<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999
REGISTRATION NO. 333-63641
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 7
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CLASSIC COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 4841 74-2630019
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
515 CONGRESS AVENUE
SUITE 2626
AUSTIN, TEXAS 78701
512/476-9095
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
J. MERRITT BELISLE
CHIEF EXECUTIVE OFFICER
CLASSIC COMMUNICATIONS, INC.
515 CONGRESS AVENUE
SUITE 2626
AUSTIN, TEXAS 78701
512/476-9095
(Name, address including zip code, and telephone number, including area code, of
agent for service)
---------------------
<TABLE>
<S> <C>
Copies of all communications to:
TIMOTHY E. YOUNG, ESQ. BRUCE A. CHEATHAM, ESQ.
WINSTEAD SECHREST & MINICK P.C. WINSTEAD SECHREST & MINICK P.C.
100 CONGRESS AVE., SUITE 800 1201 ELM STREET, SUITE 5400
AUSTIN, TEXAS 78701 DALLAS, TEXAS 75270
512/370-2804 214/745-5213
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
[CLASSIC CABLE LOGO]
PROSPECTUS
EXCHANGE OFFER FOR
$114,000,000
13 1/4% SENIOR DISCOUNT NOTES DUE 2009
Terms of Exchange Offer
- Expires 5:00 p.m., New York City time, , 1999, unless
extended
- Not subject to any condition other than that the exchange offer not
violate applicable law or any applicable interpretation of the Staff of
the Securities and Exchange Commission
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged
- Tenders of outstanding notes may be withdrawn any time prior to the
expiration of the exchange offer
- The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes
- We will not receive any proceeds from the exchange offer
- The terms of the notes to be issued are substantially identical to the
outstanding notes, except for certain transfer restrictions and
registration rights relating to the outstanding notes
- As of March 31, 1999, on a pro forma basis, we had approximately $479.7
million of senior indebtedness
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR
HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1999
<PAGE> 3
WHERE YOU CAN FIND MORE INFORMATION
As a result of this exchange offer, we will become subject to the
informational requirements of the Securities Exchange Act of 1934. As a result,
we will be required to file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any of these reports, statements and other information
that we may file at the SEC's public reference rooms in Washington, D.C., New
York, New York, and Chicago, Illinois. Please call 1-800-SEC-0330 for further
information on the public reference rooms. Our filings will also be available to
the public from commercial document retrieval services and at the web site
maintained by the SEC at http://www.sec.gov.
We have filed a registration statement on Form S-4 to register with the SEC
the exchange notes to be issued in exchange for the old notes. This prospectus
is part of that registration statement. As allowed by the SEC's rules, this
prospectus does not contain all of the information you can find in the
registration statement or the exhibits to the registration statement.
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical fact, included in this
prospectus are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur. Our 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 following the Buford acquisition;
- our ability to acquire additional cable systems on terms favorable to us;
- the passage of legislation or court decisions adversely affecting the
cable industry;
- our ability to repay our outstanding indebtedness;
- competition in the cable industry;
- the advent of new technology; and
- seasonality.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this prospectus. Except as required by law, we are not
obligated to publicly release any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this prospectus
or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are
discussed under "Risk Factors" and elsewhere in this prospectus. All subsequent
written and oral forward-looking statements attributable to Classic, or persons
acting on its behalf, are expressly qualified in their entirety by the
statements in those sections.
<PAGE> 4
SUMMARY
The following summary is intended to highlight certain information
contained elsewhere in this prospectus. This summary is not intended to be a
complete statement of all material facts of the offering and is qualified in its
entirety by the more detailed information and historical and pro forma financial
information, including the notes relating to that information, appearing
elsewhere in this prospectus. Except as otherwise required by the context, the
information presented in this prospectus concerning Classic and its business
gives effect to the acquisition of Buford Group, Inc. by our subsidiary, Classic
Cable, Inc. and the other acquisitions completed by either Classic Cable or
Buford prior to the date of this prospectus. Reference should be made to the
"Selected Historical Consolidated Financial Data -- Classic Communications,
Inc.," "Selected Historical Consolidated Financial Data -- Buford Group, Inc.,"
and "Unaudited Pro Forma Consolidated Financial Information" for the definition
of certain financial terms appearing throughout this prospectus.
THE EXCHANGE OFFER
Exchange Notes............. The forms and terms of the exchange notes are
identical in all material respects to the terms of
the old notes, except for certain transfer
restrictions, registration rights and liquidated
damages provisions relating to the old notes. These
are described elsewhere in this prospectus under
"Description of the Notes and "The Exchange Offer."
The Exchange Offer......... We are offering to exchange up to $114,000,000 of
the exchange notes for up to $114,000,000 of the
old notes. Old notes may be exchanged only in
$1,000 increments.
Expiration Date; Withdrawal
of Tender.................. Unless we extend the exchange offer, it will expire
at 5:00 p.m., New York City time, on ,
1999. We will not extend this time period to a date
later than , 1999. You may withdraw any
old notes you tender pursuant to the exchange offer
at any time prior to , 1999. We will
return, as promptly as practicable after the
expiration or termination of the exchange offer,
any old notes not accepted for exchange for any
reason without expense to you.
Certain Conditions to the
Exchange Offer........... The exchange offer is subject to the following
conditions, which we may waive.
These conditions permit us to refuse acceptance of
the old notes or to terminate the exchange offer
if:
- a lawsuit is instituted or threatened in a court
or before a government agency which may impair
our ability to proceed with the exchange offer;
- a law, statute, rule or regulation is proposed or
enacted or interpreted by the SEC which may
impair our ability to proceed with the exchange
offer; or
- any governmental approval is not received which
we think is necessary to consummate the exchange
offer.
Procedures for Tendering
Old Notes................ If you wish to accept the exchange offer, you must
complete, sign and date the letter of transmittal
in accordance with the instructions, and deliver
the letter of transmittal, along with the old notes
and any other
1
<PAGE> 5
required documentation, to the exchange agent. By
executing the letter of transmittal, you will
represent to us that, among other things:
- any exchange notes you receive will be acquired
in the ordinary course of your business;
- you have no arrangement with any person to
participate in the distribution of the exchange
notes; and
- you are not an affiliate of Classic or, if you
are an affiliate, you will comply with the
registration and prospectus delivery requirements
of the Securities Act of 1933 to the extent
applicable.
If you hold your old notes through the Depository
Trust Corporation and wish to participate in the
exchange offer, you may do so through the
Depository Trust Corporation's Automated Tender
Offer Program. By participating in the exchange
offer, you will agree to be bound by the letter of
transmittal as though you had executed such letter
of transmittal.
Interest on the Exchange
Notes...................... Interest on the exchange notes will not accrue
until August 1, 2003. No additional interest will
be paid on the old notes tendered and accepted for
exchange.
Payment of Interest........ Cash interest will not accrue on the exchange notes
prior to August 1, 2003, at which time cash
interest will accrue on the exchange notes at a
rate of 13 1/4% per annum, is payable semi-annually
in arrears on each February 1 and August 1,
commencing on February 1, 2004.
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner whose old notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
wish to tender such old notes in the exchange
offer, please contact the registered holder as soon
as possible and instruct them to tender on your
behalf and comply with our instructions set forth
elsewhere in this prospectus.
Guaranteed Delivery
Procedure.................. If you wish to tender your old notes, you may, in
certain instances, do so according to the
guaranteed delivery procedures set forth elsewhere
in this prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures."
Registration Rights
Agreement.................. We sold the old notes to the initial purchaser in a
transaction exempt from the registration
requirements of the Securities Act on July 29,
1998. At that time, Classic and the initial
purchaser entered into a registration rights
agreement which grants the holders of the old notes
certain exchange and registration rights. This
exchange offer satisfies those rights, which
terminate upon consummation of the exchange offer.
You will not be entitled to any exchange or
registration rights with respect to the exchange
notes.
Certain Federal Tax
Considerations........... With respect to the exchange of the old notes for
the exchange notes:
- the exchange will not constitute a taxable
exchange for U.S. federal income tax purposes;
- you will not recognize gain or loss upon receipt
of the exchange notes;
2
<PAGE> 6
- you must include the original issue discount in
gross income to the same extent as the old notes;
and
- you will be able to tack the holding period of
the exchange notes to the holding period of the
old notes.
Use of Proceeds............ We will not receive any proceeds from the exchange
of notes pursuant to the exchange offer.
Exchange Agent............. We have appointed Bank One, N.A., as the exchange
agent for the exchange offer. The address and
telephone number of the exchange agent are Bank
One, N.A., 235 West Schrock Road, Westerville, Ohio
43271-0184, Attention: Corporate Trust Operations,
telephone (800) 346-5153.
3
<PAGE> 7
TERMS OF THE NOTES
The form and terms of the exchange notes are substantially the same as the
form and terms of the old notes, except that the exchange notes are registered
under the Securities Act. As a result, the exchange notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damages provisions contained in the old notes.
Issuer..................... Classic Communications, Inc.
Securities Offered......... $114,000,000 aggregate principal amount of 13 1/4%
Senior Discount Notes due 2009.
Maturity................... August 1, 2009
Interest Payment Dates..... February 1 and August 1 of each year, commencing
February 1, 2004.
Sinking Fund............... None.
Optional Redemption........ Except as described below and under "Description of
the Notes -- Repurchase at the Option of Holders --
Change of Control," we may not redeem the notes
prior to August 1, 2003. After August 1, 2003, we
may redeem any amount of the notes at any time at
the respective redemption prices, together with
accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time prior to
August 1, 2001, we may redeem all of the original
aggregate principal amount of the notes with the
cash proceeds of one or more equity offerings or a
strategic equity investment. Should we do so, we
would be required to pay a redemption price equal
to 113.25% of the accreted value of the notes to be
redeemed, together with accrued and unpaid
interest, if any, to the date of redemption.
Change of Control.......... Upon the occurrence of a change of control (as
defined), the holders of the notes have the right
to require us to repurchase the notes at a price
equal to 101% of the accreted value of the notes,
together with accrued and unpaid interest, if any,
to the date of repurchase. In the event of a change
of control, Classic may not have sufficient funds
available to repurchase the exchange notes.
Ranking.................... The notes will be unsecured and will rank without
preference with all existing and future unsecured
indebtedness of Classic, and senior to all future
subordinated indebtedness of Classic. The notes
will also be subordinate to all existing and future
liabilities of Classic's subsidiaries.
