debt restructuring costs. We are currently
pursuing alternative sources of funds or means of financing to repay or
refinance the amounts outstanding on the Credit Agreement and are attempting to
refinance or restructure the amounts outstanding on the Notes. As a result of
our efforts, we have spent a total of $5.5 million in legal, investment banking
and consulting fees during the first six months of 2009, including fees paid to
advisors and consultants of our senior creditors and certain of our note
holders.





Depreciation and amortization
expense. Depreciation and
amortization expense was $6.1 million, down $0.9 million, or
12.5%.


-31-





Liquidity
and capital resources





Unrestricted
cash was $17.6 million at June 30, 2009, compared with $4.8 million at December
31, 2008.





Historically,
our primary source of liquidity, has been the cash flow generated from
operations and our primary needs for cash are funding operating expense, debt
service on our bank credit facilities and the Senior Subordinated Notes, capital
expenditures, income taxes, dividends and loans to affiliates, and working
capital. However, several factors (as described below) relating to our
outstanding debt raise significant uncertainty about our liquidity and ability
to continue as a going concern. Specifically, our debt exceeds our assets, and
our creditors may have the right to accelerate the maturity of the debt on or
before August 14, 2009, the Expiration Time for Waiver No. 9 to the Credit
Agreement (as described below).





The
Credit Agreement includes an event of default if we, as borrower, default in the
payment when due of any principal or interest due on any other indebtedness
having an aggregate principal amount of $5.0 million or more (such as Morris
Publishing’s $278.5 million of 7% Senior Subordinated Notes due 2013 (the
“Notes”)). Morris Publishing failed to pay the $9.7 million interest payment due
February 1, 2009 on the Notes. Amendment No. 6 and Waiver No. 9 (“Waiver No. 9”,
as described below) waives any default that arose from the failure to make such
interest payment and the default that arose from our failure to make the $9.7
million interest payment due August 3, 2009 on the Notes until 5:00 p.m. New
York City time on August 14, 2009. However, the waiver will terminate earlier if
Amendment No. 6 to the Forbearance Agreement (as described below) is terminated
or amended prior to such time or upon other defaults.





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





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





In view
of the current volatility in the credit markets and the market conditions in the
newspaper industry, it is likely that we will be dependent on the ability of
Morris Communications or its guarantor subsidiaries to a) enter into a
transaction that would induce a lender to refinance the senior debt, b) raise
sufficient funds to purchase the loans and commitments from the existing senior
creditors, or c) raise sufficient funds to refinance the senior debt with a new
loan from the guarantor. The failure of Morris Communications or its guarantor
subsidiaries to consummate any of the transactions noted above would likely
require us to refinance the existing bank debt or seek an amendment of the terms
of the Credit Agreement, either of which could increase our cost of borrowing,
or if such efforts are unsuccessful, the senior creditors could accelerate the
senior debt and foreclose on their security interests in substantially all of
our assets. In the event
of an acceleration of the senior debt, our assets may be insufficient to pay the
senior debt in full, and there may be little or no remaining assets to pay the
holders of the Notes.





Even if
we have paid the overdue interest (plus default interest), or amended or
restructured the Notes by the Expiration Time, we will be unlikely to meet the
financial covenants under the Credit Agreement when Morris Publishing and Morris
Communications deliver their consolidated financial statements for the second
quarter of 2009 no later than August 29, 2009 (when the relaxed financial
covenants under Amendment No. 3 to the Credit Agreement terminate). A
failure to amend or refinance before the relaxed covenants terminate would
prevent us from borrowing on the revolving line of credit and it may be required
to prepay the entire principal due under the Credit Agreement.





-32-







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




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





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





We have
classified all of the debt outstanding under the Indenture and the Credit
Agreement, as of June 30, 2009 and December 31, 2008, as current maturities of
long-term debt within current liabilities on the consolidated balance
sheet.





Operating
activities. Net cash provided by operations was $14.2 million for
the first six months of 2009, down $9.6 million from $23.7 million for the same
period in 2008.





