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EXCEL - IDEA: XBRL DOCUMENT - MORRIS PUBLISHING GROUP LLC | Financial_Report.xls |
EX-10.1 - EX 10.1 - MORRIS PUBLISHING GROUP LLC | d336956dex101.htm |
EX-31.2 - EX 31.2 - MORRIS PUBLISHING GROUP LLC | d336956dex312.htm |
EX-31.1 - EX 31.1 - MORRIS PUBLISHING GROUP LLC | d336956dex311.htm |
Table of Contents
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 March 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-112246
Morris Publishing Group, LLC
(Exact name of Registrant as specified in its charter)
Georgia | 26-2569462 | |
(State of organization) | (I.R.S. Employer Identification Number) | |
725 Broad Street Augusta, Georgia |
30901 | |
(Address of principal executive offices) | (Zip Code) |
(706) 724-0851
(Registrants Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Check one:
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
Table of Contents
QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS
In this report, Morris Publishing Group, LLC (Morris Publishing) is considered as and will be referred to as a wholly owned subsidiary of MPG Newspaper Holding, LLC (MPG Holdings), a subsidiary of Shivers Trading & Operating Company. We, us Company and our also refer to Morris Publishing and its subsidiaries and parent refers to MPG Holdings.
Morris Communications Company, LLC, a privately held media company, is an affiliate of Morris Publishing.
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Table of Contents
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 Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this report.
Generally, the words anticipates, believes, expects, intends, estimates, projects, plans and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results, to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that these statements are based upon reasonable assumptions, we can give no assurance that these statements will be realized. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this report. We assume no obligation to update or revise them or provide reasons why actual results may differ. Important factors that could cause our actual results to differ materially from our expectations include those described in Part I, Item 1A-Risk Factors, included within our Annual Report on Form 10-K for the year ended December 31, 2011, as well as other risks and factors identified from time to time in our United States Securities and Exchange Commission filings.
Some of the factors that could cause our actual results to be materially different from our forward-looking statements are as follows:
| our ability to service our debt; |
| our ability to comply with the financial tests and other covenants in our existing and future debt obligations; |
| further deterioration of economic conditions in the markets we serve; |
| risks from increased competition from alternative forms of media; |
| our ability to contain the costs of labor and employee benefits; |
| our ability to maintain or grow advertising and circulation revenues; |
| our ability to successfully implement our business strategy; |
| our ability to retain employees; |
| industry cyclicality and seasonality; and |
| fluctuations in the cost of our supplies, including newsprint. |
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Table of Contents
Unaudited condensed consolidated balance sheets
(Dollars in thousands) | March 31, 2012 |
December 31, 2011 |
||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 5,281 | $ | 5,330 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,970 and $2,008 at March 31, 2012 and December 31, 2011, respectively |
19,750 | 23,346 | ||||||
Inventories |
1,900 | 1,825 | ||||||
Deferred income taxes, net |
1,211 | 1,150 | ||||||
Assets held for sale |
14,416 | 14,416 | ||||||
Prepaid and other current assets |
1,088 | 845 | ||||||
|
|
|
|
|||||
Total current assets |
43,646 | 46,912 | ||||||
|
|
|
|
|||||
NET PROPERTY AND EQUIPMENT |
63,241 | 67,069 | ||||||
|
|
|
|
|||||
OTHER ASSETS: |
||||||||
Intangible assets, net of accumulated amortization of $3,921 and $3,856 at March 31, 2012 and December 31, 2011, respectively |
5,599 | 5,665 | ||||||
Deferred loan costs and other assets, net of accumulated amortization of loan costs of $424 and $358 at March 31, 2012 and December 31, 2011, respectively |
2,036 | 2,243 | ||||||
|
|
|
|
|||||
Total other assets |
7,635 | 7,908 | ||||||
|
|
|
|
|||||
Total assets |
$ | 114,522 | $ | 121,889 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS INTEREST IN ASSETS |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 7,209 | $ | 6,732 | ||||
Current maturities of long-term debt |
17,000 | 17,000 | ||||||
Accrued interest expense |
1,598 | 1,785 | ||||||
Income taxes payable |
1,273 | 1,053 | ||||||
Due to Morris Communications |
1,215 | 1,155 | ||||||
Deferred revenues |
12,161 | 12,090 | ||||||
Accrued employee costs |
4,482 | 2,966 | ||||||
Other accrued liabilities |
1,426 | 1,076 | ||||||
|
|
|
|
|||||
Total current liabilities |
46,364 | 43,857 | ||||||
LONG-TERM DEBT, less current portion and original issue discount |
43,799 | 50,484 | ||||||
DEFERRED INCOME TAXES, net |
20,312 | 21,490 | ||||||
OTHER LONG-TERM LIABILITIES |
2,658 | 2,761 | ||||||
|
|
|
|
|||||
Total liabilities |
113,133 | 118,592 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 6) |
||||||||
MEMBERS INTEREST IN ASSETS |
||||||||
Members surplus |
1,389 | 3,297 | ||||||
|
|
|
|
|||||
Total members interest in assets |
1,389 | 3,297 | ||||||
|
|
|
|
|||||
Total liabilities and members interest in assets |
$ | 114,522 | $ | 121,889 | ||||
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
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Table of Contents
Unaudited condensed consolidated statements of operations
Three months ended March 31 |
||||||||
(Dollars in thousands) |
2012 | 2011 | ||||||
NET OPERATING REVENUES: |
||||||||
Advertising |
$ | 34,250 | $ | 37,389 | ||||
Circulation |
14,639 | 15,340 | ||||||
Other |
2,964 | 2,187 | ||||||
|
|
|
|
|||||
Total net operating revenues |
51,853 | 54,916 | ||||||
|
|
|
|
|||||
OPERATING EXPENSES: |
||||||||
Labor and employee benefits |
20,550 | 22,473 | ||||||
Newsprint, ink and supplements |
4,826 | 5,800 | ||||||
Other operating costs (excluding depreciation and amortization) |
22,642 | 23,018 | ||||||
Impairment of fixed assets |
2,400 | | ||||||
Depreciation and amortization expense |
1,874 | 2,153 | ||||||
|
|
|
|
|||||
Total operating expenses |
52,292 | 53,444 | ||||||
|
|
|
|
|||||
OPERATING INCOME (LOSS) |
(439 | ) | 1,472 | |||||
|
|
|
|
|||||
OTHER EXPENSES (INCOME): |
||||||||
Interest expense, including amortization of debt issuance costs |
2,528 | 3,146 | ||||||
Interest income |
(1 | ) | (1 | ) | ||||
Other, net |
(40 | ) | 50 | |||||
|
|
|
|
|||||
Total other expense (income), net |
2,487 | 3,195 | ||||||
|
|
|
|
|||||
LOSS BEFORE INCOME TAX BENEFIT |
(2,926 | ) | (1,723 | ) | ||||
INCOME TAX BENEFIT |
(1,018 | ) | (573 | ) | ||||
|
|
|
|
|||||
NET LOSS |
$ | (1,908 | ) | $ | (1,150 | ) | ||
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
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Table of Contents
Unaudited condensed consolidated statements of cash flows
Three months ended March 31, |
||||||||
(Dollars in thousands) |
2012 | 2011 | ||||||
OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (1,908 | ) | $ | (1,150 | ) | ||
Adjustments to reconcile net loss to cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,874 | 2,153 | ||||||
Write-off of deferred loan costs |
||||||||
Amortization & write off of debt issuance costs |
66 | 113 | ||||||
Accretion of original issue discount |
737 | 933 | ||||||
Bad debt provision |
184 | (261 | ) | |||||
Gain on sale of fixed assets, net |
175 | 64 | ||||||
Impairment of fixed assets |
2,400 | | ||||||
Deferred income taxes |
(1,239 | ) | (539 | ) | ||||
Changes in assets and liabilities |
||||||||
Accounts receivable |
3,411 | 6,461 | ||||||
Inventories |
(75 | ) | (260 | ) | ||||
Prepaids and other current assets |
(243 | ) | (329 | ) | ||||
Other assets |
141 | | ||||||
Accounts payable |
881 | (718 | ) | |||||
Income taxes receivable |
| (34 | ) | |||||
Accrued employee costs |
1,516 | 1,007 | ||||||
Accrued interest expense |
(187 | ) | (188 | ) | ||||
Due to Morris Communications |
60 | 1,956 | ||||||
Deferred revenues and other liabilities |
422 | 630 | ||||||
Income taxes payable |
220 | | ||||||
Other long-term liabilities |
(102 | ) | 338 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
8,333 | 10,176 | ||||||
|
|
|
|
|||||
INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
(963 | ) | (219 | ) | ||||
Net proceeds from sale of property and equipment |
4 | 5 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(959 | ) | (214 | ) | ||||
|
|
|
|
|||||
FINANCING ACTIVITIES: |
||||||||
Redemption of New Notes |
(7,423 | ) | (7,496 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(7,423 | ) | (7,496 | ) | ||||
|
|
|
|
|||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(49 | ) | 2,466 | |||||
CASH AND CASH EQUIVALENTS, beginning of period |
5,330 | 2,636 | ||||||
|
|
|
|
|||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 5,281 | $ | 5,102 | ||||
|
|
|
|
|||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Interest paid |
$ | 1,895 | $ | 2,286 | ||||
Accrued capital expenditures |
404 | 742 |
See notes to unaudited condensed consolidated financial statements.