Restrictive Covenants...... The indenture under which the exchange notes will
be issued and the old notes were issued limits:
- the incurrence of additional indebtedness by us
and our subsidiaries;
- the payment of dividends on, and redemption of,
our capital stock and our subsidiaries' capital
stock and the redemption of our and our
subsidiaries' subordinated obligations;
- investments;
- sales of assets and subsidiary stock;
- transactions with affiliates;
4
<PAGE> 8
- sale and leaseback transactions; and
- liens.
In addition, the indenture limits our ability to
engage in consolidations, mergers and transfers of
substantially all of our assets and also contains
certain restrictions on distributions from our
subsidiaries. All of these limitations and
prohibitions are subject to a number of important
qualifications and exceptions.
Absence of a Public Market
for the Exchange Notes..... In general, you may freely transfer the exchange
notes. However, there are exceptions to this
general statement. Holders may not freely transfer
the exchange notes if:
- they acquire the exchange notes outside of their
ordinary course of business;
- they have an arrangement with any person to
participate in the distribution of the exchange
notes; or
- they are an affiliate of Classic.
Further, the exchange notes will be new securities
for which there will not initially be a market. As
a result, the development or liquidity of any
market for the exchange notes may not occur. The
initial purchaser has advised us that it currently
intends to make a market in the exchange notes.
However, you should be aware that the initial
purchaser is not obligated to do so. In the event
such a market may develop, the initial purchaser
may discontinue it at any time without notice. We
do not intend to apply for a listing of the
exchange notes on any securities exchange or on any
automated dealer quotation system.
5
<PAGE> 9
OUR BUSINESS
We are a growth oriented cable operator focused on non-metropolitan markets
in the central United States. We have experienced growth in subscribers,
revenues and cash flows, primarily through the successful execution and
integration of over 20 acquisitions of clustered cable systems in nine
contiguous states. Pro forma for the pending acquisition of Buford Group, Inc.,
and after giving effect to other recently announced cable transactions, we are
the 14th largest cable operator in the United States, with systems that pass
approximately 609,000 homes and serve approximately 360,000 basic subscribers.
Through the acquisition of clustered non-metropolitan cable systems, and by
upgrading these cable systems, we are building a regional platform for the
delivery of digital cable and high-speed Internet access to the homes and
businesses of our customers. We believe that our strategy combines the
attractive characteristics of the non-metropolitan cable market segment with the
growth opportunity of broadband services and the Internet.
The combination of attractive market characteristics and the successful
execution of our acquisition strategy has enabled us to achieve high growth
rates and attractive EBITDA margins. Pro forma for the Buford acquisition and
the completed acquisitions, we have annualized three months ending May 31, 1999
pro forma revenues of $156.7 million, pro forma Adjusted EBITDA of $66.5
million, and a pro forma Adjusted EBITDA margin of 42.3%.
OUR STRATEGY
Our business strategy is to:
- Focus on attractive non-metropolitan markets: We plan to continue to
focus on growing communities in or around county seats, which generally
tend to have more robust household growth, higher income per household
and a stronger business foundation than do other non-metropolitan
markets.
- Expand and improve clusters through selective acquisitions: We plan to
continue to leverage our experience in acquiring and integrating cable
systems by continuing our acquisition growth strategy when attractive
cable systems are available for acquisition at reasonable valuations.
- Focus on community relations and customer satisfaction: We plan to
maintain and enhance our relationships with the local communities in
which we operate and utilize the state-of-the-art call center we are
acquiring with the Buford acquisition to complement our existing superior
level of service to our customers.
- Increase the revenue-generating bandwidth of our cable plant: We plan to
continue to upgrade our cable plant aggressively and systematically,
utilizing the most cost-effective and appropriate technology.
- Implement our broadband services: We plan to continue to offer enhanced
video services and begin offering high-speed Internet access in selected
systems, a move which we believe will improve our competitiveness and
increase our revenues and cash flows.
RAPIDLY CONSOLIDATING INDUSTRY
Consolidation in the cable industry over the past three years has been
driven by the benefits derived from scale, including operating efficiencies,
increased advertising sales and the ability to deploy new broadband applications
efficiently. This consolidation has accelerated recently with the emergence of
the Internet as a mass medium for disseminating information, entertainment and
commerce. We believe that cable companies with broadband capacity are the
leaders in the race to become the high-speed data service providers of choice to
the consumer. Recent investments and acquisitions by AT&T, Microsoft, and
Charter Communications have validated cable's position as a preferred broadband
solution.
6
<PAGE> 10
While this consolidation has taken place primarily among large-scale
metropolitan operators, attention has expanded recently to non-metropolitan
markets. Smaller independent operators understand the value created through
consolidation and are beginning to make themselves available to be merged or
acquired. Additionally, metropolitan focused consolidators are beginning to sell
their non-metropolitan area systems. We believe that these circumstances create
an opportunity for us to continue and accelerate our focused strategy to
consolidate attractive non-metropolitan cable assets.
PROVEN MANAGEMENT TEAM
J. Merritt Belisle, our Chief Executive Officer, and Steven E. Seach, our
President and Chief Financial Officer, founded Classic in 1992 and have
assembled a management team with significant business experience operating cable
television systems and providing quality customer service to cable subscribers.
Messrs. Belisle and Seach have 20 years of collective experience in acquiring,
operating, integrating and developing cable television systems and have worked
together for over ten years.
As a result of the Buford acquisition, our management team will be further
enhanced by the addition of several key members of Buford's management team,
including Ron Martin, who will become our Executive Vice President of
Operations, and Kay Monigold, who will become our Executive Vice President of
Administration. Mr. Martin and Ms. Monigold have been in the cable industry for
over 25 years and 18 years, respectively.
Members of our management team collectively own or have the right to
acquire approximately 15% of the common stock of Classic and up to an additional
10% of Classic's common stock has been set aside for issuance to management
pursuant to options granted to them.
THE BUFORD ACQUISITION
In May 1999, our subsidiary Classic Cable, entered into a definitive
agreement to purchase all of the outstanding stock of the Buford Group, Inc.,
which operates cable television systems in Arkansas, Louisiana, Missouri and
Texas, for approximately $300 million in cash. All of Buford's existing
indebtedness will be repaid at the closing of the Buford acquisition. The Buford
cable systems serve approximately 172,000 basic subscribers and, we believe,
represent an excellent geographic and strategic fit with our existing cable
systems. In addition, we believe that the Buford acquisition provides other
benefits, including an opportunity to reduce programming costs, consolidate
headends and enhance customer service. Consummation of this offering is
contingent upon the closing of the Buford acquisition and the Brera Classic
equity investment.
THE BRERA CLASSIC EQUITY INVESTMENT
In connection with the Buford acquisition, we will receive $100.0 million
from Brera Classic, L.L.C., $97.0 million of which we will contribute in cash to
Classic Cable. This equity investment will be financed through the sale of our
common stock to Brera Classic. Brera Classic is an indirect subsidiary of Brera
Capital Partners Limited Partnership. Brera Capital Partners is a $650 million
private equity investment firm based in New York. Brera Capital Partners invests
in a limited number of industries, including telecommunications and media. Brera
Capital Partners prefers to invest alongside management teams to assist them in
achieving the operating and financial goals of their companies. After
consummation of the equity investment, Brera Classic will own approximately 64%
of the outstanding capital stock of Classic, subject to dilution in connection
with the issuance of options to certain members of our management team. See
"Certain Relationships and Related Transactions" and "Principal Stockholders."
7
<PAGE> 11
OTHER RECENT DEVELOPMENTS
Results of Classic's Operations for March, April, and May 1999: For the
three months ended May 31, 1999, Classic had revenues of $19.8 million and
Adjusted EBITDA of $8.7 million, representing an EBITDA margin of 43.9%. These
amounts represent a substantial increase over the comparable period in the prior
year, primarily as a result of acquisitions.
Results of Buford's Operations for March, April, and May 1999: For the
three months ended May 31, 1999, Buford had revenues of $19.4 million and
Adjusted EBITDA of $7.5 million, representing an EBITDA margin of 38.7%. These
amounts represent a substantial increase over the comparable period in the prior
year, primarily as a result of an acquisition.
Results of Pro Forma Consolidated Classic/Buford Operations for March,
April and May 1999: For the three months ended May 31, 1999, pro forma
consolidated revenues totaled $39.2 million and pro forma Adjusted EBITDA
totaled $16.6 million, representing a pro forma Adjusted EBITDA margin of 42.3%.
RISK FACTORS
You should consider carefully the information set forth under the caption
"Risk Factors" beginning on page 15 and all the other information set forth in
this prospectus before deciding whether to participate in the exchange offer.
------------------------
Our principal executive offices are located at 515 Congress Avenue, Suite
2626, Austin, Texas 78701. Our telephone number is (512) 476-9095, and our
Internet Web site is www.classic-cable.com. The information on our Web site is
not a part of this prospectus.
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SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
The following table presents summary pro forma financial and operating data
about us. The unaudited pro forma data give effect to the Brera Classic equity
investment, Classic Cable's new credit facility, the Buford acquisition, and the
completed acquisitions as if all of these transactions had been consummated on
January 1, 1998 in the case of the income statement data and on March 31, 1999
with respect to the balance sheet data. The pro forma data have been derived
from the Unaudited Pro Forma Consolidated Financial Information of Classic and
Buford, which is included elsewhere in this prospectus. The unaudited pro forma
data do not purport to be indicative of the results that would have been
obtained had such transactions been completed as of the assumed dates and for
the periods presented nor are they necessarily indicative of results that may be
obtained in the future. You should read this information together with "Selected
Historical Consolidated Financial Data -- Classic Communications, Inc.,"
"Selected Historical Consolidated Financial Data -- Buford Group, Inc.,"
"Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Classic's and Buford's consolidated financial statements and the notes relating
to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(IN THOUSANDS, EXCEPT
SUBSCRIBER DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... $149,897 $ 38,437
Costs and expenses.......................................... 97,289 22,799
Depreciation and amortization............................... 66,257 17,402
-------- --------
Operating loss.............................................. (13,649) (1,764)
Interest expense............................................ (51,750) (12,903)
Other income (expense)...................................... (896) 40
-------- --------
Loss before income tax benefit.............................. (66,295) (14,627)
Income tax benefit.......................................... 2,156 87
-------- --------
Net loss.................................................... $(64,139) $(14,540)
======== ========
BALANCE SHEET DATA:
Total cash and cash equivalents............................. -- $ 12,521
Total assets................................................ -- 578,532
Total debt.................................................. -- 517,805
Total liabilities........................................... -- 543,912
Total stockholders' equity.................................. -- 34,620
OTHER FINANCIAL DATA:
Adjusted EBITDA(1).......................................... $ 61,604(2) $ 15,970
Adjusted EBITDA margin(3)................................... 41.1% 41.5%
Ratio of net debt to annualized Adjusted EBITDA(4).......... -- 7.9x
Ratio of Adjusted EBITDA to interest expense................ -- 1.2x
Ratio of Adjusted EBITDA to cash interest expense........... -- 1.2x
Capital expenditures........................................ $ 34,228 $ 6,351
Deficiency of earnings to fixed charges(5).................. (66,295) (14,627)
OPERATING DATA:
Homes passed(6)............................................. 612,624 609,107
Basic subscribers(7)........................................ 361,428 361,137
Basic penetration(8)........................................ 59.0% 59.3%
Digital subscribers......................................... 1,454 2,626
Premium subscribers(9)...................................... 194,106 194,742
Premium penetration(10)..................................... 31.7% 32.0%
Average monthly basic revenue per basic subscriber(11)...... $ 28.02 $ 28.94
Average monthly total revenue per basic subscriber(12)...... $ 34.44 $ 35.56
</TABLE>
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- ---------------
(1) Adjusted EBITDA is defined as operating income (loss) plus depreciation and
amortization plus non-cash operating charges. Non-cash operating charges
consist of Classic's compensation on restricted stock of $1,108,000 and
$332,000 as well as Buford's compensation relating to stock appreciation
rights of $7,888,000 and none for the periods ended December 31, 1998 and
March 31, 1999, respectively. Adjusted EBITDA is presented because
management believes it is a widely accepted financial indicator of a
company's ability to incur and service debt. We believe that Adjusted
EBITDA is not intended to be a performance measure that should be regarded
as an alternative to, or more meaningful than, either operating income or
net income as an indicator of operating performance or to the statement of
cash flows as a measure of liquidity, is not intended to represent funds
available for dividends, reinvestment or other discretionary uses, and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. Adjusted EBITDA measures presented may not be comparable to
similarly titled measures presented by other companies.
