<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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: 1-15427
CLASSIC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION 74-2630019
OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
515 CONGRESS AVENUE, SUITE 2626
AUSTIN, TEXAS 78701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (512) 476-9095
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 [X] No
Number of shares of common stock of Classic Communications, Inc.
outstanding as of November 15, 1999: 9,739,603.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS OF CLASSIC COMMUNICATIONS, INC.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
<PAGE> 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS OF CLASSIC COMMUNICATIONS, INC.
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,497 $ 2,779
Accounts receivable, net 9,281 5,474
Prepaid expenses 1,018 424
Property, plant and equipment 284,743 127,169
Accumulated depreciation (54,517) (39,977)
--------- ---------
230,226 87,192
Deferred financing costs, net 21,501 8,919
Intangible assets:
Subscriber relationships 190,753 95,180
Franchise rights 171,834 71,464
Noncompete agreements 16,555 8,425
Goodwill 42,473 40,575
--------- ---------
421,615 215,644
Less accumulated amortization (83,662) (65,828)
--------- ---------
337,953 149,816
--------- ---------
Total assets $ 607,476 $ 254,604
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable $ 599 $ 647
Subscriber deposits and unearned income 7,513 4,846
Accrued expenses 13,475 6,106
Accrued interest 6,501 5,883
Long-term debt 522,842 282,842
Deferred taxes, net 48,674 1,068
--------- ---------
Total liabilities 599,604 301,392
Stockholders' equity (deficit):
Common stock, voting 82 17
Common stock, nonvoting 15 15
Additional paid-in capital 126,103 30,464
Unearned compensation -- (1,920)
Accumulated deficit (118,328) (75,364)
--------- ---------
Total stockholders' equity (deficit) 7,872 (46,788)
--------- ---------
Total liabilities and stockholders' equity
(deficit) $ 607,476 $ 254,604
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
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CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except
per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 33,105 $ 18,190 $ 72,391 $ 50,404
Operating expenses:
Programming 8,845 4,673 19,272 12,891
Plant and operating 3,645 2,198 8,046 6,063
General and administrative 5,518 2,811 11,273 8,168
Marketing and advertising 503 216 955 555
Corporate overhead 7,406 1,499 9,131 2,758
Depreciation and amortization 14,209 7,513 32,305 21,682
---------- ---------- --------- ---------
Total operating expenses 40,126 18,910 80,982 52,117
---------- ---------- --------- ---------
Loss from operations (7,021) (720) (8,591) (1,713)
Interest expense (12,859) (6,637) (27,851) (17,134)
Other income 95 57 110 121
---------- ---------- --------- ---------
Loss before income taxes and
extraordinary item (19,785) (7,300) (36,332) (18,726)
Income tax benefit -- 678 -- 1,719
---------- ---------- --------- ---------
Loss before extraordinary item (19,785) (6,622) (36,332) (17,007)
Extraordinary loss on extinguishment
of debt (6,632) (5,524) (6,632) (5,524)
---------- ---------- --------- ---------
Net loss $ (26,417) $ (12,146) $ (42,964) $ (22,531)
========== ========== ========= =========
Basic and diluted loss per share:
Loss applicable to common stockholders
before extraordinary item $ (2.42) $ (3.27) $ (7.85) $ (8.37)
Extraordinary loss on extinguishment of debt (0.81) (2.10) (1.43) (2.16)
---------- ---------- --------- ---------
Loss per share applicable to common
stockholders $ (3.23) $ (5.37) $ (9.28) $ (10.53)
========== ========== ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 5
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net
loss $ (42,964) $ (22,531)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for doubtful accounts 916 642
Depreciation 14,471 8,650
Amortization of intangibles 17,834 13,032
Amortization of deferred financing costs 810 802
Discount accretion on long-term debt 6,517 1,565
PIK interest on Senior Subordinated Promissory Notes -- 435
Non-cash compensation 1,920 776
Deferred tax benefit -- (1,719)
Extraordinary loss 6,632 5,524
Change in operating assets and liabilities:
Accounts receivable (1,823) (1,300)
Prepaid expenses (98) 287
Accounts payable (1,752) (503)
Subscriber deposits and unearned income 326 1,727
Accrued expenses 386 (565)
Accrued interest 618 1,062
Net Cash provided by (used in) operating activities ---------- ----------
3,793 7,884
INVESTING ACTIVITIES
Payments for other intangibles (425) --
Acquisition of cable television systems (291,942) (41,747)
Purchase of property, plant and equipment (15,971) (7,658)
---------- ----------
Net cash provided by (used in) investing activities (308,338) (49,405)
FINANCING ACTIVITIES
Proceeds from long-term debt 420,500 281,208
Repayment of long-term debt (187,377) (190,292)
Repayment of subordinated indebtedness -- (4,458)
Repayment of promissory notes -- (650)
Payment of premium on redeemed notes (860) --
Financing costs (18,704) (8,884)
Redemption of preferred stock -- (31,023)
Cash dividends paid on preferred stock -- (93)
Sales of common stock 95,704 50
Repurchase of common stock -- (125)
---------- ----------
Net cash provided by (used in) financing activities 309,263 45,733
Increase (decrease) in cash and cash equivalents 4,718 4,212
Cash and cash equivalents at beginning of period 2,779 616
---------- ----------
Cash and cash equivalents at end of period $ 7,497 $ 4,828
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 6
CLASSIC COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Classic
Communications, Inc. ("CCI"), have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three- and nine-month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1999.