3
Table of Contents
Notes to condensed consolidated financial statements (unaudited)
(Dollars in thousands)
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements furnished herein reflect all adjustments, which in the opinion of management, are necessary for the fair presentation of the financial position and results of operations of Morris Publishing Group, LLC and subsidiaries (Morris Publishing, or the Company). All such adjustments are of a normal recurring nature. Results of operations for the three-month interim period in 2012 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, 2011. The accounting policies that are employed are the same as those shown in Note 1 to the consolidated financial statements included in the December 31, 2011 Form 10-K.
As further described in Note 2, certain expenses, assets and liabilities of Morris Communications Company, LLC (Morris Communications), an affiliate of Morris Publishing, have been allocated to the Company. These allocations were based on estimates of the proportion of corporate expenses, assets and liabilities related to the Company, utilizing such factors as revenues, number of employees, salaries and wages expenses, and other applicable factors. In the opinion of management, these allocations have been made on a reasonable basis. The costs of these services charged to the Company may not reflect the actual costs the Company would have incurred for similar services as a stand-alone company. The Company and Morris Communications have executed various agreements with respect to the allocation of assets, liabilities and costs.
Extinguishment of debt and original issue discountOn March 1, 2010 (the Effective Date), the Company restructured its debt through the consummation of a plan of reorganization confirmed by the U.S. Bankruptcy Court (the Restructuring).
As part of the Restructuring, the claims of the holders of the 7% Senior Subordinated Notes due 2013, dated as of August 7, 2003 (the Original Notes), in an aggregate principal amount of $278,478, plus accrued interest, were cancelled in exchange for the issuance of $100,000 in aggregate stated principal amount of the Floating Rate Secured Notes due 2014 (the New Notes).
Under the accounting guidance for a debt extinguishment, the total maturities of the New Notes were recorded at fair value on the Effective Date of the Restructuring, and interest, as accrued on the aggregate stated principal amount outstanding of New Notes, is recorded as an expense within the consolidated statements of operations. The excess of the stated aggregate principal amount of New Notes over fair value is original issue discount (OID) and is accreted over the term of the New Notes.
Based upon trading activity in the New Notes, the fair value of the New Notes was $91,000 at issuance. Therefore, the Company recorded the New Notes as indebtedness of $91,000, with $9,000 of OID to be accreted as additional interest over the life of the New Notes.
Fair value of financial instrumentsThe Company estimated the fair values presented below using appropriate valuation methodologies and market information available as of March 31, 2012. 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 March 31, 2012, and current estimates of fair value may differ from the amounts presented.
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Table of Contents
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and equivalents, accounts receivable and accounts payable. The carrying amount of these items approximates fair value due to their short term nature.
Long-term debt. To estimate the fair value of the $63,938 aggregate stated principal amount outstanding of New Notes, the Company used the average price of the corporate bond trades reported nearest to the end of three month period ended March 31, 2012. At March 31, 2012, the fair value of the New Notes was approximately $60,101.
InventoriesInventories consist principally of newsprint, prepress costs and supplies, which are stated at the lower of cost or market value. The cost of newsprint inventory is determined by the last in, first out method (LIFO). Costs for newsprint inventory would have been $1,047 and $1,070 higher at March 31, 2012 and December 31, 2011, respectively, had the first in, first out method been used for all inventories.
2. Transactions with Parent and Affiliates
Management, Technology, Shared Services and Other Related Party FeesMorris Publishing receives certain services from, and has entered into certain transactions with Morris Communications. The management fee compensates Morris Communications for corporate services and costs incurred on behalf of Morris Publishing, including executive, legal, secretarial, tax, internal audit, risk management, employee benefit administration, travel and other support services. Prior to the Commencement Date (as described below), the technology and shared services fee compensated Morris Communications for technology and shared services.
Prior to March 1, 2010, the Effective Date of the Restructuring, the management fee was the greater of 4.0% of Morris Publishings annual total operating revenues or the amount of actual expenses allocable to the management of Morris Publishings business by Morris Communications (such allocations to be based upon time and resources spent on the management of Morris Publishings business by Morris Communications). In addition, the technology and shared services fee was based on the lesser of 2.5% of Morris Publishings total net operating revenue or the actual technology costs allocated to Morris Publishing based upon usage.
On January 6, 2010, Morris Publishing entered into a Fourth Amendment to Management and Services Agreement, effective upon the consummation of the Restructuring, changing the fees payable by Morris Publishing to an allocation of the actual amount of costs of providing the services, with the fees not to exceed $22,000 in any calendar year.
On July 7, 2011, Morris Publishing entered into a Master Services Agreement (the NIIT MSA) with NIIT Media Technologies, LLC (NIIT Media), where NIIT Media will provide the services that had historically been provided by Morris Communications subsidiary, MStar Solutions, LLC (MStar), under the Management and Services Agreement with Morris Communications and MStar (the Morris Communications Services Agreement). The NIIT MSA has a term of five years from July 7, 2011, with Morris Publishing and Morris Communications having the right to renew the agreement for an additional five-year term.
5
Table of Contents
Under the Morris Communications Services Agreement, services were provided to Morris Publishing by both Morris Communications and MStar. Generally, under the NIIT MSA, NIIT Media is expected to provide to Morris Publishing and Morris Communications substantially all of the services formerly provided by MStar under the Morris Communications Services Agreement, but Morris Communications is expected to continue to provide to Morris Publishing all of the management services under the Morris Communications Services Agreement.
NIIT Technologies Limited, a global information technology services organization headquartered in New Delhi, India, indirectly owns a 60% membership interest in NIIT Media. MStar contributed substantially all of its assets to NIIT Media in return for a 40% membership interest in NIIT Media.
The Commencement Date of the NIIT MSA was September 1, 2011 During the first year following the Commencement Date, all services will be performed at a fixed fee of $19,300, to be allocated between Morris Publishing and Morris Communications based upon services received.
Following the first anniversary of the Commencement Date, the NIIT MSA provides for monthly charges based on volume and types of services performed and a fee schedule to be agreed upon, provided that, so long as the current level of services required by Morris Communications and Morris Publishing do not change, the combined fees charged to Morris Publishing and Morris Communications will be subject to annual limits ranging from $16,100 to $17,000 during the remainder of the initial five-year term.
Jointly, Morris Publishing and Morris Communications have agreed to exclusively procure the contemplated services from NIIT Media, and committed to minimum charge commitments totaling $55,300 over the five years following the Commencement Date, with cumulative annual thresholds that must be met on each anniversary of the Commencement Date. Morris Communications and Morris Publishing will each be responsible to pay for the NIIT MSA Services provided to or related to their respective businesses (and their subsidiaries).
Morris Communications is required to indemnify Morris Publishing or pay NIIT Media for services, or liabilities related to services, provided or attributable to Morris Publishing to the extent that payments for services during any calendar year would otherwise exceed $22,000 for (i) services under the Morris Communications Services Agreement, plus (ii) NIIT MSA Services that were formerly provided under the Morris Communications Services Agreement.
