Newspaper & Mailroom

American Community Newspapers Inc. Reports 2008 Third Quarter Financial Results

Thursday 20. November 2008 - American Community Newspapers Inc. (Pink Sheets: ACNI) ("ACN" or the "Company") today reported financial results for the third quarter ended September 28, 2008.

Summary of Key Events

As previously reported, the Company is not in compliance with certain terms of its credit agreements, including financial and payment covenants, violation of which constitute events of default under such agreements.

The Company and its financial advisors continue to work with its lenders to restructure the Company’s debt. While the Company does not expect its lenders to immediately terminate its credit facilities and/or demand immediate repayment of outstanding debt, they have the right to do so as a result of the events of default. In such event, the Company’s senior lenders could seek to foreclose on their security interests in ACN’s assets and those of its subsidiaries. Alternatively, the Company’s lenders could exercise the other rights and remedies available to them under their respective credit agreements. Such actions would materially and negatively impact the Company’s liquidity, results of operations and financial condition. The Company’s senior lenders have restricted the Company’s access to additional borrowings under the Company’s credit agreement with them.

Since there is no assurance that the Company’s negotiations and/or restructuring efforts with its lenders will be successful, the entire $144.8 million aggregate balance of all loans outstanding at September 28, 2008 has been reflected as a current liability in the accompanying balance sheet. This has resulted in a liquidity deficiency of $139.1 million, the amount by which current liabilities of $151.8 million exceed current assets of $12.7 million at September 28, 2008. Any restructuring that reduces the Company’s outstanding debt is likely to have a substantial impact on the Company’s capital structure, including but not limited to its common equity.

This financial press release should be read in conjunction with the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the year ended December 30, 2007 and Forms 10-Q filed with the SEC for the quarters ended March 30, 2008 and June 29, 2008.

Third Quarter Ended September 28, 2008 Results:
— Total revenue was $16.3 million, down 12.3% from total revenue of
$18.5 million in the prior year quarter. The decline was primarily due
to the macro-economic weakness nationwide and the resulting soft
advertising environment, with the Company’s Minneapolis-St. Paul
cluster affecting results the most negatively. Excluding the
Minneapolis-St. Paul cluster, total revenue was down 8.7%. There has
been a significant slowdown in advertising expenditures in newspapers
nationwide and in advertising in general across all media.
— Advertising revenue decreased 13.6% to $14.8 million in the third
quarter of 2008 compared to advertising revenue in the same quarter of
the prior year.
— ACN’s 100 print products had a total circulation of approximately 1.3
million in the third quarter of 2008. ACN has a free,
controlled-distribution model for most of its print products, with
circulation accounting for 4.1% of total Company revenues in the
period.
— Total operating costs and expenses decreased 6.9% to $12.6 million in
the third quarter of 2008 versus the prior year as a result of
cost-saving initiatives and lower sales volume.
— Newspaper Cash Flow (NCF) decreased 26.9% to $3.6 million in the third
quarter of 2008 compared to NCF in the third quarter of 2007. The
decrease was driven primarily by the aforementioned revenue decline.
— Corporate expenses increased approximately $0.8 million or 144.5% to
$1.4 million year-over-year in the 2008 third quarter primarily due to
approximately $0.8 million expense for professional fees related to
the Company’s restructuring efforts. About $0.4 million of these
professional fees are being paid to professionals working on behalf of
the Company’s senior lenders pursuant to the Company’s obligations
under its loan agreement.

Nine Months Ended September 28, 2008 Pro forma Results:
— Total revenue was $49.4 million, down 12.8% from total revenue of
$56.7 million in the prior year period on a pro forma basis. The
decline was primarily due to the macro-economic nationwide weakness
and the resulting soft advertising environment, with the Company’s
Minneapolis-St. Paul cluster affecting results the most negatively.
Excluding the Minneapolis-St. Paul cluster, total revenue was down
9.4%. There has been a significant slowdown in advertising
expenditures in newspapers nationwide and in advertising in general
across all media.
— Advertising revenue decreased 13.9% to $45.1 million for the first
nine months of 2008 compared to the 2007 comparable period on a pro
forma basis.
— Total operating costs and expenses decreased 9.5% to $38.1 million
during the first nine months of 2008 versus the 2007 first nine months
on a pro forma basis as a result of cost-saving initiatives and lower
sales volume.
— Newspaper Cash Flow decreased 22.4% to $11.3 million for the first
nine months of 2008 compared to pro forma NCF during the comparable
prior year period. The decrease was driven primarily by the
aforementioned revenue decline.
— Corporate expenses increased by $1.2 million or 90.8% to $2.5 million
during the first nine months of 2008 compared to the comparable
period, primarily due to approximately $0.8 million expense for
professional fees related to the Company’s restructuring efforts and
to a lesser extent from other corporate costs related to the Company
becoming an operating business as of July 2, 2007. About $0.4 million
of these professional fees are being paid to professionals working on
behalf of the Company’s senior lenders pursuant to the Company’s
obligations under its loan agreement.