For further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 1998 included in CCI's
Amendment No. 1 to Form S-1 Registration Statement (dated November 15, 1999).
2. ACCOUNTS RECEIVABLE
The activity in CCI's allowance for doubtful accounts for the nine months
ending September 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FOR THE NINE MONTHS ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
September 30, 1999........ $ 737 916 (915) $ 738
September 30, 1998........ 262 642 (581) 323
</TABLE>
3. INCOME TAXES
CCI did not record an income tax benefit for the nine months ended
September 30, 1999. The effective tax rates for the nine months ended September
30, 1999 and September 30, 1998 differ primarily due to an increase in the
valuation allowance on deferred tax assets. CCI believes it is more likely than
not that such deferred tax assets will not be utilized in the near term.
CCI's benefit for income taxes differs from the amount computed by applying
the statutory rate to loss before income taxes primarily due to the impact of
permanent differences, an increase in the valuation allowance and other items as
discussed above.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Loss before extraordinary item ...................................... $(19,785) $ (6,622) $(36,332) $(17,007)
Preferred stock dividends ........................................... -- (360) -- (2,542)
Accretion of discount on preferred stock ............................ -- (1,586) -- (1,869)
-------- -------- -------- --------
Loss applicable to common stockholders before extraordinary item .... $(19,785) $ (8,568) $(36,332) $(21,418)
======== ======== ======== ========
Net loss ............................................................ $(26,417) $(12,146) $(42,964) $(22,531)
Preferred stock dividends ........................................... -- (360) -- (2,542)
Accretion of discount on preferred stock ............................ -- (1,586) -- (1,869)
-------- -------- -------- --------
Loss applicable to common stockholders .............................. $(26,417) $(14,092) $(42,964) $(26,942)
======== ======== ======== ========
Weighted-average shares outstanding ................................. 8,258 3,071 4,937 2,870
Less unvested portion of restricted stock ........................... (85) (447) (307) (312)
-------- -------- -------- --------
Adjusted weighted-average shares outstanding ........................ 8,173 2,624 4,630 2,558
======== ======== ======== ========
Basic and diluted loss per share:
Loss applicable to common stockholders before extraordinary item .... $ (2.42) $ (3.27) $ (7.85) $ (8.37)
Extraordinary loss on extinguishment of debt ........................ $ (0.81) $ (2.10) $ (1.43) $ (2.16)
-------- -------- -------- --------
Loss per share applicable to common stockholders .................... $ (3.23) $ (5.37) $ (9.28) $ (10.53)
======== ======== ======== ========
</TABLE>
<PAGE> 7
Warrants to purchase 335,853 shares of common stock at $.001 per share
outstanding during 1999 and 1998 were not included in the computation of
diluted earnings per share as the effect of their exercise would be
antidilutive. Options to purchase 559,748 and 589,500 shares of common stock
at an exercise price of $14.57 and $20.00 per share, respectively, granted in
1999 were not included in the computation of diluted earnings per share as the
effect of their exercise would be antidilutive.
5. BUFORD ACQUISITION
On July 28, 1999, CCI's wholly-owned subsidiary, Classic Cable, acquired
all of the outstanding stock and partnership interests of the Buford Group,
Inc., for approximately $300 million in cash. The acquisition was financed
through (a) the $95.7 million capital contribution from Brera Classic, LLC
("Brera") described in the Equity Investment section below, (b) the proceeds
from Classic Cable's 1999 credit facility and (c) the proceeds from a private
debt offering of $150 million of Classic Cable's 9.375% senior subordinated
notes, which were registered in August 1999 as described below. The transaction
is accounted for as a purchase transaction and the assets and liabilities
assumed are recorded at fair value.