Current
assets were $54.2 million and current liabilities, excluding the current portion
of long-term debt, were $44.4 million as of June 30, 2009 as compared to current
assets of $58.9 million and current liabilities, excluding the current portion
of long-term debt, of $39.4 million as of December 31, 2008.





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





While the
required payment of these fees had been temporarily eliminated, our other
operating costs continue to reflect all of the costs of the management and
technology and shared services incurred by our parent, with the $3.6 million in
total costs for the period May 1, 2008 through June 30, 2008 being recorded as
capital contributions from our parent.





Investment
activities. Net cash used in investing activities was $0.1 million for
the first six months of 2009 compared to $11.6 million provided by investing
activities for the same period in 2008.





For the
first six months in 2009 and 2008, we spent $0.3 million and $1.5 million on
property, plant and equipment, respectively.





On
November 30, 2007, we sold fourteen daily newspapers, three nondaily newspapers,
a commercial printing operation and other related publications to GateHouse
Media Inc. At close, we elected to have $12.4 million of the net proceeds
deposited into an escrow account in order to fund other acquisitions by
ourselves or Morris Communications through a tax-deferred Section 1031
exchange.





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


-33-





Financing
activities. Net cash used in financing activities was $1.2 million for
the first three months of 2009 compared to $34.6 million used in financing
activities for the same period in 2008.




PeriodEndDebtSummary:





Total
debt was $417.2 million at June 30, 2009, up from $411.7 million at December 31,
2008. The average interest rate on our total debt outstanding was 5.78% at June
30, 2009 and December 31, 2008. At June 30, 2008, the average interest rate on
the $522.0 million total debt outstanding was 5.98%.




At June
30, 2009, we had $60.0 million outstanding on our revolving line of
credit, up $10.0 million from $50.0 million at December 31, 2008. At June
30, 2009, the amount available on the revolving line of credit was a maximum of
$70.0 million, but was limited to $60.0 million without the consent of lenders
holding a majority of the commitments under the Credit Agreement. (See Amendment
No 4. and Waiver No. 2 to the Credit Agreement as described below). On July 31,
2009,  the Revolving Credit Commitment was permanently reduced to
$60.0 million (as described below).




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





At June
30, 2009, the interest rate was 3.125% on the $78.8 million Tranche A term loan
outstanding and was 3.361% on the revolving line of credit. During the first six
months of 2009, we paid $4.5 million in principal due on the Tranche A term
loan, with another $5.6 million of principal payments due by the end of
2009.





At June
30, 2008, the interest rate on the $86.6 million Tranche A term loan outstanding
was 4.06% and the weighted average interest rate on the $52.0 million
outstanding on the revolving line of credit was 3.75%. The commitment fee on the
unborrowed funds available under the revolving line of credit was 0.375% at June
30, 2008.





During
the first six months of 2008, we paid $2.3 million in principal due on the
Tranche A term loan and we repurchased a total of $21.5 million of our $300
million 7% Senior Subordinated Notes for a total purchase price of $12.5
million.





The
amount outstanding on the Notes was $278.5 million at June 30, 2009 and December
31, 2008.





We failed
to pay the $9.7 million interest payment which was due on February 1, 2009 on
the Notes. As a result, we have entered into the following agreements with the
lenders under the Credit Agreement and the Holders:





Amendments and Waivers to
the Credit Agreement:





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





Amendment
No. 4 also required us, by March 3, 2009, to enter into control agreements in
favor of the lenders to perfect the security interest of the lenders in all
deposit accounts, except for deposit accounts aggregating less than $0.5 million
for us, Morris Communications and our subsidiaries. Waiver No. 3 (as
described below) extended this compliance deadline to April 6,
2009.





Prior to
Amendment No. 4, the Credit Agreement provided for revolving credit
commitments of $100.0 million, in addition to the $83.3 million outstanding
on the term loan. Amendment No. 4 reduced the limit on loans available
under the revolving facility from $100.0 million to $70.0 million, but further
limited the amount available to $60.0 million without the consent of lenders
holding a majority of the commitments under the Credit Agreement.