On July 7, 2011, Morris Publishing, Morris Communications and MStar entered into the Fifth Amendment to Management and Services Agreement (the Fifth Amendment). The Fifth Amendment clarifies that services under the Fourth Amendment to Management and Services Agreement shall be suspended over time in phases to coincide with the provision of such services by NIIT Media under the NIIT MSA.
The management fee incurred with Morris Communications totaled $1,744 and $2,224 for the three-month periods ended March 31, 2012 and 2011, respectively.
The technology and shared service fees incurred with NIIT Media under the NIIT MSA totaled $3,311 for the three month period ended March 31, 2012. The technology and shared services fee incurred with Morris Communications totaled $3,033 for the three-month periods ended March 31, 2011, respectively.
The Company has recorded the management fee and all technology and shared services fees within other operating costs in the accompanying consolidated financial statements.
6
Table of Contents
Due to Morris CommunicationsDue to Morris Communications represents a net short-term payable that resulted from operating activities between the Company and its affiliate or parent.
Health and disability planThe Company participates in Morris Communications health and disability plan for active employees. Prior to the second quarter of 2011, Morris Communications had allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. The Company had allocated its portion of Morris Communications health and disability obligation within the Companys consolidated balance sheet. During the second quarter of 2011, the Company began recording its actual costs and obligation associated with the Morris Communications plan. This change did not have a material impact on the Companys financial statements.
The Companys health and disability expense was $2,014 and $1,898 for the three-month periods ended March 31, 2012 and 2011, respectively.
The Companys estimate for the incurred but not yet reported obligation under the plan was $1,091 and $1,078 as of March 31, 2012 and December 31, 2011, respectively. The Company has recorded this liability within accrued employee costs in the accompanying financial statements.
Workers Compensation ExpenseThe Company has participated in Morris Communications workers compensation self-insurance plan, which is guaranteed and secured by the Companys ultimate parent, Questo, Inc. (Questo), through a letter of credit. Accordingly, Morris Communications has allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. The expenses allocated to the Company, based on a percentage of total salaries expense, were $307 and $291 for the three-month periods ended March 31, 2012 and 2011, respectively.
Income taxesThe Company is a single member limited liability company and is not subject to income taxes, with its results being included in the consolidated federal income tax return of its ultimate parent. However, the Company is required to provide for its portion of income taxes under a Tax Consolidation Agreement with its ultimate parent and other affiliated entities. Accordingly, the Company recognizes an allocation of income taxes in its separate financial statements as if it filed a separate income tax return and remitted taxes for its current tax liability.
The Company accounts for income taxes under the provisions of the liability method as required by accounting guidance, which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not. Management believes it is more likely than not that the Companys deferred tax assets will be realized.
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Table of Contents
3. Other Intangible Assets
Newspaper mastheads (newspaper titles and Web site domain names) are not subject to amortization and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The impairment test consists of a comparison of the fair value of the Companys mastheads with their carrying amount. The Company performed impairment tests on its newspaper mastheads as of December 31, 2011 and no impairment loss was recognized.
Intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or change in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. The facts and circumstances indicating possible impairment of the finite-lived intangible assets existed; therefore the Company performed impairment tests on these long-lived assets as of December 31, 2011. The Companys analysis resulted in no impairments of long-lived assets held for future use.
Intangible assets acquired (subscriber lists, non-compete agreements and other assets) are amortized over their estimated useful lives (from 5 to 20 years).
Amortization expense of other intangible assets totaled $66 and $85 for the three-month periods ended March 31, 2012 and 2011, The remaining expense for the last nine months of 2012 and for the four succeeding years for the existing finite-lived intangible assets is estimated as follows:
Amortization Expense |
||||
2012 |
$ | 198 | ||
2013 |
254 | |||
2014 |
146 | |||
2015 |
119 | |||
2016 |
119 |
Changes in the carrying amounts of other intangibles of the Company for the three months ended March 31, 2012 were as follows:
Other intangible assets |
||||
Balance at December 31, 2011 |
$ | 5,665 | ||
Additions |
| |||
Amortization expense |
(66 | ) | ||
|
|
|||
Balance at March 31, 2012 |
$ | 5,599 | ||
|
|
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Other finite-lived and indefinite-lived intangible assets at March 31, 2012 and December 31, 2011 were as follows:
Cost | Accumulated amortization |
Net cost | ||||||||||
March 31, 2012: |
||||||||||||
Finite-lived intangible assets |
||||||||||||
Subscriber lists |
$ | 4,365 | $ | 3,068 | $ | 1,297 | ||||||
Non-compete agreements and other assets |
50 | 50 | | |||||||||
|
|
|
|
|
|
|||||||
Total finite-lived intangible assets |
4,415 | 3,118 | 1,297 | |||||||||
Indefinite-lived intangible assets |
||||||||||||
Newspaper mastheads |
5,031 | 792 | 4,239 | |||||||||
Domain names |
75 | 12 | 63 | |||||||||
|
|
|
|
|
|
|||||||
Total indefinite-lived intangible assets |
5,106 | 804 | 4,302 | |||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
$ | 9,521 | $ | 3,922 | $ | 5,599 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2011: |
||||||||||||
Finite-lived intangible assets |
||||||||||||
Subscriber lists |
$ | 4,365 | $ | 3,002 | $ | 1,363 | ||||||
Non-compete agreements and other assets |
50 | 50 | | |||||||||
|
|
|
|
|
|
|||||||
Total finite-lived intangible assets |
4,415 | 3,052 | 1,363 | |||||||||
Indefinite-lived intangible assets |
||||||||||||
Newspaper mastheads |
5,031 | 792 | 4,239 | |||||||||
Domain names |
75 | 12 | 63 | |||||||||
|
|
|
|
|
|
|||||||
Total indefinite-lived intangible assets |
5,106 | 804 | 4,302 | |||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
$ | 9,521 | $ | 3,856 | $ | 5,665 | ||||||
|
|
|
|
|
|
4. Long-Term Debt
Period Summary
Total DebtAt March 31, 2012, the Companys total debt was $60,799 ($63,938 in aggregate stated principal outstanding on the New Notes less $3,139 of OID). At December 31, 2011, the Companys total debt was $67,484 ($71,360 in aggregate stated principal outstanding on the New Notes less $3,876 of OID).
There were no outstanding borrowings against the Working Capital Facility at March 31, 2012 or December 31, 2011.
The current maturities of long-term debt as of March 31, 2012 and December 31, 2011 totaled $17,000 and $17,000, respectively. The current maturities of long-term debt reflect the Companys estimate of required redemptions of New Notes utilizing Excess Free Cash Flow within the following twelve-month period.
The average interest rate on the Companys total aggregate principal amount of debt outstanding, excluding effective rate of the OID, on the New Notes, was 10% at March 31, 2012 and December 31, 2011.
New Notes
RedemptionsThe Company is required by the New Indenture to use its monthly positive operating cash flow (if any), net of permitted cash flow adjustments, (Excess Free Cash Flow) to first repay any amounts outstanding on the Working Capital Facility, and then to redeem (on a pro rata basis) New Notes; provided, however, that no payment or redemptions are required if Excess Free Cash Flow is less than $250.
During the first quarter of 2012, the Company redeemed $7,423 in aggregate stated principal amounts outstanding on the New Notes from its Excess Free Cash Flows.
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Subsequent to March 31, 2012, the Company redeemed a total of $1,215 in aggregate stated principal amounts outstanding on the New Notes as a result of the Excess Free Cash Flows for the month of March 2012. The total amount outstanding on the New Notes at April 19, 2012 was $62,723 of stated principal.
InterestInterest expense on the aggregate stated principal amount outstanding on the New Notes totaled $1,709 and $2,098 for the three-month period ended March 31, 2012 and March 31, 2011, respectively.
The accretion on the original issue discount totaled $737 and $933 during the three-month periods ended March 31, 2012 and March 31, 2011, respectively. The accretion on the original issue discount was recorded as additional interest expense.
Working Capital Facility
During the second quarter of 2010, the Company entered into a senior, secured Loan and Line of Credit Agreement with CB&T, a division of Synovus Bank (the Bank), providing for a revolving line of credit in the amount of $10,000 (the Working Capital Facility).