The following summarized unaudited pro forma financial information assumes
the Buford acquisition had occurred on January 1, 1999 and 1998, respectively
and that the acquisition of certain systems of Cable One had occurred on January
1, 1998. The following pro forma information is not necessarily indicative of
the results that would have occurred had the transaction been completed at the
beginning of the period indicated, nor is it indicative of future operating
results (in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $ 117,292 $ 108,612
Net loss before extraordinary item..................... (41,780) (22,234)
Net loss............................................... (48,412) (27,758)
Basic and diluted loss per share....................... $ (4.97) $ (2.97)
</TABLE>
The allocation of purchase price reflected in the September 30, 1999
consolidated balance sheet is preliminary. CCI has arranged to obtain an
independent valuation of the Buford Group, Inc.'s property, plant and equipment
and intangible assets. Management expects to receive the completed report during
the fourth quarter of 1999.
6. LONG-TERM DEBT
CCI's long-term debt consists of the following as of September 30,
1999 (in thousands):
<TABLE>
<S> <C>
13 1/4% senior discount notes.................... $114,000
Discount on 13 1/4% senior discount notes........ (45,488)
9 7/8% senior subordinated notes................. 39,005
Discount on 9 7/8% senior subordinated notes..... (160)
9 3/8% senior subordinated notes................. 150,000
The 1999 credit facility......................... 265,000
Other............................................ 485
--------
Total long-term debt........................ $522,842
========
</TABLE>
REGISTRATION OF DEBT
On August 24, 1999, the Registration Statements related to the Classic
Cable 9.875% senior subordinated notes due in 2008 and the Classic
Communications 13.25% senior discount notes due 2009 were declared effective
with the Securities and Exchange Commission. On September 3, 1999, the
Registration Statement of the Classic Cable 9.375% senior subordinated notes due
2009 was declared effective.
CHANGE OF CONTROL OFFERS
Pursuant to the change of control resulting from the Brera investment
discussed below, and in accordance with the indentures of the note agreement,
CCI and Classic Cable offered to redeem all of their outstanding 9.875% senior
subordinated notes due 2008 and 13.25% senior discount notes due 2009. Classic
Cable redeemed $86 million of the 9.875% senior subordinated notes due 2008 at
101% of face value plus accrued interest. This resulted in an extraordinary loss
from the early extinguishment of debt in the third quarter of 1999 equal to the
amount of the unamortized discount and financing costs on the notes and the 1%
premium paid. Classic Cable borrowed $90.0 million under its credit facility to
repurchase the tendered 2008 senior subordinated notes and to pay associated
fees and expenses incurred as a result of the change of control offer. None of
the 13.25% senior discount notes were tendered for redemption.
<PAGE> 8
- --------------------------------------------------------------------------------
1999 CREDIT FACILITY
Classic Cable entered into a $350 million credit facility in July 1999. The
facility is composed of a Revolving Credit Facility of $75 million, Term Loan A
of $75 million, Term Loan B of $100 million and a Term Loan C of $100 million.
Interest is based upon either a LIBOR rate plus an applicable margin or, at
Classic Cable's option, a base rate plus an applicable margin.
7. EQUITY
EQUITY INVESTMENT
On July 28, 1999, CCI sold 6,490,734 shares, or 64% of its voting common
stock to Brera for $100 million. The proceeds were distributed as follows: $95.7
million was contributed to Classic Cable, $3.3 million was paid to Brera
pursuant to management and advisory fee agreements, and approximately $750,000
was paid to Brera as reimbursement for certain of its fees and expenses incurred
in connection with the investment. The agreement further provides that CCI is to
pay an annual management fee of $250,000 to Brera until CCI is sold or closes an
initial public offering, the first payment of which was made at the closing of
the Buford agreement.
STOCKHOLDERS' AGREEMENT
Effective July 28, 1999, significant stockholders of CCI's outstanding
stock entered into the 1999 stockholders' agreement which subjects the equity
securities owned by these stockholders to a right of first offer to CCI and to
other stockholders party to the stockholders' agreement. The agreement also
contains preemptive purchase rights in favor of these stockholders in the event
CCI issues or sells additional securities, other than in an initial public
offering. The 1999 stockholders' agreement replaces the 1995 stockholders'
agreement.
STOCK OPTION GRANTS
In August 1999, options to purchase 589,500 shares of Class A common stock
were issued to a director and certain officers and key employees at an exercise
price of $20.00 per share. These options have 10-year terms and vest ratably
over four years.
8. RELATED PARTY TRANSACTIONS
In accordance with various provisions of executive management's employment
agreements, CCI made payments totaling approximately $5 million in relation to
the Buford acquisition and change of control that resulted from the Brera
equity investment. All payments to management were treated as a current period
cost in the third quarter of 1999.
In connection with the closing of the Brera equity investment, certain
officers of CCI were granted stock options with a 10-year term to purchase
559,748 shares of common stock at an exercise price of $14.57 per share, which
vest over a three-year period, or earlier upon certain defined liquidity events.
The $14.57 exercise price represented the fair value of the common stock at the
date the original Brera commitment was received and the date the commitment to
grant such options was made to the officers.