(2) Adjusted EBITDA for 1998 was reduced by $775,000 of fees paid to certain
members of the executive management team in connection with completed
acquisition and financing transactions. Without these fees, Adjusted EBITDA
would have been $62,379,000.
(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of
revenues. This measurement is used by management, and is commonly used in
the cable television industry, to analyze and compare cable television
companies on the basis of operating performance. We believe that Adjusted
EBITDA margin is not intended to be a performance measure that should be
regarded as an alternative either to operating income or net income as
prepared in accordance with generally accepted accounting principles.
Adjusted EBITDA measures presented may not be comparable to similarly
titled measures presented by other companies.
(4) Net debt represents total debt less total cash and cash equivalents.
(5) Deficiency of earnings consists of loss before income tax benefit and
extraordinary loss. Fixed charges consist of interest expense and the
interest portion of rental expense.
(6) Homes passed refers to estimates by us of the approximate number of
dwelling units in a particular community that can be connected to our cable
television distribution system without any further extension of principal
transmission lines.
(7) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an
equivalent basic unit basis in which the total monthly bill for the account
is divided by the basic monthly charge for a single outlet in the area.
(8) Penetration is calculated as the number of basic subscribers as a
percentage of homes passed.
(9) For the Classic systems, premium subscribers are the number of subscribers
who pay a monthly fee for premium channels. Multiplexing of premium
channels is counted as one subscriber. For the Buford systems, multiplexing
of premium channels is counted as one subscriber for each premium channel
received.
(10) Premium penetration is calculated as the number of premium subscribers as a
percentage of basic subscribers.
(11) Average monthly basic revenue per basic subscriber equals revenues from
basic subscriptions of cable systems during the respective period divided
by the months in the period and divided by the weighted average number of
our basic subscribers for the respective period.
(12) Average monthly total revenue per basic subscriber equals total revenues of
cable systems during the respective period divided by the months in the
period and divided by the weighted average number of our basic subscribers
for such respective period.
10
<PAGE> 14
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA -- CLASSIC COMMUNICATIONS, INC.
The following table presents summary historical financial and operating
data about Classic. You should read this information together with "Selected
Historical Consolidated Financial Data -- Classic Communications, Inc.,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Classic's consolidated financial statements and the notes
relating to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................................... $ 59,821 $ 60,995 $ 69,802 $ 16,072 $ 19,576
Costs and expenses................................. 33,553 36,555 42,070 9,613 11,514
Depreciation and amortization...................... 27,510 27,832 30,531 7,006 8,955
-------- -------- -------- -------- --------
Operating loss..................................... (1,242) (3,392) (2,799) (547) (893)
Interest expense................................... (20,633) (21,299) (24,442) (5,014) (7,446)
Gain on sale of cable systems...................... 4,901 3,644 -- -- --
Write-off of abandoned telephone operations........ (2,994) (500) (220) -- --
Other income (expense)............................. -- 71 192 30 17
-------- -------- -------- -------- --------
Loss before income tax benefit and extraordinary
loss............................................. (19,968) (21,476) (27,269) (5,531) (8,322)
Income tax benefit................................. 6,802 7,347 1,930 684 --
Extraordinary loss................................. -- -- (5,524) -- --
-------- -------- -------- -------- --------
Net loss........................................... $(13,166) $(14,129) $(30,863) $ (4,847) $ (8,322)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total cash and cash equivalents.................... $ 653 $ 616 $ 2,779 $ -- $ 3,472
Total assets....................................... 245,922 220,162 254,604 -- 249,888
Total debt......................................... 197,504 191,990 282,842 -- 290,428
Total liabilities.................................. 219,232 206,643 301,392 -- 304,666
Total redeemable preferred stock................... 22,726 26,705 -- -- --
Total stockholders' equity......................... 3,965 (13,186) (46,788) -- (54,778)
OTHER FINANCIAL DATA:
Cash flows from operating activities............... $ 7,933 $ 7,892 $ 14,262 $ 887 $ (1,060)
Cash flows from investing activities............... 3,387 (1,341) (57,245) (2,140) (3,370)
Cash flows from financing activities............... (12,155) (6,588) 45,146 829 5,123
Adjusted EBITDA(1)................................. 27,326 25,498(2) 28,840(3) 6,697 8,394
Adjusted EBITDA margin(4).......................... 45.7% 41.8% 41.3% 41.7% 42.9%
Ratio of net debt to annualized Adjusted
EBITDA(5)........................................ -- -- -- -- 10.5x
Ratio of Adjusted EBITDA to interest expense....... -- -- -- -- 1.1x
Ratio of Adjusted EBITDA to cash interest
expense.......................................... -- -- -- -- 1.1x
Capital expenditures............................... $ 8,212 $ 10,135 $ 13,759 $ 2,122 $ 3,230
Deficiency of earnings to fixed charges(6)......... (19,968) (21,476) (27,269) (5,531) (8,332)
OPERATING DATA (END OF PERIOD, EXCEPT AVERAGE):
Homes passed(7).................................... 259,181 254,649 296,995 249,475 293,478
Basic subscribers(8)(9)............................ 171,657 165,737 188,871 165,102 188,775
Basic penetration(9)(10)........................... 66.2% 65.1% 63.6% 66.2% 64.3%
Digital subscribers................................ -- -- 200 -- 1,069
Premium subscribers(11)............................ 62,458 63,819 71,702 63,268 70,526
Premium penetration(12)............................ 36.4% 38.5% 38.0% 38.3% 37.4%
Average monthly basic revenue per basic
subscriber(13)................................... $22.77 $25.22 $27.87 $27.09 $28.81
Average monthly total revenue per basic
subscriber(14)................................... $27.68 $30.14 $33.24 $32.30 $34.57
</TABLE>
11
<PAGE> 15
- ---------------
(1) Adjusted EBITDA is defined as operating loss plus depreciation and
amortization plus non-cash operating charges. Non-cash operating charges
for the years ended December 31, 1996, 1997 and 1998 and the three month
periods ended March 31, 1998 and 1999 related to compensation on restricted
stock and were $1,058,000, $1,058,000, $1,108,000, $238,000 and $332,000,
respectively. Adjusted EBITDA is presented because we believe it is a
widely accepted financial indicator of a company's ability to incur and
service debt. We believe that Adjusted EBITDA is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or to the statement of cash flows as a measure of
liquidity, is not intended to represent funds available for dividends,
reinvestment or other discretionary uses, and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. Adjusted EBITDA
measures presented may not be comparable to similarly titled measures
presented by other companies.
(2) Adjusted EBITDA for 1997 was reduced by legal, consultant and other fees
totaling $1,411,000 incurred in connection with the settlement of certain
claims that arose in conjunction with divorce proceedings of one of our
officers as well as $400,000 in fees paid to certain members of our
management team in connection with completed acquisition and divestiture
transactions. Without these fees, Adjusted EBITDA would have been
$27,309,000.
(3) Adjusted EBITDA for 1998 was reduced by $775,000 of fees paid to certain
members of our executive management team in connection with completed
acquisition and financing transactions. Without these fees, Adjusted EBITDA
would have been $29,615,000.
(4) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of
revenues. This measurement is used by us, and is commonly used in the cable
television industry, to analyze and compare cable television companies on
the basis of operating performance. We believe that Adjusted EBITDA margin
is not intended to be a performance measure that should be regarded as an
alternative either to operating income or net income as prepared in
accordance with generally accepted accounting principles. Adjusted EBITDA
measures presented may not be comparable to similarly titled measures
presented by other companies.
(5) Net debt represents total debt less total cash and cash equivalents.
(6) Deficiency of earnings consists of loss before income tax benefit and
extraordinary loss. Fixed charges consist of interest expense and the
interest portion of rental expense.
(7) Homes passed refers to estimates by us of the approximate number of
dwelling units in a particular community that can be connected to our cable
television distribution system without any further extension of principal
transmission lines.
(8) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an
equivalent basic unit basis in which the total monthly bill for the account
is divided by the basic monthly charge for a single outlet in the area. End
of period basic and premium subscribers are net of system sales that
occurred during 1996 and 1997.
(9) End of period subscribers reflect asset sales that were consummated during
the third quarter of 1996 and the second quarter of 1997.
(10) Penetration is calculated as the number of basic subscribers as a
percentage of homes passed.
(11) Premium subscribers are the number of subscribers who pay a monthly fee for
premium channels. Multiplexing of premium channels is counted as one
subscriber.
(12) Premium penetration is calculated as the number of premium subscribers as a
percentage of basic subscribers.
(13) Average monthly basic revenue per basic subscriber equals revenues from
basic subscriptions of cable systems during the respective period divided
by the months in the period and divided by the weighted average number of
our basic subscribers for the respective period.