On July 1, 2008, ACN retained an advisor to provide financial advisory services. On August 26, 2008 the Company retained restructuring legal counsel. These advisors are assisting the Company in exploring strategic alternatives relating to, among other things restructuring its long-term debt. Any restructuring that reduces the Company’s outstanding debt is likely to have a substantial impact on its capital structure, including but not limited to its common equity.

As of August 13, 2008, the Company has been in violation of a financial covenant under each of its credit facility with the Bank of Montreal, as agent, and a group of banks and other commercial lenders (the “Credit Facility”) and its unsecured term loan credit facility with Ares Capital Corporation (the “Subordinated Credit Facility”). Violation of these financial covenants constitutes an event of default under the Credit Facility and the Subordinated Credit Facility. In addition, due to cross-default provisions under the Credit Facility, the financial covenant default under the Subordinated Credit Facility constitutes an additional event of default under the Credit Facility. Additionally, on September 30, 2008, the Company did not make a principal payment in the amount of $1.05 million as required by the Credit Facility. Such failure to pay constitutes an additional event of default under the Credit Facility. As a consequence of these events of default, any interest due and payable under the Credit Facility shall be at a rate that is 2 percentage points in excess of the interest otherwise payable with respect to the applicable Loans (“Default Interest Rate”). Furthermore, under a cross default provision contained in the certificate of designations for the Company’s Series A Preferred Stock, the imposition of Default Interest Rate under the Subordinated Credit Facility has caused the dividend rate on Series A Preferred Stock to increase by 2 percentage points.

On November 30, 2007, the Company executed two interest rate 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 had identical terms of two years. Under these swaps, the Company paid an amount to the swap counterparty representing interest on a notional amount at a fixed rate of 3.91% and received an amount from the swap counterparty representing interest on the notional amount at a rate equal to the three-month LIBOR. At the request of its senior lenders, the Company terminated the interest rate swap contracts on September 29, 2008 and incurred a total close-out fee of approximately $0.7 million which is included in current liabilities for the period ended September 28, 2008. This transaction resulted in an immaterial gain for the three months ended September 28, 2008 and loss of approximately $0.7 million for the nine months ended September 28, 2008.

On August 21, 2008, the Company received notice from the American Stock Exchange (“AMEX,” now known as NYSE Alternext US LLC) staff indicating that the Company was not in compliance with certain of AMEX’s continued listing standards, as set forth in Sections 134 and 1101 of the AMEX Company Guide, due to its failure to file its Form 10-Q for the fiscal quarter ended June 29, 2008 with the SEC. The Company was afforded the opportunity to submit a plan of compliance to AMEX and, on September 4, 2008, the Company did so. On September 23, 2008, AMEX notified the Company that it accepted its plan of compliance and allowed it until November 19, 2008, to regain compliance with the continued listing standards. On October 21, 2008 the Company notified AMEX of its intent to voluntarily delist its common stock, warrants and units from AMEX and that it intended to voluntarily deregister its common stock, warrants and units under the Securities Exchange Act of 1934, as amended, and cease filing reports with the SEC.

On November 6, 2008 the Company filed its Form 10-Q for the three and six months ended June 29, 2008 with the SEC.

On November 10, 2008, the Company filed a Form 15 with the SEC to voluntarily deregister its common stock, warrants and units under the Securities Exchange Act of 1934, as amended, suspending its obligation to file reports with the SEC, including Forms 10-K, 10-Q, and 8-K. The Company expects that the deregistration will become effective on or about February 8, 2009. Also on November 10, 2008, the Company’s common stock, warrants and units were delisted from AMEX and commenced trading on the Pink OTC Markets, a centralized electronic quotation service for over-the-counter securities, under the ticker symbols ACNI.PK, ACNIW.PK and ACNIU.PK, respectively.