Additionally, the officers will receive options with a 10-year term to
purchase 559,748 shares of Class B common stock at an exercise price equal to
the initial offering price per share to the public of the Class A common stock
in the stock offering described below. These options vest over a three year
period, or earlier upon certain defined liquidity events.
In connection with the Buford acquisition, CCI paid a transaction fee of
$300,000 to The Austin Advisory, a financial consulting firm in which a former
member of executive management is a principal.
9. SUBSEQUENT EVENTS
STAR ACQUISITION
On October 14, 1999, an indirect subsidiary of CCI entered into an
agreement with Star Cable Associates ("Star"), to purchase substantially all of
the assets of Star for approximately $110 million in cash and (1) $20 million
in Series A cumulative redeemable convertible preferred stock (the "Preferred
Stock") or (2), in the event of the consummation of the initial public
offering ("IPO") of CCI's Class A voting common stock ("Class A Common Stock")
prior to the closing of the Star acquisition, approximately 555,555 shares of
Class A Common Stock of CCI. The Preferred Stock would have a stated value of
$1,000 per share and rank senior to all classes of junior stock. The holders of
the Preferred Stock would be entitled to cumulative cash dividends at a rate of
6% per annum for the first 18 months from the date of issuance, 8% per annum
for the 19th month through the 23rd month from the date of issuance and 10% per
annum for the 24th month and thereafter from the date of issuance, which
dividends would be payable in two semi-annual installments on the last day of
June and December of each year. All Preferred Stock would be converted into
shares of Class A Common Stock in the event of the closing of an initial public
offering at a conversion price of $36.00 per share. CCI would be able to
convert all of the Preferred Stock at any time two years after the date of
issuance of the Preferred Stock at a conversion price of $32.00 per share.
<PAGE> 9
STOCK TRANSACTIONS
In October 1999, CCI approved an amendment to its Certificate of
Incorporation. As a result and contingent on the stock offering discussed below,
all shares of existing voting stock will convert into shares of Class B common
stock and the terms of the nonvoting shares will be amended. In addition, a new
class of common stock, Class A common stock, will be authorized. The shares of
voting common stock will be converted to Class B common stock on a one-for-one
basis. Each share of Class A common stock will receive one vote per share. Each
share of Class B common stock will receive ten votes per share.
THE 1999 OMNIBUS STOCK INCENTIVE PLAN
In October 1999, the 1999 Omnibus Stock Incentive Plan was adopted
contingent on the stock offering discussed below. Two million shares of Class A
common stock are reserved for issuance under the plan. The plan provides for the
issuance of stock-based incentive awards, including stock options, stock
appreciation rights, restricted stock, deferred stock and performance shares. An
award may consist of one arrangement or benefit or two or more of them in tandem
or in the alternative. Under this plan, awards covering no more than 80% of the
shares reserved for issuance under the plan may be granted to any participant in
any one year.
STOCK OFFERING
In October 1999, the Board of Directors approved plans for CCI to register
shares of its Class A common stock for sale to the public.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and results of operations of Classic Communications, Inc.
("CCI") for the nine months ended September 30, 1999 and 1998. This discussion
should be read in conjunction with CCI's "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for the fiscal year ended
December 31, 1998 and the six-month period ended June 30, 1999 contained in
CCI's Form S-1 Registration Statement dated October 19, 1999. Since its
inception, CCI has completed multiple acquisitions and divestitures of cable
systems. As a result, management believes that period-to-period comparisons of
CCI's financial results to date are not necessarily meaningful and should not be
relied upon as an indication of future performance. In addition, the financial
condition and operating results of CCI could differ materially from those
discussed herein and its current business plans could be altered in response to
market conditions and other factors beyond CCI's control.
The statements, other than statements of historical fact, included in this
Report are forward-looking statements. These statements include, but are not
limited to:
- statements regarding CCI's plans for future acquisitions;
- statements regarding integration of CCI's cable systems and future
acquired systems;
- statements regarding CCI's planned capital expenditures and system
upgrades;
- statements regarding the offering of video and internet access on CCI's
systems; and
- statements regarding CCI's preparations for the year 2000 date change.
Forward-looking statements generally can also be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "plan," "seek," or "believe." CCI believes that the
expectations reflected in such forward-looking statements are accurate. However,
CCI cannot assure you that such expectations will occur. CCI's actual future
performance could differ materially from such statements. Factors that could
cause such or contribute to such differences include, but are not limited to:
- the uncertainties and/or potential delays associated with respect to
integrating Buford and Star and future acquisitions;
- CCI's ability to acquire additional cable systems on favorable terms;
- the passage of legislation or court decisions adversely affecting the
cable industry;
- CCI's ability to repay or refinance outstanding indebtedness;
- the timing, actual cost and allocation of CCI's capital expenditures and
system upgrades;
- CCI's potential need for additional capital;
- competition in the cable industry;
- the advent of new technology; and
- seasonality.