Interest and Deferred Loan CostsInterest expense on the average amount outstanding on the Working Capital Facility totaled $10 for the three-month period ending March 31, 2012.
Modification of Working Capital FacilityOn May 11, 2012, the Company entered into an agreement with the Bank extending the maturity of the Working Capital Facility to May 15, 2013 with no other changes to the provisions of the agreement.
Loan Amortization Expense
During the first quarter of 2010, the Company deferred $593 in loan costs related to the issuance of the New Notes and is amortizing those costs over the four and one-half year maturity of the New Notes.
During the second quarter of 2010, the Company deferred the $453 in debt issuance costs associated with the Working Capital Facility and is amortizing these costs ratably through May 15, 2011, the original maturity date of the Working Capital Facility.
Loan amortization expense totaled $66 and $113 during the three-month periods ended March 31, 2012 and 2011, respectively.
New Indenture
On March 1, 2010, the Effective Date of the Restructuring, the Company entered into the New Indenture with respect to the New Notes.
Under the terms of the New Indenture, the New Notes bear 10% interest commencing March 1, 2010 and payable in cash quarterly. The New Notes mature on October 1, 2014.
The New Notes are secured by a lien on substantially all of the assets of the Company. The New Notes, and the liens securing the New Notes, are subordinated to any senior debt of the Company, which includes the Working Capital Facility.
Under certain conditions, the notes may be redeemed at the option of the Issuers. Upon certain sales or dispositions of assets or events of loss unless the proceeds are reinvested in accordance with the New Indenture, the Issuers must offer to use proceeds to redeem the Notes. Upon a change of control of Morris Publishing, the Issuers must offer to repurchase all of the New Notes.
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The New Indenture contains various representations, warranties and covenants generally consistent with the Original Indenture, including requirements to provide reports and to file publicly available reports with the United States Securities and Exchange Commission (SEC) (unless the SEC will not accept the reports) and limitations on dividends, indebtedness, liens, transactions with affiliates and capital expenditures.
In addition, the New Indenture contains financial covenants requiring the Company to meet certain financial tests on an on-going basis, including a total leverage ratio and a cash interest coverage ratio, based upon the consolidated financial results of the Company. At March 31, 2012, the Company was in compliance with all financial covenants under the New Indenture.
In addition, the holders of the New Notes, as permitted by the New Indenture, appointed an observer to the Board of Directors of the Company and each of its subsidiaries.
Working Capital Facility
The parties to the Working Capital Facility are the Company, as borrower, all of its subsidiaries and its parent, as guarantors, and the Bank.
Interest accrues on outstanding principal at the rate of LIBOR plus 4%, with a minimum rate of 6%.
The Working Capital Facility is secured by a first lien on substantially all of the assets of Morris Publishing and its subsidiaries. Liens on such assets were previously granted to the Collateral Agent for the holders of the New Notes pursuant to the New Indenture. Pursuant to the New Indenture and an Intercreditor Agreement between the Collateral Agent and the Bank, the New Notes (and their related liens) are subordinated to the Working Capital Facility. The Working Capital Facility contains various customary representations, warranties and covenants, as well as financial covenants similar to the financial covenants in the New Indenture.
The Company is permitted by the New Indenture to either renew or replace this Working Capital Facility. If at any time the Company does not have a working capital facility, it would intend to retain cash flow generated from operations in order to maintain cash balances of up to $7,000 to provide liquidity, as permitted by the New Indenture, but the Company would be required to use monthly excess free cash flow to redeem New Notes to the extent its cash balances exceed $7,000.
5. Income Taxes
The income tax benefit for three-month periods ended March 31, 2012 and March 31, 2011 totaled $1,018 and $573, respectively.
The Companys income tax provision has been prepared as if the Company was filing a separate income tax return and the impact of the cancellation of debt on other affiliated parties, if any, has not been recognized. To the extent the terms of the Amended Tax Agreement require the Company to pay less than the amount of taxes that would have been required as a separate corporation (as a result of treating its parents indebtedness as if it were the Companys indebtedness), such lesser amount will not reduce the Companys tax expense, but will be treated as a capital contribution by its parent.
The difference between the effective rate and statutory rate is primarily attributable to state income and franchise taxes and the non-deductibility travel and entertainment expenses.
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6. Commitments and Contingencies
From time to time, the Company is involved in litigation in the ordinary course of its business. In managements opinion, the outcome of any pending legal proceedings will not have a material adverse impact on the Companys financial position or results of operations.
The nature of the Companys operations exposes it to certain risks of liabilities and claims with respect to environmental matters. Management does not believe that environmental compliance requirements are likely to have a material effect on the Company. The Company cannot predict what additional environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted, or the amount of future expenditures that may be required in order to comply with these laws. There can be no assurance that future environmental compliance obligations or discovery of new conditions will not arise in connection with its operations or facilities and that these would not have a material adverse effect on the Companys business, financial condition or results of operations.
7. Subsequent Events
On May 4, 2012 the Company purchased $800 of stated principal amount of the New Notes at 94.5% of the face amount, effectively reducing the outstanding face amount to $61,923, after the March excess flow payment of $1,215 made on April 20, 2012.
In the month of April 2012 all the remaining severance costs related to our decision to outsource the printing our Topeka (Kan.) newspaper to a third party was incurred in the amount of $969 amounting to $1,346 in total.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements as of and for the three-month periods ended March 31, 2012 and 2011 and with our consolidated financial statements as of December 31, 2011 and 2010 and for each of three years in the period ended December 31, 2011, filed on Form 10-K with the United States Securities and Exchange Commission (SEC).
Information availability
Our quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K and all amendments to those reports are available free of charge on our Web site, www.morris.com, as soon as feasible after such reports are electronically filed with or furnished to the SEC. In addition, information regarding corporate governance at Morris Publishing Group, LLC (Morris Publishing, we, our) and our affiliate, Morris Communications Company, LLC (Morris Communications), is also available on this Web site.
The information on our Web site is not incorporated by reference into, or as part of, the Report on Form 10-Q filed with the SEC.
Critical accounting policies and estimates
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our allowances for bad debts, asset impairments, self-insurance and casualty, management fees, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
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 three months ended March 31, 2012 to the items that we disclosed as our critical accounting policies and estimates herein and in the Managements Discussion and Analysis of Financial Condition and Results of Operations in our annual report dated December 31, 2011 filed on Form 10-K filed with the SEC.
Extinguishment of debt and original issue discountOn March 1, 2010 (the Effective Date), we restructured our debt through the consummation of a plan of reorganization confirmed by the U.S. Bankruptcy Court (the Restructuring).
As part of the Restructuring, the claims of the holders of the 7% Senior Subordinated Notes due 2013, dated as of August 7, 2003 (the Original Notes), in an aggregate principal amount of $279.5 million, plus accrued interest, were cancelled in exchange for the issuance of $100.0 million in aggregate stated principal amount of the Floating Rate Secured Notes due 2014 (the New Notes).
Under the accounting guidance for a debt extinguishment, the total maturities of the New Notes were recorded at fair value on the Effective Date of the Restructuring, and interest, as accrued on the aggregate stated principal amount outstanding of New Notes, is recorded as an expense within the consolidated statements of operations. The excess of the stated aggregate principal amount of New Notes over fair value is original issue discount (OID) and is accreted over the term of the New Notes.
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Based upon trading activity in the New Notes, the fair value of the New Notes was $91.0 at issuance. Therefore, we recorded the New Notes as indebtedness of $91.0 million, with $9.0 million of OID to be accreted as additional interest over the life of the New Notes.
Cost allocationsIn this report certain expenses, assets and liabilities of 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. 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.
We receive certain services from, and have entered into certain transactions with Morris Communications. The management fee compensates Morris Communications for corporate services and costs incurred on behalf of Morris Publishing, including executive, legal, secretarial, tax, internal audit, risk management, employee benefit administration, travel and other support services. Prior to the Commencement Date (as described below), the technology and shared services fee compensated Morris Communications for technology and shared services.