-34-


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




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





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





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





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





In
addition, we wrote off $0.2 million in deferred loan costs during January of
2009.





Additional
Waiversto the
Credit Agreement—Waivers
No. 3, No. 4, No. 5, No. 6 and No. 7 ultimately extended the original waiver
period from March 3, 2009 until July 14, 2009, or earlier, if upon termination
of the Forbearance Agreement (as described below).





In
addition, Amendment No. 5 deleted the Mandatory Transaction requirement added by
Amendment No. 3 to the Credit Agreement. Prior to its deletion, the Mandatory
Transaction requirement would have required Morris Publishing, Morris
Communications or one or more of their subsidiaries to consummate a
transaction (or at least sign a binding letter of intent to do so) that would
generate sufficient funds to either prepay all loans under the Credit
Agreement or purchase an assignment of all loans and commitments of the lenders
at par, no later than the delivery date of Morris Communications’ financial
statements for the quarter ending March 31, 2009 (but not later than May 30,
2009).  Amendment No. 5 also required Morris Communications to provide
certain additional financial and company information to the
lenders.





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





Waiver
No. 6 and No. 7 also waived any event of default that may have occurred
consisting solely of the consolidated cash flow ratio of Morris Communications
and Morris Publishing exceeding the applicable amount permitted under Section
6.06(a) of the Credit Agreement ultimately until July 14, 2009.


-35-





Senior Subordinated
Notes





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




Amendments
toForbearance
Agreement—
Amendments No. 1, No. 2, No. 3 and No. 4 to the Forbearance Agreement ultimately
extended the Forbearance Period was extended to July 14, 2009.





During
the Forbearance Period, and for up to seven business days thereafter, the
Amended Forbearance Agreement restricts the our ability to enter into any
transaction which would refinance any of its existing senior debt under the
Credit Agreement where any our affiliates would become a holder of senior debt
and limits new liens on our properties, without prior written consent of holders
of more than 66 2/3% of the outstanding Notes.




Intercompany loan receivable
permitted under the Indenture:





The
amount outstanding on the intercompany loan receivable due from Morris
Communications was $18.2 million and $12.2 million as of June 30, 2008 and
December 31, 2008, respectively.





During
the six-month periods ending June 30, 2009 and 2008, we reported the $0.4
million and $0.3 million, respectively, in accrued loan receivable interest as
contra equity. The average annual interest rate in 2009 and 2008 was 3.38% and
4.40%, respectively, on average loan balances of $24.4 million, and $15.2
million (excluding the income taxes payable on the GateHouse sale),
respectively. As of June 30, 2009, the total accumulated interest accrued on the
loan receivable was $6.3 million.





Dividends declared and
recorded under the Indenture:





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





Subsequent
events:





We
evaluated subsequent events through August 12, 2009, which is the date that the
condensed consolidated financial statements were available to be
issued.





Failure
to make August 3, 2009 interest payment on the Notes— During the third
quarter of 2009, we failed to pay the $9.7 million interest payment which was
due on August 3, 2009 on the notes.





Waivers
to Credit Agreement— Subsequent to June 30, 2009, we entered into Waivers
No. 8 and Amendment No. 6 and Waiver No. 9 (“Waiver No. 9”) to the Credit
Agreement which ultimately extended the waiver of cross default that arose from
the failure to make the February 1, 2009 and August 3, 2009 interest
payments due on the Notes until August 14, 2009, or earlier, if upon termination
of the Forbearance Agreement.





In
addition, Waiver No. 9 permanently reduced the Revolving Credit Commitment to
$60 million.


-36-





Waivers
No. 8 and 9 ultimately extended the waiver of any event of default that may
have occurred consisting solely of the consolidated cash flow ratio of Morris
Communications and Morris Publishing exceeding the applicable amount permitted
under Section 6.06(a) of the Credit Agreement until August 14,
2009.





Amendments
to Forbearance Agreement— Subsequent to June 30, 2009, we entered into
Amendments No. 5 and No. 6 to the Forbearance Agreement
ultimately extending the Forbearance Period to August 14, 2009. The Amended
Forbearance Agreement incorporates our failure to make the $9.7 million
interest payment due on August 3, 2009.