Investors should not unduly rely on these forward-looking statements, which
speak only as of the date of this Report. Except as required by law, CCI is not
obligated to publicly release any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this Report or to
reflect the occurrence of unanticipated events. Important factors that could
cause CCI's actual results to differ materially from its expectations are
discussed in this Report. All subsequent written and oral forward-looking
statements attributable to CCI, or persons acting on its behalf, are expressly
qualified in their entirety by the statements in this Report.
All percentage amounts and ratios were calculated using the underlying data
in thousands. Operating results for the three and nine month periods ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for the full fiscal year.
Results of Operations
REVENUES. Revenues increased $22.0 million, or 44%, for the nine months
ended September 30, 1999, as compared to the corresponding prior year period.
Basic revenues increased by $7.5 million due to increased subscribers of
approximately 28,000 in July 1998 and 170,000 in July 1999 and basic rate
increases. The increase in subscribers was due to the acquisition of systems
from Cable One in July 1998 and the acquisition of Buford Group, Inc. in July
1999. In addition, there was a rate increase of approximately 7% affecting
approximately two-thirds of our customers in February 1999 which resulted in an
increase in basic revenues per subscriber of 7% from $27.74 to $29.69 period to
period. Classic Cable has historically increased rates in February in order to
offset increases in operating costs such as programming which occur primarily in
January of each year.
OPERATING EXPENSES. Operating expenses increased $28.9 million, or 55%,
for the nine months ended September 30, 1999, as compared to the corresponding
prior year period. Programming expenses increased $6.4 million due to the
continued escalation in rates charged by programming vendors as well as an
increase in the subscriber base over the same period in 1998. Plant and
operating and general and administrative expenses increased $5.1 million, or
36%, as a result of the additional costs associated with the systems acquired
in 1998 and 1999. Corporate overhead increased $6.4 million primarily due to
$6.6 million of acquisition related compensation expenses incurred in connection
with the Buford acquisition. Depreciation and amortization expense for the nine
months ended September 30, 1999 was $32.3 million, an increase of $10.6 million
over the same period in 1998. The increase represents the effect of acquisitions
and capital expenditures.
OTHER INCOME AND EXPENSES. Interest expense increased $10.7 million, or
63%, for the nine months ended September 30, 1999, as compared to the
corresponding prior year period. This increase is primarily the result of the
debt issued in conjunction with the July 1999 and 1998 acquisitions and
subsequent refinancing of debt.
INCOME TAX BENEFIT. The income tax benefit decreased $1.7 million for the
nine months ended September 30, 1999, as compared to the corresponding prior
year period. No tax benefit was recognized in 1999. The effective tax rates for
the nine months ended September 30, 1999 and September 30, 1998 differ from
the statutory rates primarily due to an increase in the valuation allowance on
deferred tax assets.
NET LOSS. As a result of the above described fluctuations in CCI's results
of operations and extraordinary losses recognized in connection with
the July 1998 and 1999 refinancing of debt, the net loss of $43.0 million for
the nine months ended September 30, 1999 increased by $20.4 million, as
compared to the net loss of $22.5 million for the corresponding prior year
period.
Liquidity and Capital Resources
Operating income before depreciation and amortization or "operating cash
flow" as commonly referred to in the cable communications business, was $20.0
million and $23.7 million for the nine months ended September 30, 1999 and 1998,
respectively. Operating cash flow less the impact of non-cash operating charges
and cash charges related to acquisition and financing transactions was $31.1
million and $20.7 million for the nine months ended September 30, 1999 and 1998,
respectively. Operating cash flow is a measure of a company's ability to
generate cash to service its obligations, including debt service obligations,
and to finance capital and other expenditures. In part due to the capital
intensive nature of the cable communications business and the resulting
significant level of non-cash depreciation and amortization expense, operating
cash flow is frequently used as one of the basics for comparing businesses in
the cable communications industry, although our measure of operating cash flow
may not be comparable to similarly titled measures of other companies. Operating
cash flow is the primary basis used by our management to measure the operating
performance of our business. Operating cash flow does not purport to represent
net income or net cash provided by operating activities, as those terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to measurements as an indicator of our performance.
For the nine months ended September 30, 1999 and 1998, CCI's capital
expenditures, other than those related to acquisitions, were approximately $16.0
million and $7.7 million, respectively. Capital expenditures include expansion
and improvements of existing cable properties, plant and equipment upgrades, as
well as cable line drops, line plant extensions and installations of service to
new subscribers.