Prior to March 1, 2010, the Effective Date of the Restructuring, the management fee was the greater of 4.0% of our annual total operating revenues or the amount of actual expenses allocable to the management of our business by Morris Communications (such allocations to be based upon time and resources spent on the management of our business by Morris Communications). In addition, the technology and shared services fee was based on the lesser of 2.5% of our total net operating revenue or the actual technology costs allocated to us based upon usage.
On January 6, 2010, we entered into a Fourth Amendment to Management and Services Agreement, effective upon the consummation of the Restructuring, changing the fees payable by us to an allocation of the actual amount of costs of providing the services, with the fees not to exceed $22.0 million in any calendar year.
On July 7, 2011, we entered into a Master Services Agreement (the NIIT MSA) with NIIT Media Technologies, LLC (NIIT Media), where NIIT Media will provide the services that had historically been provided by Morris Communications subsidiary, MStar Solutions, LLC (MStar), under the Management and Services Agreement with Morris Communications and MStar (the Morris Communications Services Agreement). The NIIT MSA has a term of five years from July 7, 2011, with Morris Publishing and Morris Communications having the right to renew the agreement for an additional five-year term.
Under the Morris Communications Services Agreement, services were provided to us by both Morris Communications and MStar. Generally, under the NIIT MSA, NIIT Media is expected to provide substantially all of the services formerly provided by MStar under the Morris Communications Services Agreement, but Morris Communications is expected to continue services under the Morris Communications Services Agreement.
NIIT Technologies Limited, a global information technology services organization headquartered in New Delhi, India, indirectly owns a 60% membership interest in NIIT Media. MStar contributed substantially all of its assets to NIIT Media in return for a 40% membership interest in NIIT Media.
NIIT Media commenced services on September 1, 2011, the Commencement Date. During the first year following the Commencement Date, all services will be performed at a fixed fee of $19.3 million, to be allocated between Morris Publishing and Morris Communications based upon services received.
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Following the first anniversary of the Commencement Date, the NIIT MSA provides for monthly charges based on volume and types of services performed and a fee schedule to be agreed upon, provided that, so long as the current level of services required by Morris Communications and Morris Publishing do not change, the combined fees charged to Morris Publishing and Morris Communications will be subject to annual limits ranging from $16.1 million to $17.1 million during the remainder of the initial five-year term.
Jointly, Morris Publishing and Morris Communications have agreed to exclusively procure the contemplated services from NIIT Media, and committed to minimum charge commitments totaling $55.3 million over the five years following the Commencement Date, with cumulative annual thresholds that must be met on each anniversary of the Commencement Date. Morris Communications and Morris Publishing will each be responsible to pay for the NIIT MSA Services provided to or related to their respective businesses (and their subsidiaries).
Morris Communications is required to indemnify us or pay NIIT Media for services, or liabilities related to services, provided or attributable to us to the extent that payments for services during any calendar year would otherwise exceed $22.0 million for (i) services under the Morris Communications Services Agreement, plus (ii) NIIT MSA Services that were formerly provided under the Morris Communications Services Agreement.
On July 7, 2011, Morris Publishing, Morris Communications and MStar entered into the Fifth Amendment to Management and Services Agreement (the Fifth Amendment). The Fifth Amendment clarifies that services under the Management and Services Agreement shall be suspended over time in phases to coincide with the provision of such services by NIIT Media under the NIIT MSA.
We have recorded the management fee and all technology and shared services fees within other operating costs in the accompanying consolidated financial statements.
Income taxesWe are a single member limited liability company and are not subject to income taxes, with our results being included in the consolidated federal income tax return of our ultimate parent. However, we are required to provide for our portion of income taxes under a Tax Consolidation Agreement with our ultimate parent and other affiliated entities. Accordingly, we recognize an allocation of income taxes in our separate financial statements as if we filed a separate income tax return and remitted taxes for our current tax liability.
On January 6, 2010, we entered into an Amended and Restated Tax Consolidation Agreement (Amended Tax Agreement) with our parent entities, MPG Newspaper Holding, LLC (MPG Holdings), Shivers Trading & Operating Company (Shivers), and Questo, Inc. (Questo), and our affiliated entity, Morris Communications. The amendments in the agreement (1) clarify that we will not be liable for adverse consequences related to specified extraordinary transactions in 2009 primarily relating to our parent entity and other related entities, (2) provide that, in calculating our tax payment obligation, the indebtedness of our parent entity, MPG Holdings, will be treated as if it were our indebtedness and (3) provide that the Trustee of the New Indenture will have an approval right with respect to elections or discretionary positions taken for tax return purposes related to specified transactions or actions taken with respect to the indebtedness of MPG Holdings, if such elections, positions or actions would have an adverse consequence on the New Notes or Morris Publishing. To the extent the terms of the Amended Tax Agreement require us to pay less than the amount of taxes that would have been required under the separate return method; such lesser amount will not reduce our income tax expense, but will be treated as a capital contribution by our parent.
We account for income taxes under the provisions of the liability method as required by accounting guidance, which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not.
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Overview
Morris Publishing owns and operates 12 daily newspapers as well as non-daily newspapers, city magazines and free community publications in the Southeast, Midwest, Southwest and Alaska. Morris Publishings newspapers include, among others, The Florida Times-Union, (Jacksonville, Fla.), The Augusta (Ga.) Chronicle, Savannah (Ga.) Morning News, Lubbock (Texas) Avalanche-Journal, Amarillo (Texas) Globe-News, Athens (Ga.) Banner Herald, Topeka (Kans.) Capital-Journal, and The St. Augustine (Fla.) Record. The majority of our daily newspapers are the primary, and sometimes, the sole provider of comprehensive local market news and information in the communities that we serve.
Our products focus on the community from a content and advertising point of view. The longevity of our newspapers demonstrates the value and relevance of the comprehensive and in-depth local news and information that we provide; thus, creating strong reader loyalty and brand name recognition in each community that we serve. As a result, we believe that we have provided our advertisers a strong market reach through the high audience penetration rates in our markets.
We operate in a single reporting segment, and the presentation of our financial condition and performance is consistent with the way in which our operations are managed. However, from time to time, each individual newspaper may perform better or worse than our newspaper group as a whole due to certain local conditions, particularly within the retail, auto, housing and labor markets.
Revenue: While most of our revenue is generated from advertising and circulation from our newspaper operations, we also print and distribute periodical publications and operate commercial printing operations in conjunction with our newspapers.
| Advertising revenue: During the first quarter of 2012 and 2011, advertising revenue, including both print and online media formats, represented 66.1% and 68.1%, respectively, of our total net operating revenue. We categorize advertising as follows: |
| Retail*local retailers, local stores for national retailers, department and furniture stores, grocers, niche shops, local financial institutions, local hospitals , restaurants and other small businesses. |
| Classified*local employment, automotive, real estate and other advertising. |
| National*national and major accounts such as wireless communications companies, airlines and hotels. |
* | On-line, included in all the categories abovebanner, display, classified, behavioral targeting, search and other advertising on Web sites or mobile devices. |
Retail, classified and national advertising revenue represented 57.9%, 35.1% and 6.9%, respectively, of our first quarter of 2012 advertising revenue, compared to 58.1%, 34.9% and 7.0%, respectively, in the first quarter of 2011.
Linage, the number of inserts, Internet page views, along with rate and mix of advertisement are the primary components of advertising revenue. The advertising rate depends largely on our market reach, primarily through circulation and readership.
Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays, with our second and fourth fiscal quarters being our strongest quarters in terms of revenue. In addition, we have experienced declines in advertising revenue over the past few years, due primarily to the economic recession and secular changes in the industry.
Circulation revenue: During the first quarter of 2012 and 2011, circulation revenue represented 28.2% and 27.9%, respectively, of our total net operating revenue.
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Circulation revenue is based on the number of newspapers sold and is primarily derived from home delivery sales to subscribers and single copy sales at vending racks and retail stores. We also sell copies through our Newspapers in Education (NIE) program which is a cooperative effort of newspapers working with local schools to encourage the use of the newspaper as a tool for instruction and to promote literacy.
Recently, we began implementing a metered online model at some of our newspapers Web sites, in which users who are not print subscribers are given free access to a limited number local news articles per month, and after that limit are required to have a paid print or online subscription in order to view additional locally produced articles. In addition, we offer paid online subscriptions at most of our newspapers for access to our content through e-reader platforms.