Additional
Waivers and Forbearance— We anticipate additional extensions of the
waiver and forbearance periods as we continue to pursue alternative sources of
funds or means of financing to repay or refinance the amounts outstanding on the
Credit Agreement and attempt to refinance or restructure the amounts outstanding
on the Notes. The timing and ultimate outcome of such efforts cannot be
determined 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.


-37-





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





There
have been no material changes regarding the registrants’ market risk position
from the information provided in our annual report dated December 31, 2008 filed
with the Securities and Exchange Commission on Form 10-K.





Although
some of our outstanding debt is at a fixed rate, increases in the interest rates
applicable to borrowings under our bank credit facilities would result in
increased interest expense and a reduction in our net income. (See the
quantitative and qualitative disclosures about market risk are discussed under
the caption “Market Risk” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations in said annual report and Note 6 to our
unaudited condensed consolidated financial statements as of and for the three
months ending June 30, 2009 regarding long-term debt).





Based on
our $138.8 million of variable rate debt at June 30, 2009, a 1.0% increase or
decrease in interest rates on this variable-rate debt would decrease or increase
annual interest expense by $13.9 million and net income by $8.5
million.





ITEM
4. CONTROLS AND PROCEDURES





Our
management carried out an evaluation, with the participation of our chief
executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures as of June 30, 2009. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.





There has
not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13A-15(d) under the Exchange Act
that occurred during the three-month period ended June 30, 2009, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.


-38-





Part
II





Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





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





Most
notably, there are currently several factors relating to our outstanding debt
that raise significant uncertainty about our liquidity and ability to continue
as a going concern.





The
Credit Agreement includes an event of default if we, as borrower, defaults in
the payment when due of any principal or interest due on any other indebtedness
having an aggregate principal amount of $5.0 million or more (such as Morris
Publishing’s $278.5 million of 7% Senior Subordinated Notes due 2013 (the
“Notes”)). Morris Publishing failed to pay the $9.7 million interest payment due
February 1, 2009 on the Notes. Amendment No. 6 and Waiver No. 9 (“Waiver No. 9”,
as described in Note 9) waives any default that arose from the failure to make
such interest payment and the default that arose from our failure to make the
$9.7 million interest payment due August 3, 2009 on the Notes until 5:00 p.m.
New York City time on August 14, 2009 (the “Expiration Time”). However, the
waiver will terminate earlier if Amendment No. 6 to the Forbearance Agreement
(as described in Note 9) is terminated or amended prior to such time or upon
other defaults.





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





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





In view
of the current volatility in the credit markets and the market conditions in the
newspaper industry, it is likely that we will be dependent on the ability of
Morris Communications or its guarantor subsidiaries to a) enter into a
transaction that would induce a lender to refinance the senior debt, b) raise
sufficient funds to purchase the loans and commitments from the existing senior
creditors, or c) raise sufficient funds to refinance the senior debt with a new
loan from the guarantor. The failure of Morris Communications or its guarantor
subsidiaries to consummate any of the transactions noted above would likely
require us to refinance the existing bank debt or seek an amendment of the terms
of the Credit Agreement, either of which could increase our cost of borrowing,
or if such efforts are unsuccessful, the senior creditors could accelerate the
senior debt and foreclose on their security interests in substantially all of
our assets. In the event
of an acceleration of the senior debt, our assets may be insufficient to pay the
senior debt in full, and there may be little or no remaining assets to pay the
holders of the Notes.





Even if
we have paid the overdue interest (plus default interest), or amended or
restructured the Notes by the Expiration Time, Morris Communications would be
unlikely to meet the financial covenants under the Credit Agreement when we and
Morris Communications deliver our consolidated financial statements for the
second quarter of 2009 no later than August 29, 2009 (when the relaxed financial
covenants under Amendment No. 3 to the Credit Agreement terminate). A failure to
amend or refinance before the relaxed covenants terminate would prevent us from
borrowing on the revolving line of credit and we may be required to prepay the
entire principal due under the Credit Agreement and Morris Communications may be
required to pay on its guaranty.