In July 1999, Classic Cable issued $150.0 million of 9.375% Senior
Subordinated Notes due 2009. Concurrently with the offering, Classic Cable
entered into the 1999 Credit Agreement. The proceeds from these transactions and
a sale of CCI's stock were approximately $425.0 million and were used to (a)
fund the acquisition of Buford Group, Inc., (b) repay the 1998 Credit Agreement
and (c) pay fees and expenses of these transactions. The 1999 Credit Agreement
consists of (a) a $75.0 million revolving credit facility which matures in 2007,
(b) a $75.0 million Term A loan facility which matures in 2007, (c) a $100.0
million Term B loan facility which matures in 2008, and (d) a $100.0 million
Term C loan facility which matures in 2008. Mandatory payments commence in 2001.
Interest is based upon either a LIBOR rate plus an applicable margin or, at
Classic Cable's option, a base rate plus an applicable margin. The Term C loan
facility was utilized in September 1999 to fund the partial redemption of $86.0
million of the 2008 subordinated notes.
CCI has debt service requirements increasing from approximately $40 million
a year to $54 million over the next eight years. During the next four fiscal
years, CCI anticipates capital expenditures averaging approximately $50 million
a year. Debt covenants dictate that Classic Cable maintain certain ratios
related to debt balances and operating results in addition to limiting the
amount that can be used for capital expenditures. Funds to support Classic
Cable's operations and pay the anticipated debt service and capital expenditure
requirements are anticipated to be primarily generated from its operating
activities and from additional financing activities. On September 30, 1999, we
had $75.0 million available under Classic Cable's line of credit, subject to
some limitations.
The 1999 Credit Agreement of Classic Cable is collateralized by essentially
all of the assets of Classic Cable. CCI has no operations of its own.
Consequently, it will rely on dividends and cash flow of Classic Cable to meet
its debt service obligations. The terms of the Credit Agreement restrict certain
activities of Classic Cable, including the incurrence of additional indebtedness
and the payment of certain dividends. Accordingly, substantially all the assets
and operations of Classic Cable are restricted as to transfer to CCI and may not
be available for dividends and/or debt service of CCI.
Management believes that CCI has sufficient resources from cash provided
from operations and available borrowings to support its operations and capital
requirements for at least the next 12 months. There can be no assurance,
however, that Classic Cable's business will generate sufficient cash flow from
operations, that currently anticipated cost savings and operating improvements
will be realized on schedule or that future borrowings will be available to CCI
under Classic Cable's credit facility in an amount sufficient to enable CCI to
pay its indebtedness or to fund its other liquidity needs. CCI may need to
refinance all or a portion of its indebtedness on or before maturity. There can
be no assurance that CCI will be able to refinance any of its indebtedness,
including Classic Cable's credit facility and its outstanding notes, on
commercially reasonable terms or at all.
INFLATION
Certain of CCI's expenses, such as programming, wages and benefits,
equipment repair and maintenance, billing and marketing are subject to
inflation. However, because changes in costs are generally passed through to
subscribers, these changes historically have not had a material adverse effect
on CCI's results of operations.
YEAR 2000 COMPLIANCE
Through 1999, most large companies will be facing a potentially serious
business problem because many software applications and computer equipment
developed in the past may not properly recognize calendar dates beginning in the
year 2000. This problem could cause computers to either shut down or provide
incorrect data.
These problems are expected to increase in frequency and severity as the
year 2000 approaches. This issue impacts our owned or licensed computer systems
and equipment used in connection with internal operations, including:
- information processing and financial reporting systems;
- customer billing systems;
- customer service systems;
- telecommunication transmission and reception systems; and
- facility systems
CCI also relies directly or indirectly, in the regular course of business,
on the proper operation and compatibility of third party systems. The year 2000
problem could cause these systems to fail or become incompatible with its
systems.
The failure or loss of compatibility among systems could cause material
disruptions, including the inability to process transactions, generate invoices,
or to respond to requests for service. CCI could also face similar disruptions
if the year 2000 problem causes general widespread problems or an economic
crisis. CCI cannot now estimate the extent of these potential disruptions on its
results of operations, liquidity or financial condition.
Through the redeployment of internal resources and the selective engagement
of outside consultants, CCI is addressing the year 2000 problem with respect to
its internal operations in three stages:
- conducting an inventory and evaluation of its systems, components, and
other significant infrastructure to identify those elements that it
reasonably believes could be expected to be affected by the year 2000
problem. This stage has been completed.
- remediation or replacing equipment that, based upon such inventory and
evaluation, CCI believes may fail to operate properly in the year 2000.
This stage has been completed.
- testing of the remediation and replacement conducted in stage two. This
stage is substantially complete, with further testing to be conducted up
to and through December 31, 1999.
To date, costs incurred that were directly related to addressing the year
2000 problem have not been material. CCI does not expect that the total cost of
its year 2000 remediation will be material.
