Registrant’s
Telephone Number, Including Area Code: (972)
628-4080
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Applicable
(Former
Name or Former Address, if Changed Since Last
Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
o
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
o
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
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Forward-Looking
Statements
Statements
made in this Current Report, other than those concerning historical financial
information, may be considered forward-looking statements. These statements
are
subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including but not
limited to general business and economic conditions, competitive factors, raw
materials purchasing and fluctuations in demand. Please refer to our Securities
and Exchange Commission filings for further information.
Unless
the context otherwise requires, references to “we,”“us” or the “Company” refer
to American Community Newspapers Inc. and its subsidiaries.
The
information furnished under this Item 2.02, including the exhibit related
thereto, shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, nor shall it be deemed incorporated by
reference in any disclosure document of ours, except as shall be expressly
set
forth by specific reference in such document.
Item
2.04.
Triggering
Events That Accelerate or Increase a Direct Financial Obligation
or an
Obligation under an Off-Balance Sheet
Arrangement.
Background
On
July2, 2007, we closed three financing transactions which provided a portion of
the
funds used to effect the acquisition of our sole operating business and to
pay
other expenses associated with the acquisition. We closed on a credit agreement,
dated as of June 29, 2007, with the Bank of Montreal, Chicago Branch (“BMO”), as
administrative agent, and the lenders identified therein (“Senior Lenders”),
which provided for a $125 million secured credit facility (“Credit Facility”),
comprised of a revolving loan of up to $20 million (“Revolving Loan Facility”)
and two term loans (“Term Loan Facility”), one in the amount of $35 million
(“Term A Loan”) and one in the amount of $70 million (“Term B Loan”). We also
closed on a credit agreement, dated as of June 29, 2007, with Ares Capital
Corporation (“Ares”, and together with Senior Lenders, the “Lenders”), which
provided for a $30 million unsecured, term-loan credit facility (“Subordinated
Credit Facility”). In addition, we issued 42,193 shares of Series A Preferred
Stock at a purchase price of $100 per share for aggregate gross proceeds of
$4,219,300 (“Series A Preferred Stock,” and together with the Credit Facility
and Subordinated Credit Facility, the “2007 Financings”).
On
November 30, 2007, we executed two interest rate swaps (“Swaps”), one in the
notional amount of $30 million and one in the notional amount of $25 million,
with a spot starting date of December 4, 2007. The interest rate swaps have
identical terms of two years. Under these swaps, we pay an amount to the swap
counterparty representing interest on a notional amount at a rate of 3.91%
and
receives an amount from the swap counterparty representing interest on the
notional amount at a rate equal to the three-month LIBOR.
Financial
Covenant and Related Defaults under the Credit
Facilities
As
of
August 13, 2008, we are in violation of a financial covenant under the Credit
Facility and a financial covenant under the Subordinated Credit Facility. Each
covenant requires us to maintain a consolidated total debt leverage ratio (as
defined in each facility) below a specified maximum. The Credit Facility’s
covenant requires that the ratio of consolidated debt to EBITDA for the trailing
four quarters (each as calculated pursuant to the Credit Facility) not exceed
6.50 to 1.00 as at June 29, 2008. As of June 29, 2008, our consolidated total
debt leverage ratio was 7.33 to 1.00, based on consolidated total debt for
purposes of the Credit Facility of $108,500,000 and trailing four quarters
EBITDA of $14,802,000. The Subordinated Credit Facility’s covenant requires that
the ratio of consolidated debt to EBITDA for the trailing four quarters (each
as
calculated pursuant to the Subordinated Credit Facility) not exceed 8.00 to
1.00
during the period from December 31, 2007 to June 29, 2008. As of June 29, 2008,
our consolidated total debt leverage ratio was 9.68 to 1.00, based on
consolidated total debt for purposes of the Subordinated Credit Facility of
$143,317,000 and trailing four quarters EBITDA of $14,802,000. Violation of
these financial covenants constitutes an event of default under the Credit
Facility and the Subordinated Credit Facility (“Financial Covenant Defaults”).
In addition, due to cross-default provisions under the Credit Facility, the
Financial Covenant Default under the Subordinated Credit Facility and the
defaults under the agreements governing the Swaps (described below) constitute
additional defaults under the Credit Facility (“Cross Defaults”).
2
Risks
and Uncertainties Related to the Credit Facilities
While
we
do not expect our lenders to immediately terminate either facility and/or demand
immediate repayment of outstanding debt and payment of accrued interest, they
would have the right to do so as a result of the Financial Covenant Defaults
and, in the case of the Credit Facility, the Cross Defaults. In such event,
the
Senior Lenders could seek to foreclose on their security interests in our assets
and those of our subsidiaries. Alternatively, our lenders could take other
actions, such as imposing a default interest rate that is 2% above the interest
rate otherwise due under the respective facilities and, in the case of BMO
and
the Senior Lenders, restricting our access to additional revolving loan
borrowings and letters of credit. Such actions would materially and negatively
impact our liquidity, results of operations and financial
condition.