(14) Average monthly total revenue per basic subscriber equals total revenues of
cable systems during the respective period divided by the months in the
period and divided by the weighted average number of our basic subscribers
for the respective period.
12
<PAGE> 16
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA -- BUFORD GROUP, INC.
The following table presents summary historical financial and operating
data about Buford. You should read this information together with "Selected
Historical Consolidated Financial Data -- Buford Group, Inc.," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Buford's consolidated financial statements and the notes relating to those
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................ $ 49,561 $ 58,136 $ 70,475 $15,263 $ 18,861
Costs and expenses.................................. 32,932 40,858 51,168 11,656 11,538
Depreciation and amortization....................... 17,175 17,753 21,399 4,870 5,727
-------- -------- -------- ------- --------
Operating income (loss)............................. (546) (475) (2,092) (1,263) 1,596
Interest expense.................................... (5,345) (5,787) (7,919) (1,592) (2,094)
Gain on sale of cable systems....................... 5,418 -- -- -- --
Other income (expense).............................. 344 859 (221) 60 23
-------- -------- -------- ------- --------
Loss before income taxes and cumulative effect of
change in accounting principle.................... (129) (5,403) (10,232) (2,795) (475)
Income tax benefit (expense)........................ (94) 315 226 (156) 87
Cumulative effect of change in accounting principle,
net of taxes...................................... -- -- -- -- (207)
-------- -------- -------- ------- --------
Net loss............................................ $ (223) $ (5,088) $(10,006) $(2,951) $ (595)
======== ======== ======== ======= ========
BALANCE SHEET DATA:
Total assets........................................ $117,676 $143,932 $175,953 -- $174,080
Total debt.......................................... 60,053 85,000 118,000 -- 118,000
Total liabilities................................... 69,182 97,008 131,147 -- 129,869
Total stockholders' equity.......................... 48,493 46,924 44,806 -- 44,211
OTHER FINANCIAL DATA:
Cash flows from operating activities................ $ 13,628 $ 16,872 $ 20,334 $ 3,522 $ 4,267
Cash flows from investing activities................ (20,289) (39,683) (53,151) (4,333) (3,121)
Cash flows from financing activities................ (10,927) 24,947 32,830 -- --
Adjusted EBITDA(1).................................. 18,087 20,797 27,195 5,283 7,323
Adjusted EBITDA margin(2)........................... 36.5% 35.8% 38.6% 34.6% 38.8%
Capital expenditures................................ $ 15,593 $ 22,042 $ 20,469 $ 4,496 $ 3,121
Deficiency of earnings to cover fixed charges(3).... (129) (5,403) (10,232) (2,795) (475)
OPERATING DATA (END OF PERIOD, EXCEPT AVERAGE):
Homes passed(4)..................................... 234,994 270,430 315,629 270,430 315,629
Basic subscribers(5)................................ 131,148 143,829 172,557 148,550 172,362
Basic penetration(6)................................ 55.8% 53.2% 54.7% 54.9% 54.7%
Digital subscribers................................. -- 65 1,254 92 1,557
Premium subscribers(7).............................. 92,247 99,644 122,404 102,769 124,216
Premium penetration(8).............................. 70.3% 69.3% 70.9% 69.2% 72.1%
Average monthly basic revenue per basic
subscriber(9)..................................... $ 24.80 $ 26.31 $ 28.17 $ 27.15 $ 29.06
Average monthly total revenue per basic
subscriber(10).................................... $ 32.05 $ 33.68 $ 35.64 $ 34.54 $ 36.55
</TABLE>
13
<PAGE> 17
- ---------------
(1) Adjusted EBITDA is defined as operating income (loss) plus depreciation and
amortization plus non-cash operating charges. Non-cash operating charges
for the years ended December 31, 1996, 1997 and 1998 and the three month
periods ended March 31, 1998 and 1999 related to employee stock
compensation were $1,458,000, $3,519,000, $7,888,000, $1,676,000 and none,
respectively. Adjusted EBITDA is presented because we believe it is a
widely accepted financial indicator of a company's ability to incur and
service debt. We believe that Adjusted EBITDA is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or to cash provided by operations as a measure of
liquidity, is not intended to represent funds available for dividends,
reinvestment or other discretionary uses, and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. Adjusted EBITDA
measures presented may not be comparable to similarly titled measures
presented by other companies.
(2) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of
revenues. This measurement is used by us, and is commonly used in the cable
television industry, to analyze and compare cable television companies on
the basis of operating performance. We believe that Adjusted EBITDA margin
is not intended to be a performance measure that should be regarded as an
alternative either to operating income or net income as prepared in
accordance with generally accepted accounting principles. Adjusted EBITDA
measures presented may not be comparable to similarly titled measures
presented by other companies.
(3) Deficiency of earnings consists of loss before income tax benefit (expense)
and cumulative effect of change in accounting principle. Fixed charges
consist of interest expense and the interest portion of rental expense.
(4) Homes passed refers to estimates by us of the approximate number of
dwelling units in a particular community that can be connected to our cable
television distribution system without any further extension of principal
transmission lines.
(5) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an
equivalent basic unit basis in which the total monthly bill for the account
is divided by the basic monthly charge for a single outlet in the area.
(6) Penetration is calculated as the number of basic subscribers as a
percentage of homes passed.
(7) Each premium channel received is counted as a separate premium subscriber.
(8) Premium penetration is calculated as the number of premium subscribers as a
percentage of basic subscribers.
(9) Average monthly basic revenue per basic subscriber equals revenues from
basic subscriptions of cable systems during the respective period divided
by the months in the period and divided by the weighted average number of
Buford's basic subscribers for the respective period.
(10) Average monthly total revenue per basic subscriber equals total revenues of
cable systems during the respective period divided by the months in the
period and divided by the weighted average number of Buford's basic
subscribers for the respective period.
14
<PAGE> 18
RISK FACTORS
In addition to the other information set forth in this prospectus, you
should carefully review the following risk factors before deciding to
participate in the exchange offer.
WE ARE A HOLDING COMPANY AND ARE DEPENDENT ON THE OPERATIONS OF OUR
SUBSIDIARIES.
We are a holding company and are dependent on the cash flow generated by
our direct and indirect operating subsidiaries. We must rely on dividends or
other intercompany transfers from our operating subsidiaries to generate the
funds necessary to meet debt service and other obligations, including the
payment of principal and interest on the notes. The ability of our subsidiaries
to pay dividends or make other payments will be subject to applicable state
laws.
WE DEPEND UPON OUR SUBSIDIARIES FOR FUNDS NECESSARY TO MAKE PAYMENTS ON THE
NOTES.
We have no operations of our own. Consequently, we will rely on dividends
from Classic Cable, and hence the cash flow of Classic Cable, in order to meet
our debt service obligations. The debt instruments of Classic Cable severely
restrict, among other things, the payment of dividends, the making of loans by
Classic Cable or its subsidiaries to us and our ability to purchase exchange
notes tendered pursuant to a change of control offer.
As a result of the relationship between Classic Cable and us, our
creditors, including the holders of the exchange notes, will effectively rank
junior to all creditors of Classic Cable, including the bank lenders under
Classic Cable's new credit facility, the holders of the senior subordinated
notes of Classic Cable and the trade creditors of Classic Cable and its
subsidiaries, notwithstanding that the exchange notes will be our senior
obligations. Accordingly, in the event of the dissolution, bankruptcy,
liquidation or reorganization of Classic Cable and/or us, the holders of the
exchange notes may not receive any amounts with respect to the exchange notes
until after the payment in full of the claims of creditors of Classic Cable. As
of March 31, 1999, pro forma for the Buford acquisition, the aggregate amount of
indebtedness and other obligations of Classic Cable and its subsidiaries, to
which the holders of the exchange notes will be structurally subordinated, would
have been approximately $479.7 million.
The exchange notes will not be secured by any of our assets. We will pledge
all of the capital stock of Classic Cable to collateralize borrowings of Classic
Cable under its new credit facility. If Classic Cable becomes insolvent or is
liquidated, or if payment under its new credit facility is accelerated, the
lenders under Classic Cable's new credit facility would be entitled to exercise
the remedies available to a secured lender under applicable law and pursuant to
Classic Cable's new credit facility. Accordingly, these lenders have a prior
claim on our assets.
WE HAVE SIGNIFICANT DEBT WHICH MAY LIMIT FUNDS AVAILABLE TO OPERATE AND COMPETE
EFFECTIVELY.
We, along with our subsidiary Classic Cable, have a significant amount of
debt outstanding. As of March 31, 1999, pro forma for the Buford acquisition, we
would have owed approximately $517.8 million under our various debt agreements.
The maximum amount of senior debt that we would have been able to borrow on that
date was $71.3 million, subject to limitations contained in Classic Cable's new
credit facility. Under Classic Cable's new credit facility, Classic Cable will
be required to make minimum principal payments totaling approximately $2.9
million beginning in 2001, increasing to $19.8 million by 2007, with all unpaid
amounts due by 2008. You should be aware that this significant amount of debt
could have important consequences to you as a holder of the notes, including the
following:
- We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes;
- A significant portion of Classic Cable's cash flow from operations must
be dedicated to the repayment of indebtedness, which will reduce the
amount of cash it has available for other purposes;
15
<PAGE> 19
- We may be disadvantaged as compared to our competitors as a result of the
significant amount of debt we now owe; and
- Our ability to adjust to changing market conditions and our ability to
withstand competition may be hampered by the amount of debt we now owe.
It may also make us more vulnerable in a market downturn.
Our earnings on a pro forma basis were not sufficient to cover our fixed
charges by $66.3 million for the year ended December 31, 1998 and by $14.6
million for the three months ended March 31, 1999. However, you should know that
these amounts reflect non-cash charges totaling approximately $75.3 million for
the year ended and $17.7 million for the three months, primarily from
depreciation and amortization.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES WILL BE ABLE TO
INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE.
We and our subsidiaries will be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not fully prohibit us
or our subsidiaries from doing so. Classic Cable's new credit facility would
permit additional borrowing of up to $75.0 million after completion of the
Buford acquisition and related financings, and all of those borrowings will be
senior to the notes. If new debt is added to our and our subsidiaries' current
debt levels, the related risks that we and they now face could intensify. See
"Description of Other Indebtedness" and "Description of the Notes."
WE MAY NOT HAVE ENOUGH CASH TO SERVICE OUR INDEBTEDNESS AND TO FUND OUR CAPITAL
EXPENDITURES AND ACQUISITIONS.