-39-





If this
was to occur, it could lead to an event of default under the Indenture.
Specifically, there is an event of default under the Indenture if we fail to pay
other indebtedness (such as the senior debt) exceeding $5.0 million upon final
maturity or within 20 days of an acceleration. In such an event, we cannot
assure the holders of the Notes that we would have sufficient assets to pay any
amounts due on the Notes. As a result, the holders of the Notes may receive no
payments or less than the full amount they would be otherwise entitled to
receive on the Notes, and Shivers’ interest in our company may be worthless. In
response to all the factors described above, Morris Communications and our
management are pursuing alternative sources of funds or means of financing to
repay or refinance the amounts outstanding on the Credit Agreement and we
attempting to refinance or restructure the amounts outstanding on the Notes.
However, the timing and ultimate outcome of such efforts cannot be determined at
this time.





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





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





None.




Item
3. Defaults Upon Senior Securities.





None.





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





None.




Item
5. Other Information.





None.


-40-





Item 6. Exhibits.





10.1
                              
                              Amendment
      No. 5 and Waiver No. 4, effective April 6, 2009, with JPMorgan Chase Bank,
      N.A. as Administrative Agent under the Credit Agreement dated as of
      December 14, 2005.10.2
                              
                              Amended
      Forbearance Agreement, effective April 6, 2009, between Morris Publishing
      Group, LLC and Morris Publishing Finance Co., as issuers, and all other
      subsidiaries of Morris Publishing Group, LLC , as subsidiary guarantors,
      and holders of over 80% of the Notes issued under the Indenture, dated as
      of August 7, 2003.10.3
                              
                              Waiver
      No. 5, effective April 23, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement dated as of December 14,
      2005.10.4
                              
                              Amendment
      No. 2 to Forbearance Agreement, effective April 23, 2009, between Morris
      Publishing Group, LLC and Morris Publishing Finance Co., as issuers, and
      all other subsidiaries of Morris Publishing Group, LLC , as subsidiary
      guarantors, and holders of over 80% of the Notes issued under the
      Indenture, dated as of August 7, 2003.10.5
                              
                              Waiver
      No. 6, effective May 28, 2009, with JPMorgan Chase Bank, N.A. as
      Administrative Agent under the Credit Agreement dated as of December 14,
      2005.10.6
                              
                              Amendment
      No. 3 to Forbearance Agreement, effective May 28, 2009, between Morris
      Publishing Group, LLC and Morris Publishing Finance Co., as issuers, and
      all other subsidiaries of Morris Publishing Group, LLC , as subsidiary
      guarantors, and holders of over 80% of the Notes issued under the
      Indenture, dated as of August 7, 2003.10.7
                              
                              Waiver No. 7,
      effective June 12, 2009, with JPMorgan Chase Bank, N.A. as Administrative
      Agent under the Credit Agreement dated as of December 14, 2005.10.8
                              
                              Amendment
      No. 4 to Forbearance Agreement, effective June 12, 2009, between Morris
      Publishing Group, LLC and Morris Publishing Finance Co., as issuers, and
      all other subsidiaries of Morris Publishing Group, LLC , as subsidiary
      guarantors, and holders of over 80% of the Notes issued under the
      Indenture, dated as of August 7, 2003.31.1
                              
                              Rule
      13a-14(a) Certifications31.2
                              
                              Rule
      13a-14(a) Certifications32.1
                              
                              Section
      1350
Certifications


-41-





SIGNATURES





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





MORRIS
      PUBLISHING GROUP, LLCDate: August 12,
      2009
                
                By:
                
                /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
                  and
      as its Principal Financial
Officer)





SIGNATURES





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




MORRIS
      PUBLISHING FINANCE CO.Date: August 12,
      2009
                
                By:
                
                /s/
      Steve K. StoneSteve
      K. StoneChief
      Financial Officer(On
      behalf of the Registrant,
                  and
      as its Principal Financial
Officer)


-42-