Subscriptions are sold for one-month (EZ Pay), 13 week, 26 week and 52 week terms. We have increased the use of EZ Pay programs (a monthly credit or debit card payment program), door to door sales, kiosks, in-paper and online promotions to increase our circulation. Our call service center has an active stop-loss program for all expiring subscribers.
| Other revenue: Our other revenue consists primarily of commercial printing, periodicals, and other online revenue. |
Printing and distribution: We currently own/lease and operate 10 print facilities with each producing the newspaper and other publications for their respective communities served. The St. Augustine newspaper is currently printed at the Jacksonville facility and Bluffton Today is currently printed at the Savannah facility.
During the first quarter of 2012, we contracted with two third party newspapers to produce the print edition copies of The Topeka (Kan.) Capital-Journal and Athens (Ga.) Banner-Herald newspapers editions. One third party newspaper began printing of the Athens newspaper during the first quarter of 2012 and the other third party newspaper is expected to commence printing of the Topeka newspaper during the second quarter of 2012.
The distribution of our daily newspapers is typically outsourced to independent, locally based, third-party distributors that also distribute a majority of our weekly newspapers and non-newspaper publications. In addition, certain of our shopper and weekly publications are delivered via the U.S. Postal Service.
| Newsprint: Newsprint, along with employee expenses, is a primary cost at each newspaper. |
We are a member of a consortium which enables us to obtain favorable pricing through the groups reduced negotiated rates. We generally maintain a company average of 25 to 30 day inventory of newsprint which is a readily available commodity.
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Financial summary for the three months ended March 31, 2012 compared to March 31, 2011
Financial Summary. The following table summarizes our consolidated financial results for the three-month periods ended March 31, 2012 and 2011:
Three months ended March 31, |
||||||||
(Dollars in thousands) |
2012 | 2011 | ||||||
Total net operating revenues |
$ | 51,853 | $ | 54,916 | ||||
Total operating expenses |
52,292 | 53,444 | ||||||
|
|
|
|
|||||
Operating income (loss) |
(439 | ) | 1,472 | |||||
|
|
|
|
|||||
Interest expense including amortization of debt issuance costs |
2,528 | 3,146 | ||||||
Other |
(41 | ) | 49 | |||||
|
|
|
|
|||||
Other expenses, net |
2,487 | 3,195 | ||||||
|
|
|
|
|||||
Loss before taxes |
(2,926 | ) | (1,723 | ) | ||||
Income tax benefit |
(1,018 | ) | (573 | ) | ||||
|
|
|
|
|||||
Net loss |
$ | (1,908 | ) | $ | (1,150 | ) | ||
|
|
|
|
Compared to the first quarter of 2011, our total net operating revenue was $51.9 million, down $3.0 million, or 5.5%, from $54.9 million, and total operating expenses were $52.3 million, down $1.1 million, or 2.1%, from $53.4 million. As a result, our operating loss was $(1.9) million during the first quarter of 2012, up $0.7 million, or 65.9%, from $(1.2) million operating loss during the same quarter last year.
Interest and loan amortization expense is summarized in the table below:
Three months ended March 31 |
||||||||
(Dollars in thousands) |
2012 | 2011 | ||||||
New Notes |
||||||||
Stated interest @ 10.0% |
$ | 1,709 | $ | 2,098 | ||||
Accretion of original issue discount |
737 | 933 | ||||||
|
|
|
|
|||||
2,446 | 3,031 | |||||||
Other |
16 | 2 | ||||||
|
|
|
|
|||||
Total interest expense |
2,462 | 3,033 | ||||||
Loan amortization |
66 | 113 | ||||||
|
|
|
|
|||||
Interest and loan amortization expense |
$ | 2,528 | $ | 3,146 | ||||
|
|
|
|
Our loss before taxes was $2.9 million during the first quarter of 2012, compared to a net loss before taxes of $1.7 million during the first quarter of 2011.
For the first quarter of 2012 and 2011, our income tax benefit was $1.0 million and $573 thousand, respectively.
Our net loss was $1.9 million during the first quarter of 2012, compared to a net loss of $1.2 million during same quarter last year.
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Results of operations for the three months ended March 31, 2012 compared to March 31, 2011
Net operating revenue. The table below presents the total net operating revenue for the three-month periods ended March 31, 2012 and 2011:
(Dollars in thousands) |
Three months ended March 31 |
Percentage change |
||||||||||
2012 | 2011 | 2012 vs. 2011 |
||||||||||
Net operating revenues |
||||||||||||
Advertising |
||||||||||||
Retail |
$ | 19,848 | $ | 21,722 | (8.6 | %) | ||||||
National |
2,369 | 2,621 | (9.6 | %) | ||||||||
Classified |
12,033 | 13,046 | (7.8 | %) | ||||||||
|
|
|
|
|
|
|||||||
Total advertising revenues |
34,250 | 37,389 | (8.4 | %) | ||||||||
Circulation |
14,639 | 15,340 | (4.6 | %) | ||||||||
Other |
2,964 | 2,187 | 35.5 | % | ||||||||
|
|
|
|
|
|
|||||||
Total net operating revenues |
$ | 51,853 | $ | 54,916 | (5.6 | %) | ||||||
|
|
|
|
|
|
Advertising revenue. Advertising revenue was $34.3 million, a decrease of $3.1 million, or 8.4%, from $37.4 million during the first quarter of 2011.
Compared to the first quarter of 2011, advertising revenue from our daily newspapers was down $2.7 million, or 8.1%.
Advertising revenue from Jacksonville was down $1.1 million, or 11.3%, and St. Augustine was down $0.1 million, or 8.0%. Augusta was down $0.6 million, or 13.4%, Savannah was down $0.2 million, or 5.6%, Lubbock was down $0.2 million, or 6.4%, Topeka was down $0.2 million, or 7.0%, Athens was down $0.1 million, or 3.9%, and Amarillo was down $0.4 million, or 10.1%.
Our non-daily publications were down $0.4 million, or 10.5%.
Retail advertising revenue:
Retail advertising revenue was $19.8 million, down $1.9 million, or 8.6%, from $21.7 million during the prior year, with significant declines from our seven largest daily newspapers.
Classified advertising revenue:
Total classified advertising revenue was $12.0 million, down $1.0 million, or 7.8%, from $13.0 million in 2011.
Jacksonville was down $0.5 million, or 15.1%, contributing half of the net decrease.
National advertising revenue:
Total national advertising revenue was $2.4 million, down $0.2 million, or 9.6%, from $2.6 million last year, with Jacksonville accounting for almost all of the decline.
Circulation revenue. Circulation revenue was $14.6 million, down $0.7 million, or 4.6%, from $15.3 million during the first quarter of 2011, with the price increases in many of our markets being offset by the decrease in circulation volume.
Average daily and Sunday circulation volume, excluding the NIE editions, was down 8.8% and 3.3%, respectively, with Jacksonville accounting for about 31% of the weekly circulation decline. During 2010, we converted most of our NIE print editions to lower priced electronic editions, resulting in a significant increase in NIE circulation volume.
Other revenue. Other income was $3.0 million, up $0.8 million, or 35.5%, from $2.2 million during the first quarter of 2011 primarily due to the increase in other online revenues and revenue generated through print services provided for other third party publications.
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Net operating expenses. The table below presents the total operating expenses for the three-month periods ended March 31, 2012 and 2011:
(Dollars in thousands) |
Three months ended March 31, |
Percentage change |
||||||||||
2012 | 2011 | 2012 vs. 2011 |
||||||||||
Operating expenses |
||||||||||||
Labor and employee benefits |
$ | 20,550 | $ | 22,473 | (8.6 | %) | ||||||
Newsprint, ink and supplements |
4,826 | 5,800 | (16.8 | %) | ||||||||
Other operating costs |
22,642 | 23,018 | (1.6 | %) | ||||||||
Impairment of fixed assets |
2,400 | | N/A | |||||||||
Depreciation and amortization |
1,874 | 2,153 | (13.0 | %) | ||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
$ | 52,292 | $ | 53,444 | (2.1 | %) | ||||||
|
|
|
|
|
|
Labor and employee benefits. Total labor and employee benefit costs was $20.6 million, down $1.9 million, or 8.6%, from $22.5 million during 2011, with these costs being favorably impacted by reductions in head count.