Our ability to make payments on and to refinance our indebtedness,
including these notes, and to fund planned capital expenditures and acquisitions
will depend on Classic Cable's ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We cannot assure you that Classic Cable's business will generate sufficient
cash flow from operations and that currently anticipated cost savings and
operating improvements will be realized on schedule in an amount sufficient to
enable us to pay our indebtedness, including indebtedness under these notes, or
to fund our other liquidity needs. We may need to refinance all or a portion of
our indebtedness, including these notes, on or before maturity. We cannot assure
you that we will be able to refinance any of our indebtedness, including Classic
Cable's credit facility and these notes, on commercially reasonable terms or at
all.
IF THE OPERATIONS OF THE COMPANIES CLASSIC CABLE ACQUIRES ARE NOT SUCCESSFULLY
INTEGRATED WITH ITS OPERATIONS, OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
The benefits we anticipate in the combination of Classic Cable and Buford
may not be realized if combining Classic Cable's business and Buford's business
cannot be accomplished in an efficient and effective manner. This combination
will require, among other things, the integration of management philosophies and
personnel, arrangements with third party vendors, standardization of training
programs, realization of operating efficiencies and effective coordination of
sales and marketing and financial reporting efforts. Acquisitions in general
pose a number of special risks for us, including adverse short-term effects on
our reported operating results, diversion of management's attention, and
unanticipated problems or legal liabilities. Future acquisitions and the
integration of other companies' operations into ours may not be successful or
accomplished efficiently. If we fail to integrate Buford's operations
successfully, Classic Cable's operations and our financial results could be
affected, both materially and adversely.
16
<PAGE> 20
IF WE CANNOT ADEQUATELY MANAGE OUR INCREASED SIZE RESULTING FROM CLASSIC CABLE'S
ACQUISITION OF BUFORD, ITS FUTURE OPERATIONS MAY BE ADVERSELY AFFECTED.
Classic Cable's operations will approximately double with the purchase of
Buford. Its future operations depend largely upon its ability to manage this
sizeable and growing business successfully. In addition, Classic Cable's
management team will have to manage a larger number of cable operations than it
has previously operated. If we fail to manage the size and the growth of Classic
Cable's business, a material adverse effect could result.
WE MAY CONTINUE TO INCUR NET LOSSES.
We had a pro forma consolidated net loss of $64.1 million for the year
ended December 31, 1998 and a pro forma net loss of $14.5 million for the three
months ended March 31, 1999. We expect to continue to incur net losses for the
foreseeable future. These losses reflect significant depreciation and
amortization charges and interest expense on debt we incurred. We cannot assure
you that we will become profitable in the foreseeable future, if ever. You
should also be aware that there are restrictions and limitations on our ability
to utilize our net operating losses for federal income tax purposes in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Classic Communications."
OUR DEBT AGREEMENTS MAY SIGNIFICANTLY LIMIT OR PROHIBIT US FROM ENGAGING IN
CERTAIN TRANSACTIONS.
The indenture and Classic Cable's new credit facility impose significant
operating and financial restrictions on us and our subsidiaries.
The loan documents Classic Cable will sign to borrow money to acquire
Buford impose significant restrictive covenants on Classic Cable and require
Classic Cable to maintain specified financial ratios and satisfy certain
financial tests. Classic Cable's ability to meet these financial ratios and
tests may be affected by events beyond its control and, as a result, we cannot
assure you that Classic Cable will be able to meet such tests. In addition, the
restrictions contained in Classic Cable's new credit facility could limit its
ability to obtain future financing, make needed capital expenditures, withstand
a future downturn in its business or in the economy or otherwise conduct
necessary corporate activities. Classic Cable's failure to comply with the
restrictions in the indenture and its new credit facility could lead to a
default under the terms of those documents. In the event of such a default, the
lenders could declare all amounts borrowed and all amounts due under other
instruments that contain certain provisions for cross-acceleration or cross-
default due and payable. In addition, the lenders could terminate their
commitments to lend to Classic Cable in the future. If that occurs, we cannot
assure you that we would be able to make payments on our notes or that we would
be able to find additional alternative financing. Even if we could obtain
additional alternative financing, we cannot assure you that it would be on terms
that are favorable or acceptable to us.
You should also be aware that the existing indebtedness under Classic
Cable's new credit facility is secured by substantially all of Classic Cable's
and its subsidiaries' assets. Should a default or acceleration of this
indebtedness occur, the holders of this indebtedness could sell the assets to
satisfy all or a part of what is owed. For additional information, please refer
to the sections in this prospectus entitled "Description of the Notes -- Certain
Covenants" and "Description of Other Indebtedness."
WE MAY BE REQUIRED TO REPURCHASE OUR OUTSTANDING NOTES.
Upon consummation of the Brera Classic equity investment, a change of
control will occur and we will be required to offer to repurchase our
outstanding old notes at a purchase price equal to 101% of the accreted value of
such notes plus accrued and unpaid interest. We cannot assure you that some or
all of the holders of those notes will not require us to repurchase their notes,
and we cannot assure you that we will have enough funds to pay for all of the
notes. We have not arranged for financing to repurchase these notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --
17
<PAGE> 21
Liquidity and Capital Resources -- Pro Forma for the Buford Acquisition and
Other Completed Acquisitions."
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE TO PURCHASE THESE NOTES.
If a change of control occurs after the change of control resulting from
consummation of the Brera Classic equity investment, we will be required to make
an offer to purchase all of the exchange notes then outstanding. We will be
required to purchase the exchange notes at 101% of their accreted value, plus
accrued and unpaid interest to the date of repurchase. If a change of control
occurs, we cannot be sure that we will have enough funds to pay for all of the
notes. If we are required to purchase the notes, we will need to secure
third-party financing if we do not have available funds to meet our purchase
obligations. However, we cannot assure you that we will be able to secure such
financing on favorable terms, if at all.
Also, our financing arrangements will restrict our ability to repurchase
the notes, including pursuant to a change of control. Furthermore, a change of
control will result in an event of default under Classic Cable's new credit
facility and may lead to an acceleration of any other senior indebtedness it may
have at that time. The restrictions on Classic Cable would require it to pay its
new credit facility and any other senior indebtedness in full before it could
pay dividends enabling us to repurchase our outstanding notes. See "-- We may be
required to repurchase our outstanding notes. . ." and "Description of the
Notes -- Repurchase at the Option of Holders -- Change of Control." The
inability to purchase all of the tendered notes would constitute an event of
default under the indenture.
BRERA CLASSIC WILL BE OUR CONTROLLING STOCKHOLDER.
After the Brera Classic equity investment, Brera Classic will hold
approximately 64% of our issued and outstanding shares of common stock. As a
result, Brera Classic will control us and will have the ability to elect the
majority of our directors. The board, in turn, may appoint new senior management
and approve any actions requiring the approval of our stockholders. These
actions include adopting amendments to our certificate of incorporation and
approving mergers or sales of substantially all of our assets. The interests of
Brera Classic, Classic and their respective affiliates may conflict with the
interests of the holders of the notes.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL. THE LOSS OF ANY ONE
OF THESE COULD ADVERSELY AFFECT OUR BUSINESS.
Our continued success is highly dependent upon the personal efforts and
abilities of our senior management, including J. Merritt Belisle, our Chief
Executive Officer, and Steven E. Seach, our President and Chief Financial
Officer. Although we have employment contracts with these officers, we cannot
assure you that their services will continue to be available to us and the loss
of either one of them could impact us in a negative way.
WE MAY NOT BE ABLE TO CONTINUE OUR ACQUISITION STRATEGY.
A significant element of our growth strategy is to expand by acquiring
cable television systems located in reasonable proximity to existing systems or
of a sufficient size to enable the acquired system to serve as the basis for a
regional cluster. We cannot assure you that we will be able to identify and
acquire additional cable systems or that we will be able to finance significant
acquisitions in the future. See "Business -- Our Strategy."
WE CANNOT ASSURE YOU THAT OUR FRANCHISES WILL BE RENEWED OR THAT A FRANCHISE
AUTHORITY WILL NOT GRANT A FRANCHISE IN OUR MARKETS TO A COMPETITOR.
Our business is dependent upon the retention and renewal of our local
franchises. Franchises typically impose conditions relating to the operation of
cable television systems, including requirements relating to
18
<PAGE> 22
the payment of fees, system bandwidth capacity, customer service requirements,
franchise renewal and termination. Historically, franchises have been renewed
for cable operators that have provided satisfactory services and have complied
with the terms of their franchises. We may not be able to retain or renew such
franchises, or renew these franchises on terms as favorable to us as our
existing franchises. Furthermore, it is possible that a franchise authority
might grant a franchise to another cable company or other telecommunications
provider seeking to provide cable services. The non-renewal or termination of
franchises relating to a significant portion of our subscribers could have a
material adverse effect on our results of operations. See
"Business -- Franchises."
OUR BUSINESS IS SUBJECT TO COMPREHENSIVE LEGISLATION AND GOVERNMENT REGULATION.
The cable television industry is subject to extensive regulation at the
federal and local levels, and in some cases, at the state level. The 1984 Cable
Act, the 1992 Cable Act and the 1996 Telecom Act establish a national policy to
guide the development and regulation of cable television systems. Principal
responsibility for implementing the policies of the Cable Acts and 1996 Telecom
Act has been allocated between the FCC and state or local regulatory
authorities. We cannot predict the effect that ongoing or future developments
may have on the cable communications industry or on our operations and we cannot
assure you that our revenues and results of operations will not be adversely
affected in the future by regulation of cable system rates.
A federal district court in Oregon recently held that, as a condition of
approving AT&T's acquisition of TCI's cable franchises, the City of Portland had
the authority to require AT&T to provide competing Internet and other on-line
services providers with open access to AT&T's cable platforms. This case has
been appealed. Similar conditions could be imposed upon us, either pursuant to a
local franchising authority's approval of a merger or other transaction between
us and another company or through future regulatory or legislative developments
at the federal, state or local level. On the other hand, future regulatory or
legislative developments at the federal or state level could limit the authority
of local franchising authorities to impose such conditions. Restrictions along
these lines, if upheld or enacted, could prohibit us from entering into
exclusive access agreements with affiliated, and possibly unaffiliated, Internet
providers.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies. Although no state in which we currently
operate has enacted state level regulation, we cannot assure you that the states
in which we do operate will not enact such regulation, or that we will not
acquire any other cable systems in a state that does regulate our business. See
"Legislation and Regulation -- State and Local Regulation." Government
regulations at any level may affect our ability to obtain a sufficient return on
our investments. Furthermore, the regulations are changing rapidly to allow
significantly increased competition among various service providers. As a
result, we cannot predict the eventual effect of these regulations. See
"Legislation and Regulation." We need government approval for a number of
license transfers that are required in connection with the Brera Classic equity
investment and the Buford acquisition. While we do not anticipate problems in
obtaining approval, we may need to complete the acquisition and the offering
using temporary licenses or oral agreements. If we cannot obtain final approval,
our ability to operate some of our cable systems could be significantly
impaired. With respect to a small number of other licenses, additional filings
will be required to ensure compliance with the FCC's foreign ownership
restrictions.