Much of CCI's assessment efforts have involved, and depend upon, inquiries
to third party service providers, suppliers and vendors of various parts or
components of its systems. CCI has obtained certifications from third party
service providers, suppliers and vendors as to the readiness of mission critical
elements. Certain of these parties have certified the readiness of their
products but will not certify their operability within its fully integrated
systems. CCI cannot assure you that these technologies of third parties, on
which it relies, will be year 2000 ready or timely converted into year 2000
compliant systems compatible with its systems. CCI has, however, evaluated the
potential impact of third party and/or integration failure on its systems in
connection with the development of its contingency plans.
CCI's year 2000 plan calls for appropriate contingency planning for its
at-risk business functions. As part of its normal operations, contingency plans
are in place to minimize disruption of service to customers and other critical
business functions, including guidelines for informing the appropriate personnel
in order to accelerate restoration of service.
CCI has negotiated certain contractual rights relating to the year 2000
problem in the Star asset purchase agreement. CCI has included acquired cable
television systems in its year 2000 compliance efforts. CCI is monitoring the
remediation process for the systems it is acquiring to ensure completion of
remediation in a timely manner. CCI has found that these companies are following
a three stage process similar to that outlined above and are on a similar time
line for completion. CCI is not currently aware of any likely material system
failures relating to the year 2000 affecting the acquired systems.
CCI believes its efforts have significantly reduced its level of
uncertainty about the year 2000 problem and, in particular, about the year 2000
compliance and readiness of its material vendors. However, no assurance can be
given that year 2000 compliance can be achieved without costs that might affect
future financial results or cause reported financial information not to be
necessarily indicative of future operating results or future financial
condition.
Factors Affecting CCI's Business and Prospects
There are numerous factors that affect CCI's business and the results of its
operations. These factors include changes in laws and regulations; changes in
the competitive environment; changes in technology; franchise related matters;
market conditions that may adversely affect the availability of debt and equity
financing for working capital, capital expenditures or other purposes; and other
general economic conditions.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Classic Cable's credit facility bears interest at floating rates.
Accordingly, its earnings are affected by changes in short-term interest rates.
Classic Cable does not enter into derivatives or other financial instruments for
trading or speculative purposes. However, the credit facility does require that
50% of Classic Cable's outstanding debt be effectively subject to a fixed rate.
If Classic Cable has non-fixed rate debt in a principal amount in excess of its
current senior subordinated indebtedness, as set forth in the credit facility,
then Classic Cable must enter into interest rate hedges and/or other
arrangements which are designed solely to protect against fluctuations in
interest rates. These arrangements would be required only with respect to the
portion of Classic Cable's debt in excess of its senior subordinated
indebtedness to the extent necessary to raise the aggregate amount of Classic
Cable's fixed rate debt to 50% of its outstanding debt.
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Changes in Certificate of Incorporation and Bylaws
On July 28, 1999, the board of directors of Classic Communications,
Inc. ("CCI") approved the amended and restated certificate of incorporation
which, among other things, increased the number of shares of authorized stock to
15,000,000, including 55,000 shares of preferred stock, par value $.01 per
share, and 14,945,000 shares of common stock, which was divided into two
classes, 10,442,000 shares of voting common stock, par value $.01 per share, and
4,503,000 shares of non-voting common stock, par value $.01 per share. CCI's
board of directors also approved CCI's amended and restated bylaws.
(c) Recent Sales of Unregistered Securities
On July 28, 1999, CCI issued 5,490,734 shares of its voting common
stock at a price of $14.57 per share and 1,000,000 shares of its voting common
stock at a price of $20.00 per share to Brera Classic, LLC, for an aggregate
purchase price of $100,000,000.
CCI believes that the sale and issuance of securities in the above
transaction was exempt from registration under the Securities Act of 1933 by
virtue of Section 4(2) thereof, or Rule 506 thereunder, as transactions by an
issuer not involving a public offering. Appropriate legends are affixed to the
stock certificates issued in the transaction. All recipients either received
adequate information about the Registrant or had access to such information. In
addition, the foregoing transaction was consummated without the use of
underwriters and public offering documents and involved only one purchaser.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a),(c) On July 22, 1999, CCI held a special meeting of its
stockholders at which a majority of the CCI stockholders approved (1) CCI's
amended and restated certificate of incorporation (2) the employment agreements
of J. Merritt Belisle and Steven E. Seach, (3) the award of an option to
purchase 279,874 shares of the Registrant's voting common stock to each of
Messrs. Belisle and Seach, (4) the vesting of all previous restricted stock
awards to Messrs. Belisle and Seach due to the "change of control" of the
Registrant, (5) the payment of $1,500,000 to each of Messrs. Belisle and Seach
as transaction fees, and (6) the payment of $780,000 and $700,000 to Messrs.