Compared to 2011, our salaries and wages, including severance costs, totaled $14.7 million, down $1.7 million, or 11.6%, from $16.4 million.
Our average full time equivalents (FTEs) were down 243, or 12.9%.
Commissions and bonuses were $2.0 million, down $0.3 million, or 13.0%, from $2.3 million during 2011, primarily due to the decline in advertising revenues.
Employee medical insurance cost was $2.0 million, up $0.1 million, or 5.3%, from $1.9 million during the first quarter last year.
Other employee costs totaled $1.9 million, unchanged from $1.9 million last year.
Newsprint, ink and supplements cost. Newsprint, ink and supplements costs were $4.8 million, down $1.0 million, or 16.8%, from $5.8 million during 2011.
Compared to 2011, total newsprint expense was $4.4 million, down $0.7 million, or 13.7%, from $5.1 million, with a 3.4% decrease in the average cost per ton of newsprint.
Supplements and ink expense totaled $0.4 million, down $0.3, or 42.8% from $0.7 million the first quarter of 2011.
Other operating costs. Other operating costs were $22.6 million, down $0.4 million, or 1.6%, from $23.0 million in 2011.
The management fee incurred with Morris Communications totaled $1.7 million and $2.2 million for the three-month periods ended March 31, 2012 and 2011, respectively.
The technology and shared services fee incurred with NIIT Media totaled $3.3 million in the first quarter of 2012, up $0.2 million from the $3.1 million incurred with Morris Communications in the first quarter of 2011.
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The combined technology and shared services fees from Morris Communications and NIIT Media and the management fee charged by Morris Communications under the Morris Communications Services Agreement totaled $5.1 million, down $0.2 million or 3.8% from $5.3 million during the first quarter of 2011. The combined fees will not to exceed $22.0 million in any calendar year.
Impairment of fixed assets. We decided to outsource the printing of our publications in Topeka (Kan.), and, in connection with that decision, recognized an impairment of the Topeka (Kan.) Capital-Journal press equipment in the amount of $2.4 million in March of 2012.
Depreciation and amortization. Depreciation and amortization expense was $1.9 million, down $0.3 million, or 13%, from $2.2 million in 2011.
Liquidity and capital resources
Our unrestricted cash balance was $5.3 million at March 31, 2012, approximately unchanged from the $5.3 million at December 31, 2011.
At March 31, 2012, our sources of liquidity were the cash flow generated from operations, our cash balances and a $10.0 million senior secured Working Capital Facility (as described below). Our primary short term needs for cash were funding operating expenses, capital expenditures, income taxes, working capital and the quarterly interest payments and any required monthly Excess Free Cash Flow redemptions on the New Notes.
During the fourth quarter of 2011, we listed for sale our Athens, Georgia newspaper building and real estate (the Real Property). On March 19, 2012 we signed an agreement to sell the Real Property for $13.2 million, subject to the Buyers right to terminate the agreement within 60 days. Under the terms of the Indenture to the New Notes (the New Indenture), we would be required to use the net cash proceeds from the sale to prepay any amounts outstanding under our Working Capital Facility and then to offer to repurchase New Notes from note holders on a pro rata basis at 101.0% of the principal amount. We are currently exploring additional repayment or refinancing opportunities, subject to market conditions, with hope to repay and/or refinance the indebtedness under the New Indenture in 2012.
As permitted by the New Indenture, we intend to maintain a $10.0 million senior secured Working Capital Facility for the foreseeable future. Going forward, we intend to continue to renew or replace this Working Capital Facility from time to time. If at any time we do not have a Working Capital Facility, we would intend to retain cash flow generated from operations in order to maintain cash balances of up to $7.0 million to provide liquidity, as permitted by the New Indenture, but we would be required to use monthly excess free cash flow to redeem New Notes to the extent our cash balances exceed $7.0 million.
We expect that, for the reasonably foreseeable future, cash generated from operations, together with the proceeds from the Working Capital Facility, will be sufficient to allow us to service our debt, fund our operations, and to fund planned capital expenditures and expansions. However, our cash reserves and the Working Capital Facility may not be sufficient to cover any significant unexpected periods of negative cash flow.
Operating activities. Net cash provided by operations was $8.3 million for the first three months of 2012, down $1.9 million from $10.2 million for the same period in 2011.
Excluding current maturities of long-term debt, current assets were $43.6 million and current liabilities were $29.4 million as of March 31, 2012 compared to current assets of $46.9 million and current liabilities of $26.9 million as of December 31, 2011.
Investing activities. Net cash used in investing activities was $1.0 million for the first three months of 2012, compared to $0.2 million used in investing activities for the first three months of 2011.
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During the first three months in 2012 and 2011, we spent $1.0 million and $0.2 million on property, plant and equipment, respectively. We anticipate our total capital expenditures to range from $4.0 million to $5.0 million during calendar year 2012.
Financing activities. Net cash used in financing activities was $7.4 million for the first three months of 2012, compared to $7.5 million used in financing activities for the same period in 2011.
Period Summary
Total DebtAt March 31, 2012, our total debt was $60.8 million ($63.9 million in aggregate stated principal outstanding on the New Notes less $3.1 million of OID). At December 31, 2011, our total debt was $67.5 million ($71.4 million in aggregate stated principal outstanding on the New Notes less $3.9 million of OID).
There were no outstanding borrowings against the Working Capital Facility at March 31, 2012 or December 31, 2011.
The current maturities of long-term debt as of March 31, 2012 and December 31, 2011 totaled $17.0 million and $17.0 million, respectively. The current maturities of long-term debt reflect our estimate of required redemptions of New Notes utilizing Excess Free Cash Flow within the following twelve-month period.
The average interest rate on our total aggregate principal amount of debt outstanding, excluding effective rate of the OID, on the New Notes, was 10% at March 31, 2012 and December 31, 2011.