We
are
conducting discussions with each of Ares and BMO with respect to addressing
the
defaults. There can be no assurance that we will be able to obtain waivers
or
other relief from Ares or BMO.
On
July1, 2008, we retained Carl Marks Securities LLC to provide financial advisory
services, including assistance in negotiations with
our
lenders and the development and execution of a financial restructuring plan.
In
addition, we are seeking to engage restructuring counsel. With the assistance
of
these advisors, we are exploring alternatives for formulating a balance sheet
restructuring plan.
There
can be no assurance that we will arrive at a financial restructuring plan that
is satisfactory to our lenders, or that such a plan, once implemented, will
successfully alleviate the risks and uncertainties described
herein.
Series
A Preferred Stock
Under
a
cross default provision contained in the certificate of designations for our
Series A Preferred Stock, the default under the Subordinated Credit Facility
has
caused the dividend rate on our Series A Preferred Stock to rise by 2%.
Dividends will continue to accrue from the date of issue whether or not we
have
funds legally available for the payment of such dividends and whether or not
any
such dividends are declared by our board of directors. If all or any of the
applicable dividends are not paid in cash, then the unpaid amount of dividends
shall be added to the accreted value of each share of Series A Preferred Stock
for purposes of calculating succeeding periods’ dividends.
Swaps
Under
cross default provisions contained in the agreements governing the Swaps, the
Financial Covenant Defaults under the credit facilities have triggered defaults
under the Swaps. As a result, the counterparties to each Swap (“Counterparties”)
have a right of termination. If either Swap is terminated, we will be obligated
to pay the Counterparty an amount equal to the market value of the Swap and
the
loss incurred by the Counterparty as a result of the termination (including,
among other things, the cost of re-establishing a hedge position). There can
be
no assurance that we will be able to obtain waivers or other forms of relief
from the Counterparties.
3
Item
2.06.
Material
Impairments.
In
connection with the preparation and review of the financial statements for
our
fiscal quarter ended June 29, 2008, management concluded and our Audit Committee
concurred that a material charge needed to be recorded for impairment of the
value of certain of our intangible assets and the goodwill recorded as a result
of the acquisition of our operating business on July 2, 2007.
We
had
previously decided to perform our annual impairment test during the second
fiscal quarter of 2008. Considering our stock price and market capitalization,
macroeconomic factors impacting the industry as a whole and our recent and
forecasted operating performance (including a year-over-year and
quarter-over-quarter decline in revenue), along with other factors, we also
determined that indicators of potential impairment were present during the
quarter.
In
assessing the recoverability of our goodwill and other intangible assets,
including our mastheads, we employed an independent valuation firm to analyze
the fair value of our business using an income approach and a market approach.
Based on their preliminary valuation, we expect to record a pre-tax, non-cash
operating charge of at least $69 million for the fiscal quarter ended June29,2008. We intend to include the final impairment charge in our Quarterly Report
(as defined below), when available. For further information regarding the filing
of our Quarterly Report, refer to Item 8.01.
We
do not
expect to make any future cash expenditures as a result of the
impairment.
Risks
and Uncertainties Related to the Impairment
The
required valuation methodology and underlying financial information that were
used to analyze the impairment require significant judgments to be made by
management. These judgments include, but are not limited to, long-term
projections of future financial performance and the selection of appropriate
discount rates used to determine the present value of future cash flows. Changes
in such estimates or the application of alternative assumptions could produce
significantly different results.
The
charge of $69 million represents a preliminary estimate of the impairment of
our
goodwill and other intangible assets. There is a reasonable possibility that
adjustments will be made to the preliminary estimate resulting from, among
other
things, such factors as arrangements with our creditors, industry and market
performance and our operating performance and projections. We are unable to
estimate the magnitude of any further adjustments to our impairment charge
at
this time.
Item
8.01.
Other
Events.
Quarterly
Report on Form 10-Q; Filing Delayed
Until
uncertainties related to impairment of the value of certain of our intangible
assets, including goodwill, have been resolved, we are unable to complete the
preparation of our interim financial statements to be included in our quarterly
report on Form 10-Q for the period ended June 29, 2008 (“Quarterly Report”). We
plan to file our Quarterly Report promptly after it becomes possible to measure
and recognize the impact of such uncertainties on our financial statements
and
our independent registered public accounting firm can complete their review
of
our interim financial statements.
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 hereunto
duly authorized.