THE CABLE TELEVISION INDUSTRY IS EXTREMELY COMPETITIVE AND WE CANNOT PREDICT
WHETHER WE WILL BE SUCCESSFUL IN REMAINING COMPETITIVE.
Because our franchises are non-exclusive, there is the potential for
competition with our cable systems from other operators of cable systems,
including systems operated by local governments and from other distribution
systems capable of delivering programming to homes or businesses, including
direct broadcast satellite systems, known as DBS, and multichannel multipoint
distribution service systems, known as wireless cable, because these systems use
low-power microwave frequencies to transmit video programming over the air to
customers. Within the home video programming market, we compete with other cable
19
<PAGE> 23
franchise holders and with DBS and wireless cable providers. In recent years,
the FCC has adopted policies providing for a more favorable operating
environment for new and existing technologies that provide, or have the
potential to provide, substantial competition to cable systems. Programming
comparable to that of cable systems is currently available to the owners of home
satellite dish earth stations through conventional-, medium- and high-powered
satellites. Several companies offer DBS service. In recent years there has been
significant national growth in the number of subscribers to DBS services, and
such growth would be assisted if one or more DBS providers is successful in
delivering local broadcast signals. Legislation to amend the Copyright Act to
authorize carriage of local broadcast signals by DBS providers has passed both
chambers of Congress and is currently pending before a conference committee.
In addition, recent FCC and judicial decisions and federal legislation has
enabled local telephone companies to provide a wide variety of video services
competitive with services provided by cable systems and to provide cable
services directly to customers. We cannot predict the extent to which
competition will materialize from other cable television operators, other
distribution systems for delivering video programming to the home or other
potential competitors, or, if such competition materializes, the extent of its
effect on us. Various local exchange carriers currently are providing video
programming services within and outside their telephone service areas through a
variety of distribution methods, including both the deployment of broadband
cable facilities and the use of wireless transmission facilities. Advances in
communications technology, as well as changes in the marketplace and the
regulatory and legislative environment, are constantly occurring. As a result,
we cannot predict the effect that ongoing or future developments might have on
the cable industry. See "Business -- Competition" and "Legislation and
Regulation."
WE COULD BE ADVERSELY AFFECTED IF OUR OR OUR VENDORS' COMPUTER SYSTEMS ARE NOT
YEAR 2000 COMPLIANT.
Year 2000 issues exist when dates are recorded in computers using two
digits, rather than four, and are then used for arithmetic operations,
comparisons or sorting. A two-digit recording may recognize a date using "00" as
1900 rather than 2000, which could cause our computer systems to perform
inaccurate computations. We may not be able to identify all systems with Year
2000 problems. Moreover, the costs to correct these problems may be substantial.
Also we may not be able to correct the problems we identify. You should be aware
that Year 2000 issues relate not only to our systems, but also to those used by
our suppliers. We anticipate that system replacements and modifications will
resolve any Year 2000 issues that may exist with our suppliers or their
suppliers. However, we cannot assure you that such replacements or modifications
will be completed successfully or on time and, as a result, any failure to
complete such modifications on time could materially affect our financial and
operating results in a negative way. For additional information regarding the
Year 2000 issue and the potential impact on our business, refer to the section
in this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
YOU MAY FIND IT DIFFICULT TO SELL YOUR NOTES.
Currently, there is no public market for the notes. We do not intend to
apply for listing of the notes on any securities exchange or on any automated
dealer quotation system. Although the initial purchaser has informed us that it
intends to make a market in the notes, it is not obligated to do so and may
discontinue any such market at any time without notice. In addition, such market
making activity may be limited during the exchange offer or during an offering
under a shelf registration statement should we decide to file one. As a result,
we can make no assurances to you as to the development or liquidity of any
market for the notes, your ability to sell the notes, or the price at which you
may be able to sell the notes. Future trading prices of the notes will depend on
many factors, including, among other things, prevailing interest rates, our
operating results and the market for similar securities. Historically, the
market for securities similar to the notes, including non-investment grade debt,
has been subject to disruptions that have caused substantial volatility in the
prices of such securities. We cannot assure you that, if a market develops, it
will not be subject to similar disruptions.
20
<PAGE> 24
THE OLD NOTES WERE ISSUED AT A DISCOUNT, WHICH MAY RESULT IN ADVERSE
CONSEQUENCES TO A HOLDER OF THE NOTES AND CLASSIC.
The old notes were issued at a substantial discount from their principal
amount at maturity. Although cash interest will not accrue on the notes prior to
August 1, 2003, and there will be no payments of cash interest on the notes
prior to February 1, 2004, original issue discount, the difference between the
stated redemption price at maturity of the exchange notes and the issue price of
the old notes, will accrue from the issue date of the old note and generally
will be includible as interest income in the notes holder's gross income for
United States federal income tax purposes in advance of the cash payments to
which the income is attributable.
Furthermore, the exchange notes will be subject to the high yield discount
obligation rules which will defer and may in part eliminate our ability to
deduct the original issue discount attributable to the exchange notes.
Accordingly, our after tax cash flow might be less than if the original issue
discount on the notes were deductible when it accrues. See "United States
Federal Income Tax Considerations." Similar results may apply under state tax
laws.
If a bankruptcy case is commenced by or against Classic or Classic Cable
under the Federal Bankruptcy Code after the issuance of the exchange notes, the
claim of a holder of exchange notes with respect to the principal amount thereof
may be limited to an amount equal to the sum of (i) the initial offering price
allocable to the notes and (ii) that portion of the original issue discount
which is not deemed to constitute unmatured interest for purposes of the
Bankruptcy Code. Any original issue discount that was not amortized as of any
such bankruptcy filing would constitute unmatured interest.
21
<PAGE> 25
USE OF PROCEEDS
We will receive no cash proceeds from the exchange pursuant to the exchange
offer. The exchange offer is intended to satisfy our obligations under the
registration rights agreement.
The net proceeds to Classic and Classic Cable from the offering of the old
notes of Classic and the old notes of Classic Cable, along with the proceeds
from the senior credit agreement, were approximately $280.2 million and were
used to
- fund the acquisition of certain assets of Cable One, Inc. ($41.7
million),
- redeem existing preferred stock and accrued dividends ($31.0 million),
- retire the outstanding subordinated debt and accrued interest ($4.5
million),
- repay the previous senior credit agreement and other outstanding debt
($190.3 million) and interest ($2.6 million) and
- pay fees and expenses of these transactions ($10.1 million).
The preferred stock accrued dividends at rates ranging from 8% to 15% and
had mandatory redemption requirements in 2001 and 2005. The subordinated debt
accrued interest at rates ranging from 7.5% to 15% and matured in 2002 and 2007.
The senior credit agreement accrued interest at the LIBOR rate plus an
applicable margin. Principal payments were to begin in 1999 with the balance due
in 2005.
22
<PAGE> 26
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Financial Information is
based on the audited and unaudited financial statements of Classic and Buford
included elsewhere in this prospectus, and unaudited financial information of
certain systems acquired by Classic Cable in July 1998 from Cable One and
certain systems acquired by Buford in April 1998. The unaudited pro forma
adjustments are based upon available information and certain assumptions that we
believe are reasonable. The Unaudited Pro Forma Consolidated Financial
Information and accompanying notes should be read in conjunction with the
historical financial statements of Classic and Buford and the respective notes
to those statements, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus.
The Unaudited Pro Forma Consolidated Balance Sheet has been prepared to
give effect to the financing we are entering into in connection with the Buford
acquisition as if it had occurred on March 31, 1999. The Unaudited Pro Forma
Consolidated Statements of Operations have been prepared to give effect to the
Buford acquisition and the other acquisitions completed by both Classic Cable
and Buford during 1998 as if they had occurred on January 1, 1998. All
acquisitions are accounted for under the purchase method of accounting. The
Unaudited Pro Forma Consolidated Financial Information reflects our allocation
of the purchase price for the Buford acquisition based upon our current
estimates of the values of the assets to be acquired and liabilities assumed.
The final purchase price and the allocation of that price may vary as additional
information is obtained and, accordingly, the ultimate allocation may differ
from those used in the Unaudited Pro Forma Consolidated Financial Information.
The Unaudited Pro Forma Consolidated Financial Information does not purport
to be indicative of the results that would have been obtained had the
transactions been completed as of the assumed date and for the periods presented
or that may be obtained in the future. The Unaudited Pro Forma Consolidated
Financial Information is included in this prospectus for informational purposes,
and while we believe that it may be helpful in understanding our combined
operations for the periods indicated, you should not unduly rely on the
information.
23
<PAGE> 27
CLASSIC COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASSIC
COMMUNICATIONS BUFORD ADJUSTMENTS PRO FORMA
-------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................... $ 3,472 $ 9,049 -- $ 12,521
Accounts receivable, net.................... 5,061 2,516 -- 7,577
Prepaid expenses............................ 872 241 -- 1,113
Property, plant and equipment............... 130,399 203,848 $(80,639)(d)(l) 253,608
Accumulated depreciation.................... (43,641) (91,905) 91,905(e) (43,641)
-------- -------- -------- --------
86,758 111,943 11,266 209,967
Deferred financing costs, net............... 9,061 154 14,319(f)(u)(w) 23,534
Other assets................................ -- 2,365 -- 2,365
Intangible assets:
Subscriber relationships.................. 95,367 -- 82,042(m) 177,409
Franchise rights.......................... 71,486 54,417 31,877(g)(n) 157,780
Noncompete agreements..................... 8,425 7,434 (441)(h)(o) 15,418
Goodwill.................................. 40,506 3,203 (1,741)(i)(p) 41,968
-------- -------- -------- --------
215,784 65,054 111,737 392,575
Less accumulated amortization............... (71,120) (17,242) 17,242(j) (71,120)
-------- -------- -------- --------
144,664 47,812 128,979 321,455
-------- -------- -------- --------
Total assets....................... $249,888 $174,080 $154,564 $578,532
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................... $ 593 $ 416 -- $ 1,009
Subscriber deposits and unearned income... 5,011 2,351 -- 7,362
Accrued expenses.......................... 4,779 8,003 -- 12,782
Accrued interest.......................... 2,787 -- -- 2,787
Long-term debt............................ 290,428 118,000 $109,377(k)(q)(s)(t) 517,805
Deferred taxes, net....................... 1,068 1,099 -- 2,167
-------- -------- -------- --------
Total liabilities.................. 304,666 129,869 109,377 543,912
Stockholders' equity:
Common stock, voting...................... 17 1 64(a)(r1) 82
Common stock, nonvoting................... 15 -- -- 15
Additional paid-in capital................ 28,876 14,833 82,102(b)(r2)() 125,811
Accumulated deficit....................... (83,686) 29,377 (36,979)(c)(v)(w) (91,288)
-------- -------- -------- --------
Total stockholders' equity......... (54,778) 44,211 45,187 34,620
-------- -------- -------- --------
Total liabilities and
stockholders' equity.............. $249,888 $174,080 $154,564 $578,532
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
24
<PAGE> 28
CLASSIC COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(DOLLARS IN THOUSANDS)
The following pro forma adjustments to the unaudited consolidated balance
sheet assume the Buford acquisition and the related financing had been
consummated on March 31, 1999.