Belisle and Seach, respectively, as change of control payments as set forth in
their prior employment agreements. At the record date for the meeting, 1,720,608
shares of voting common stock were issued and outstanding and 1,371,977 shares
of voting common stock were represented at the meeting either in person or by
proxy. Of the shares of voting common stock represented at the meeting,
1,242,573 shares were voted in favor of amending and restating the certificate
of incorporation, and 129,404 abstained. With respect to all other matters voted
on at the meeting, 1,371,977 shares voted in favor of such actions and 0 shares
abstained.
ITEM 5. OTHER INFORMATION.
Purchase of Star
On October 14, 1999, an indirect subsidiary of CCI entered into an
agreement with Star Cable Associates ("Star"), to purchase substantially all of
the assets of Star for approximately $110 million in cash and (1) $20 million in
Series A cumulative redeemable convertible preferred stock (the "Preferred
Stock") or (2), in the event of the consummation of the initial public offering
("IPO") of CCI's Class A voting common stock ("Class A Common Stock") prior to
the closing of the Star acquisition, approximately 555,555 shares of Class A
Common Stock of CCI. The Preferred Stock would have a stated value of $1,000 per
share and rank senior to all classes of junior stock. The holders of the
Preferred Stock would be entitled to cumulative cash dividends at a rate of 6%
per annum for the first 18 months from the date of issuance, 8% per annum for
the 19th month through the 23rd month from the date of issuance and 10% per
annum for the 24th month and thereafter from the date of issuance, which
dividends would be payable in two semi-annual installments on the last day of
June and December of each year. All Preferred Stock would be converted into
shares of Class A Common Stock in the event of the closing of an initial public
offering at a conversion price of $36.00 per share. CCI would be able to convert
all of the Preferred Stock at any time two years after the date of issuance of
the Preferred Stock at a conversion price of $32.00 per share.
Star owns 37 systems in Louisiana, Texas and Ohio and serves
approximately 57,000 subscribers. The asset purchase agreement contains
customary representations, warranties, covenants, indemnities and closing
conditions, including closing conditions related to governmental approvals and
the transfer of franchise licenses by Star to Classic Cable, Inc., a subsidiary
of the Registrant. The asset purchase agreement is terminable by any party to
the agreement not in breach of the agreement on March 31, 2000 if the Star
acquisition has not been consummated prior to such date. The asset purchase
agreement is terminable on July 31, 2000 by any party to the agreement if the
Star acquisition had not been consummated prior to such date. The Registrant
issued a press release with respect to the agreement on October 14, 1999, a copy
of which is attached as Exhibit 99.1 to its Form 8-K/A filed on October 25,
1999.
Filing of IPO
On October 19, 1999, CCI filed for an initial public offering of
approximately $150 million of Class A common shares. Proceeds will be used to
repay a portion of the Registrant's debt and to finance part of the Star
acquisition. CCI issued a press release with respect to the filing on October
20, 1999, a copy of which is attached as Exhibit 99.2 to its Form 8-K/A filed on
October 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
On October 25, 1999, CCI filed a Form 8-K announcing (1) their
change in accountants from Ernst & Young LLP to
PricewaterhouseCoopers LLP, (2) the signing of an asset
purchase agreement whereby Universal Cable Holdings, Inc. will
acquire all of the cable assets of Star Cable Associates and
(3) the filing of its Registration Statement on Form S-1 on
October 19, 1999. On October 26, 1999 and November 5, 1999,
Classic filed Form 8-K/As amending the Form 8-K filed on
October 25, 1999.
<PAGE> 12
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.
CLASSIC COMMUNICATIONS, INC.
Date: November 15, 1999 /s/ STEVEN E. SEACH
--------------------------------------
Steven E. Seach
President and Chief Financial Officer
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CLASSIC
COMMUNICATIONS, INC. FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1998 AND 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 4,828 7,497
<SECURITIES> 0 0
<RECEIVABLES> 5,585 10,019
<ALLOWANCES> 323 738
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,393 17,796
<PP&E> 122,126 284,743
<DEPRECIATION> 36,861 54,517
<TOTAL-ASSETS> 256,998 607,476
<CURRENT-LIABILITIES> 13,754 28,088
<BONDS> 0 0
0 0
0 0
<COMMON> 32 97
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 256,998 607,476
<SALES> 0 0
<TOTAL-REVENUES> 50,404 72,391
<CGS> 0 0
<TOTAL-COSTS> 52,117 80,982
<OTHER-EXPENSES> (121) (110)
<LOSS-PROVISION> 642 916
<INTEREST-EXPENSE> 17,134 27,851
<INCOME-PRETAX> (18,726) (36,332)
<INCOME-TAX> (1,719) 0
<INCOME-CONTINUING> (17,007) (36,332)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (5,524) (6,632)
<CHANGES> 0 0
<NET-INCOME> (22,531) (42,964)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