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New NotesWe are required by the New Indenture to use our monthly positive operating cash flow (if any), net of permitted cash flow adjustments, (Excess Free Cash Flow) to first repay any amounts outstanding on the Working Capital Facility, and then to redeem (on a pro rata basis) New Notes; provided, however, that no payment or redemptions are required if Excess Free Cash Flow is less than $250 thousand. During the first quarter of 2010, the Company deferred $0.6 million in loan costs related to the issuance of the New Notes and is amortizing those costs over the four and one-half year maturity of the New Notes. The table below summarizes our interest payments and redemptions of aggregate stated principal outstanding on the New Notes utilizing our monthly Excess Free Cash Flows and Available Cash Balance(s) (as defined below) since 2010:
(dollars in thousands) |
Beginning Principal Outstanding |
Principal Redeemed |
Interest Paid |
Ending Principal Outstanding |
Payment Due Date |
|||||||||||||||
Quarterly interest payment |
$ | 100,000 | $ | | $ | 833 | $ | 100,000 | 4/1/10 | |||||||||||
Excess Free Cash Flow-March 2010 |
100,000 | | | 100,000 | 4/23/10 | |||||||||||||||
Excess Cash-Tranche A repayment |
100,000 | 3,211 | 21 | 96,789 | 4/23/10 | |||||||||||||||
Excess Free Cash Flow-April 2010 |
96,789 | | | 96,789 | 5/21/10 | |||||||||||||||
Excess Cash-Tranche B refinance |
96,789 | 1,760 | 24 | 95,029 | 5/21/10 | |||||||||||||||
Excess Free Cash Flow-May 2010 |
95,029 | 1,016 | 22 | 94,013 | 6/17/10 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Second Quarter-2010 |
5,987 | 900 | ||||||||||||||||||
Quarterly interest payment |
94,013 | | 2,350 | 94,013 | 7/1/10 | |||||||||||||||
Excess Free Cash Flow-June 2010 |
94,013 | 2,803 | 14 | 91,210 | 7/19/10 | |||||||||||||||
Excess Free Cash Flow-July 2010 |
91,210 | | | 91,210 | 8/24/10 | |||||||||||||||
Excess Free Cash Flow-August 2010 |
91,210 | 1,094 | 24 | 90,116 | 9/17/10 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Third Quarter-2010 |
3,897 | 2,388 | ||||||||||||||||||
Quarterly interest payment |
90,116 | | 2,254 | 90,116 | 10/1/10 | |||||||||||||||
Excess Free Cash Flow-September 2010 |
90,116 | 424 | 2 | 89,692 | 10/19/10 | |||||||||||||||
Excess Free Cash Flow-October 2010 |
89,692 | 1,994 | 26 | 87,698 | 11/18/10 | |||||||||||||||
Excess Free Cash Flow-November 2010 |
87,698 | 1,190 | 24 | 86,508 | 12/15/10 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Fourth Quarter-2010 |
3,608 | 2,306 | ||||||||||||||||||
Quarterly interest payment |
86,508 | | 2,163 | 86,508 | 1/3/11 | |||||||||||||||
Excess Free Cash Flow-December 2010 |
86,508 | | | 86,508 | 1/21/11 | |||||||||||||||
Excess Free Cash Flow-January 2011 |
86,508 | 4,269 | 55 | 82,239 | 2/16/11 | |||||||||||||||
Excess Free Cash Flow-February 2011 |
82,239 | 3,227 | 68 | 79,012 | 3/16/11 | |||||||||||||||
|
|
|
|
|||||||||||||||||
First Quarter-2011 |
7,496 | 2,286 | ||||||||||||||||||
Quarterly interest payment |
79,012 | | 1,975 | 79,012 | 4/1/11 | |||||||||||||||
Excess Free Cash Flow-March 2011 |
79,012 | 579 | 3 | 78,433 | 4/21/11 | |||||||||||||||
Excess Free Cash Flow-April 2011 |
78,433 | | | 78,433 | 5/16/11 | |||||||||||||||
Excess Free Cash Flow-May 2011 |
78,433 | 322 | 6 | 78,111 | 6/15/11 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Second Quarter-2011 |
901 | 1,984 | ||||||||||||||||||
Quarterly interest payment |
78,111 | | 1,953 | 78,111 | 7/1/11 | |||||||||||||||
Excess Free Cash Flow-June 2011 |
78,111 | 563 | 3 | 77,548 | 7/19/11 | |||||||||||||||
Excess Free Cash Flow-July 2011 |
77,548 | | | 77,548 | 8/17/11 | |||||||||||||||
Excess Free Cash Flow-August 2011 |
77,548 | 3,445 | 73 | 74,103 | 9/16/11 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Third Quarter-2011 |
4,008 | 2,029 | ||||||||||||||||||
Quarterly interest payment |
74,103 | | 1,853 | 74,103 | 10/3/11 | |||||||||||||||
Excess Free Cash Flow-September 2011 |
74,103 | 1,195 | 6 | 72,908 | 10/18/11 | |||||||||||||||
Excess Free Cash Flow-October 2011 |
72,908 | 1,547 | 20 | 71,361 | 11/16/12 | |||||||||||||||
Excess Free Cash Flow-November 2011 |
71,361 | | | 71,361 | N/A | |||||||||||||||
|
|
|
|
|||||||||||||||||
Fourth Quarter-2011 |
2,742 | 1,879 | ||||||||||||||||||
Quarterly interest payment |
71,361 | | 1,784 | 71,361 | 1/3/12 | |||||||||||||||
Excess Free Cash Flow-December 2011 |
71,361 | 1,369 | 7 | 69,992 | 1/20/12 | |||||||||||||||
Excess Free Cash Flow-January 2012 |
69,992 | 3,678 | 53 | 66,314 | 2/21/12 | |||||||||||||||
Excess Free Cash Flow-February 2012 |
66,314 | 2,376 | 50 | 63,938 | 3/15/12 | |||||||||||||||
|
|
|
|
|||||||||||||||||
First Quarter-2012 |
7,423 | 1,894 | ||||||||||||||||||
Quarterly interest payment |
63,938 | | 1,598 | 63,938 | 4/2/12 | |||||||||||||||
Excess Free Cash Flow-March 2012 |
63,938 | 1,215 | 7 | 62,723 | 4/20/12 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Total to date |
37,277 | 17,271 | ||||||||||||||||||
|
|
|
|
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Working Capital Facility
During the second quarter of 2010, we entered into a senior, secured Loan and Line of Credit Agreement with the CB&T, a division of Synovus Bank (the Bank), providing for a revolving line of credit in the amount of $10.0 million (the Working Capital Facility).
During the second quarter of 2010, we deferred the $0.5 million in debt issuance costs associated with the loan and amortized these costs ratably through May 15, 2011, the original maturity date of the Working Capital Facility.
On May 11, 2012, we entered into an agreement with the Bank extending the maturity of the Working Capital Facility to May 15, 2013 with no other changes to the provisions of the agreement.
New Indenture
On March 1, 2010, the Effective Date of the Restructuring, we entered into the New Indenture with respect to the New Notes.
Under the terms of the New Indenture, the New Notes bear 10% interest commencing March 1, 2010 and payable in cash quarterly. The New Notes mature on October 1, 2014.
The New Notes are secured by a lien on substantially all of our assets. The New Notes, and the liens securing the New Notes, will be subordinated to any of our senior debt, and includes the Working Capital Facility.
Under certain conditions, the New Notes may be redeemed at the option of the Issuers. Upon certain sales or dispositions of assets or events of loss unless the proceeds are reinvested in accordance with the New Indenture, the Issuers must offer to use proceeds to redeem the Notes. Upon a change of control of Morris Publishing, the Issuers must offer to repurchase all of the New Notes.
The New Indenture contains various representations, warranties and covenants generally consistent with the Original Indenture, including requirements to provide reports and to file publicly available reports with the United States Securities and Exchange Commission (SEC) (unless the SEC will not accept the reports) and limitations on dividends, indebtedness, liens, transactions with affiliates and capital expenditures.
In addition, the New Indenture contains financial covenants requiring us to meet certain financial tests on an on-going basis, including a total leverage ratio and a cash interest coverage ratio, based upon our consolidated financial results. At March 31, 2012, we were in compliance with all financial covenants under the New Indenture.
In addition, the holders of the New Notes, as permitted by the New Indenture, appointed an observer to our Board of Directors and each of our subsidiaries.
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Working Capital Facility
The parties to the Working Capital Facility are Morris Publishing, as borrower, all of our subsidiaries and our parent, as guarantors, and the Bank.
Interest accrues on outstanding principal at the rate of LIBOR plus 4%, with a minimum rate of 6%.
The Working Capital Facility is secured by a first lien on substantially all of the assets of Morris Publishing and our subsidiaries. Liens on such assets were previously granted to the Collateral Agent for the holders of the New Notes pursuant to the New Indenture. Pursuant to the New Indenture and an Intercreditor Agreement between the Collateral Agent and the Bank, the New Notes (and their related liens) are subordinated to the Working Capital Facility. The Working Capital Facility contains various customary representations, warranties and covenants, as well as financial covenants similar to the financial covenants in the New Indenture.
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, 2011 filed with the Securities and Exchange Commission on Form 10-K.
We have limited exposure to the impact of interest rate fluctuations since substantially all of our outstanding debt is at a fixed rate.
To estimate the fair value of the $63.9 million aggregate stated principal amount outstanding of Floating Rate Secured Notes due 2014 dated as of March 1, 2011 (the New Notes), we used the average price of the corporate bond trades reported on or around March 31, 2012. At March 31, 2012, the fair value of the New Notes was approximately $60.1 million.
ITEM 4. CONTROLS AND PROCEDURES
Our management carried out an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2012. 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 March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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, 2011, as well as other risks and factors identified from time to time in other United States Securities and Exchange Commission filings.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
None.
10.1 | Agreement for Purchase and Sale with Hagen Creek Properties for the sale of Morris Publishings newspaper building and real estate in Athens, Georgia. | |
31.1 | Rule 13a-14(a) Certifications | |
31.2 | Rule 13a-14(a) Certifications |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MORRIS PUBLISHING GROUP, LLC | ||||||
Date: May 14, 2012 | By: | /s/ Steve K. Stone | ||||
Steve K. Stone | ||||||
Chief Financial Officer | ||||||
(On behalf of the Registrant, and as its Principal Financial and Accounting Officer) |
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