The Buford acquisition will be accounted for using the purchase method. The
cost of the acquisition will be allocated to the fair value of the assets
acquired as of the closing date, based upon valuations that are not yet
complete. Accordingly, the allocations of the purchase price may change upon
completion of the acquisition. This pending acquisition is dependent upon
obtaining various approvals and sufficient financing.
The estimated purchase price of Buford and the preliminary allocations are
as follows:
<TABLE>
<S> <C> <C>
Purchase price of Buford.................................... $ 302,302
=========
Eliminate Buford equity:
(a) Common stock................................................ $ 1
(b) Additional paid-in capital.................................. 14,833
(c) Accumulated deficit......................................... 29,377
---------
Total Buford equity......................................... 44,211
Eliminate historical property, plant and equipment:
(d) Costs....................................................... (203,848)
(e) Accumulated deprecation..................................... 91,905
Eliminate historical intangible assets:
(f) Deferred financing costs.................................... (154)
(g) Franchise rights............................................ (54,417)
(h) Noncompete agreements....................................... (7,434)
(i) Goodwill and other intangible assets........................ (3,203)
(j) Accumulated amortization.................................... 17,242
(k) Eliminate long-term debt not assumed........................ 118,000
Adjustments to record assets at fair value:
(l) Property, plant and equipment............................... 123,209
(m) Subscriber relationships.................................... 82,042
(n) Franchise rights............................................ 86,294
(o) Noncompete agreements....................................... 6,993
(p) Goodwill.................................................... 1,462
---------
Total....................................................... $ 302,302
=========
</TABLE>
25
<PAGE> 29
Sources and uses of funds for the Buford acquisition are as follows:
<TABLE>
<S> <C> <C>
SOURCES OF FUNDS:
(q) The offering of new subordinated notes by Classic Cable..... $ 150,000
(r) The Brera Classic equity investment:
(1) Common stock, voting.................................... 65
(2) Additional paid-in capital.............................. 96,935
(s) New Classic Cable credit facility........................... 178,677
---------
Total sources of funds...................................... $ 425,677
=========
USES OF FUNDS:
(t) Retirement of existing credit facility...................... $ 101,300
Buford acquisition.......................................... 302,302
Fees and expenses:
(u) Deferred financing costs.................................... 16,875
(v) Other transaction costs..................................... 5,200
---------
Total uses of funds......................................... $ 425,677
=========
</TABLE>
(w) Concurrent with the Buford acquisition, we will write off unamortized
deferred financing costs of $2,402 related to the existing credit facility.
The charge for the write off will be reflected as an extraordinary charge in
the income statement for the period during which the Buford acquisition is
closed. No such charge is included in the pro forma income statement
information presented in this prospectus.
26
<PAGE> 30
CLASSIC COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BUFORD
CLASSIC CABLE 1998 TOTAL PRO
COMMUNICATIONS ONE BUFORD ACQUISITION ADJUSTMENTS FORMA
-------------- ------ -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 69,802 $6,564 $ 70,475 $3,056 -- $149,897
Operating expenses:
Programming................. 17,840 1,831 18,339 708 -- 38,718
Plant and operating......... 8,437 815 6,937 397 -- 16,586
General and
administrative............ 11,295 1,037 16,183 557 -- 29,072
Marketing and advertising... 850 97 345 -- -- 1,292
Corporate overhead.......... 3,648 -- 9,364 99 $ (1,490)(a) 11,621
Depreciation and
amortization.............. 30,531 529 21,399 750 13,048(b) 66,257
-------- ------ -------- ------ -------- --------
Total operating
expenses............. 72,601 4,309 72,567 2,511 11,558 163,546
-------- ------ -------- ------ -------- --------
Operating income (loss)......... (2,799) 2,255 (2,092) 545 (11,558) (13,649)
Interest expense................ (24,442) -- (7,919) (34) (19,355)(c) (51,750)
Other income (expense).......... (28) (648) (221) 1 -- (896)
-------- ------ -------- ------ -------- --------
Income (loss) before income
taxes......................... (27,269) 1,607 (10,232) 512 (30,913) (66,295)
Income tax benefit.............. 1,930 -- 226 -- --(d) 2,156
-------- ------ -------- ------ -------- --------
Net Income (loss)............... $(25,339) $1,607 $(10,006) $ 512 $(30,913) $(64,139)
======== ====== ======== ====== ======== ========
</TABLE>
See the Notes to the Unaudited Pro Forma Consolidated Statement of Operations.
27
<PAGE> 31
CLASSIC COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASSIC TOTAL PRO FORMA
COMMUNICATIONS BUFORD ADJUSTMENTS AS ADJUSTED
-------------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues..................................... $19,576 $18,861 -- $ 38,437
Operating expenses:
Programming............................. 5,231 5,217 -- 10,448
Plant and operating..................... 2,306 1,694 -- 4,000
General and administrative.............. 2,948 4,160 -- 7,108
Marketing and advertising............... 173 109 -- 282
Corporate overhead...................... 856 358 $ (253)(a) 961
Depreciation and amortization........... 8,955 5,727 2,720(b) 17,402
------- ------- ------- --------
Total operating expenses........... 20,469 17,265 2,467 40,201
------- ------- ------- --------
Income (loss) from operations................ (893) 1,596 (2,467) (1,764)
Interest expense............................. (7,446) (2,094) (3,363)(c) (12,903)
Other income (expense)....................... 17 23 -- 40
------- ------- ------- --------
Loss before income taxes..................... (8,322) (475) (5,830) (14,627)
Income tax benefit........................... -- 87 --(d) 87
------- ------- ------- --------
Net loss..................................... $(8,322) $ (388) $(5,830) $(14,540)
======= ======= ======= ========
</TABLE>
See the Notes to Unaudited Pro Forma Consolidated Statements of Operations.
28
<PAGE> 32
CLASSIC COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The accompanying Unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1998 and the three months ended March 31, 1999
reflect the pro forma adjustments described below as if the Buford acquisition
and the related financing as well as acquisitions completed in 1998 by Classic
Cable and Buford all occurred on January 1, 1998. The Unaudited Pro Forma
Consolidated Statements of Operations combine the historical results of
operations of Classic with those of Buford and the completed acquisitions. These
statements reflect the following adjustments for the period indicated:
(a) Classic Cable has formulated a restructuring plan whereby certain
identified employees of Buford's corporate management will be terminated.
The functions of these employees were duplicative with those of Classic
Cable and there is no expectation that the revenues generated by the Buford
systems will be adversely affected by the restructuring plan. The costs
associated with these employees was $1,490 and $253 for the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively.
(b) Represents pro forma adjustments to depreciation and amortization
in connection with the Buford acquisition and the completed acquisitions.
The depreciation and amortization expense of property, plant and equipment
and intangible assets acquired, net of elimination of depreciation and
amortization expense on historical assets, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1998 MARCH 31, 1999
------------ --------------
<S> <C> <C>
Depreciation and amortization expense on the purchased basis
of property, plant and equipment and intangible assets
acquired.................................................. $ 35,726 $ 8,447
Elimination of historical depreciation and amortization
expense................................................... (22,678) (5,727)
-------- -------
Total adjustment to depreciation and
amortization.................................... $ 13,048 $ 2,720
======== =======
</TABLE>
The property, plant, and equipment and intangible assets acquired in
connection with the Buford acquisition are estimated below:
<TABLE>
<CAPTION>
DEPRECIATION/
AMORTIZATION
PERIOD
(YEARS)
-------------
<S> <C> <C>
Land........................................................ $ 888 --
Buildings................................................... 3,909 30
Leasehold improvements...................................... 818 7
Vehicles.................................................... 3,766 5
Cable television distribution systems....................... 43,940 12
UHF system.................................................. 9,280 7
Mobile radio equipment...................................... 364 7
Headend electronics......................................... 26,406 7
Headend tower and antennae.................................. 11,077 7
Microwave equipment......................................... 4,657 7
Shop and test equipment..................................... 5,517 7
Drops....................................................... 9,622 7
Furniture and fixtures...................................... 1,608 7
Office equipment............................................ 986 7
Computer hardware and equipment............................. 322 4
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
DEPRECIATION/
AMORTIZATION
PERIOD
(YEARS)
-------------
<S> <C> <C>
Computer software........................................... 49 3
Subscriber relationships.................................... 82,042 12
Franchise rights............................................ 86,294 8
Noncompete agreements....................................... 6,993 5
Goodwill.................................................... 1,462 20
-------- --
$300,000
========
</TABLE>
(c) Represents:
- interest expense on the new credit facility using a current
interest rate of 7.60%, 7.60% and 7.85% for the revolver, the
Term A and the Term B loans, respectively, per annum,
- interest expense on the notes using a rate of 9.375% per annum,
- amortization expense of deferred financing fees related to the
new debt under our financing,
- elimination of historical interest expense related to Buford's
debt not assumed, and
- elimination of historical interest expense from the repayment of
the current credit facility with proceeds from the financing and
elimination of the related amortization of deferred financing
costs, as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- ------------------
<S> <C> <C>
Interest expense on the new Classic Cable credit facility... $ 13,822* $ 3,455*
Interest expense on the new subordinated Classic Cable
notes..................................................... 14,063 3,516
Full year interest expense on exchange notes................ 12,653 --
Amortization expense of deferred financing fees related to
the financing............................................. 1,867 467
Elimination of historical interest expense on the current
credit facility and subordinated debt and related
amortization of deferred financing costs.................. (23,050) (4,075)
-------- -------
Total increase to interest expense................ $ 19,355 $ 3,223
======== =======
</TABLE>
- ---------------
* The total effect of a 1/8% variance in the interest rate would be $223 and
$56, respectively.
(d) Represents the:
- tax effect of pro forma adjustments,
- recognition of tax expense for the acquired systems which were
historically not allocated tax expense by their former parent,
and
- the effect of recording a valuation allowance on excess deferred
tax assets arising from pro forma adjustments.
30
<PAGE> 34
We record a tax benefit only to the extent existing deferred tax
liabilities reverse within the appropriate period to offset deferred tax assets.
These reversing liabilities will be fully recognized in 1998, and a valuation
allowance remains on 100% of the remaining deferred tax assets. As a result, the
ratable tax benefit to be realized is limited, resulting in an effective rate of
less than 5%.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1998 MARCH 31, 1999
------------ --------------
<S> <C> <C>
Total pro forma adjustments................................. (30,913) (5,830)
Tax rate.................................................... 34% 34%
------- -------
10,510 1,982
Total Cable One and the Buford 1998 acquisition pre tax
income.................................................... 2,119 --
Tax rate.................................................... 34% 34%
------- -------
(720) --
Effect of valuation allowance............................... (9,790) (1,982)
------- -------
Total adjustment to income tax benefit...................... -- --
======= =======
</TABLE>
31
<PAGE> 35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA --
CLASSIC COMMUNICATIONS, INC.
The following table presents selected historical financial data about
Classic. You should read this information together with "Summary Historical
Financial and Operating Data -- Classic Communications, Inc.," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Classic's consolidated financial statements and the notes relating to those
statements included elsewhere in this prospectus.
Classic's selected historical financial data as of and for each of the five
years in the period ended December 31, 1998 have been derived from Classic's
consolidated financial statements, which have been audited and reported upon by
Ernst & Young LLP. The historical data for the three months ended March 31, 1998
and 1999 have been derived from Classic's unaudited financial statements. The
unaudited financial statements contain all adjustments, consisting of normal
recurring accruals, which Classic considers necessary for a fair presentation of
its financial position and results of operations for these periods.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................................... $16,019 $ 36,677 $ 59,821 $ 60,995 $ 69,802 $ 16,072 $ 19,576
Costs and expenses............................... 8,372 18,911 33,553 36,555 42,070 9,613 11,514
Depreciation and amortization.................... 6,383 16,427 27,510 27,832 30,531 7,006 8,955
------- -------- -------- -------- -------- -------- --------
Operating income (loss).......................... 1,264 1,339 (1,242) (3,392) (2,799) (547) (893)
Interest expense................................. (4,975) (14,199) (20,633) (21,299) (24,442) (5,014) (7,446)
Gain on sale of cable systems.................... 115 -- 4,901 3,644 -- -- --
Write-off of abandoned telephone operations...... -- -- (2,994) (500) (220) -- --
Other income (expense)........................... -- -- -- 71 192 30 17
------- -------- -------- -------- -------- -------- --------
Loss before income tax benefit, minority interest
and extraordinary loss......................... (3,596) (12,860) (19,968) (21,476) (27,269) (5,531) (8,322)
Income tax benefit............................... 1,121 4,533 6,802 7,347 1,930 684 --
Extraordinary loss............................... -- (4,054) -- -- (5,524) -- --
Minority interest in net loss of subsidiary...... 46 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net loss......................................... $(2,429) $(12,381) $(13,166) $(14,129) $(30,863) $ (4,847) $ (8,322)
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Total assets..................................... $96,136 $271,516 $245,922 $220,162 $254,604 -- $249,888
Total debt....................................... 58,161 207,706 197,504 191,990 282,842 -- 290,428
Total liabilities................................ 78,251 232,531 219,232 206,643 301,392 -- 304,666
Total redeemable preferred stock................. 12,332 19,260 22,726 26,705 -- -- --
Total stockholders' equity....................... 5,553 19,725 3,965 (13,186) (46,788) -- (54,778)
</TABLE>
32
<PAGE> 36
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA -- BUFORD GROUP, INC.
The following table presents selected historical financial data about
Buford. You should read this information together with "Summary Historical
Financial and Operating Data -- Buford Group, Inc.," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and Buford's
consolidated financial statements and the notes relating to those statements
included elsewhere in this prospectus.
The selected data presented below under the headings "Income Statement
Data" and "Balance Sheet Data," for and as of the end of each of the years in
the five-year period ended December 31, 1998 are derived from Buford's
consolidated financial statements, which financial statements have been audited
by KPMG LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1998 and 1997, and for each of the years
in the three-year period ended December 31, 1998, and the auditors' report
thereon, are included elsewhere in this prospectus. The historical data for the
three months ended March 31, 1998 and 1999 have been derived from Buford's
unaudited financial statements. The unaudited financial statements contain all
adjustments, consisting of normal recurring accruals, which Buford considers
necessary for a fair presentation of Buford's financial position and results of
operations for these periods.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................................ $ 37,032 $ 49,558 $ 49,561 $ 58,136 $ 70,475 $ 15,263 $ 18,861
Costs and expenses.............................. 26,755 32,965 32,932 40,858 51,168 11,656 11,538
Depreciation and amortization................... 13,670 17,379 17,175 17,753 21,399 4,870 5,727
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)......................... (3,393) (786) (546) (475) (2,092) (1,263) 1,596
Interest expense................................ (2,823) (6,332) (5,345) (5,787) (7,919) (1,592) (2,094)
Gain on sale of cable systems................... -- 8,506 5,418 -- -- -- --
Other income (expense).......................... 191 1,443 344 859 (221) 60 23
-------- -------- -------- -------- -------- -------- --------
Loss before income tax benefit (expense) and
cumulative effect of change in accounting
principle..................................... (6,025) 2,831 (129) (5,403) (10,232) (2,795) (475)
Income tax benefit (expense).................... 3,027 7,235 (94) 315 226 (156) 87
Cumulative effect of change in accounting
principle..................................... -- -- -- -- -- -- (207)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............................... $ (2,998) $ 10,066 $ (223) $ (5,088) $(10,006) $ (2,951) $ (595)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................... $127,702 $127,379 $117,676 $143,932 $175,953 -- $174,080
Total debt...................................... 72,110 70,643 60,053 85,000 118,000 -- 118,000
Total liabilities............................... 91,773 80,122 69,182 97,008 131,147 -- 129,869
Total stockholders' equity...................... 35,969 47,257 48,493 46,924 44,806 -- 44,211
</TABLE>
33
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding our
financial condition and results of operations for each of the years ended
December 31, 1996, 1997 and 1998. This discussion should be read in conjunction
with "Selected Historical Consolidated Financial Data -- Classic Communications,
Inc.," "Selected Historical Consolidated Financial Data -- Buford Group, Inc.,"
"Unaudited Pro Forma Consolidated Financial Information" and both Classic's and
Buford's consolidated financial statements and the notes relating to those
statements appearing elsewhere in this prospectus. During their existence, both
Classic Cable and Buford have completed multiple acquisitions and divestitures
of cable systems. As a result, we believe that period-to-period comparisons of
their financial results to date are not necessarily meaningful and should not be
relied upon as an indication of future performance.
OVERVIEW
As a result of the Buford acquisition and after giving effect to other
recently announced cable transactions, we are the 14th largest cable television
operator in the United States. We own, operate and develop cable television
systems in selected non-metropolitan markets across nine contiguous states
primarily located in the central United States. Since 1992, we have completed
and integrated over 20 acquisitions. As of March 31, 1999, our collective
systems passed approximately 609,000 homes and served approximately 360,000
basic subscribers.
We have developed a plan to integrate the operation of Buford's cable
systems with Classic Cable's cable systems. The major initiatives of this plan
are to (A) eliminate duplicative general and administrative expenses, (B)
enhance our customer service program with the addition of Buford's call center
and satellite-based communications service system, (C) reduce duplicative
service costs pursuant to our "clustering" philosophy, and (D) increase the
quality of programming services in the acquired systems.
Revenues. Revenues are primarily attributable to monthly subscription fees
charged to subscribers for our basic and premium cable television programming
services. Basic revenues consist of monthly subscription fees for all services,
other than premium programming, as well as monthly charges for customer
equipment rental. Premium revenues consist of monthly subscription fees for
programming provided on a per channel basis. In addition, other revenues are
derived from:
- installation and reconnection fees charged to basic subscribers to
commence or reinstate service;
- pay-per-view charges;
- late payment fees;
- advertising revenues; and
- commissions related to the sale of merchandise by home shopping services.
At March 31, 1999, our collective systems served approximately 360,000
basic subscribers and approximately 194,000 premium units, representing a basic
penetration rate of approximately 59% and a premium penetration rate of
approximately 32%. The table below sets forth for the periods indicated the
percentage of our total revenues attributable to the various sources:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------ -------------
<S> <C> <C>
Basic............................................... 84.0% 84.1%
Premium............................................. 11.2 10.9
Other............................................... 4.8 5.0
----- -----
Total revenues............................ 100.0% 100.0%
===== =====
</TABLE>
34
<PAGE> 38
Operating Expenses. Our operating expenses consist of (A) programming fees,
(B) plant and operating costs, (C) general and administrative expenses and (D)
marketing costs directly attributable to the systems. Programming fees have
historically increased at rates in excess of inflation due to system
acquisitions and internal growth, as well as increases in the number, quality
and cost of programming services offered by us. We benefit from our membership
in an industry cooperative with over 10 million basic subscribers that provides
its members with volume discounts from programming networks and cable equipment
vendors. Plant and operating costs include expenses related to wages and
employee benefits of technical personnel, electricity, systems supplies,
vehicles and other operating costs. General and administrative expenses directly
attributable to the systems include wages and employee benefits for customer
service, accounting and administrative personnel, franchise fees and expenses
related to billing, payment processing, and office administration.
Corporate Overhead. Corporate overhead consists primarily of expenses
incurred by our executive management, which are not directly attributable to any
one system.
Operating Losses. The high level of depreciation and amortization
associated with the acquisitions and capital expenditures related to continued
construction and upgrading of the current systems, together with interest costs
related to our financing activities, have contributed to our net losses. We
believe that such net losses are common for the cable television industry.
RESULTS OF OPERATIONS -- CLASSIC COMMUNICATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1999
----------------------- -----------------------
AMOUNT % OF REVENUES AMOUNT % OF REVENUES
------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $16,072 100.0 % $19,576 100.0 %
Operating expenses:
Programming................................... 4,118 25.6 5,231 26.7
Plant and operating........................... 1,959 12.2 2,306 11.8
General and administrative.................... 2,699 16.8 2,948 15.1
Marketing and advertising..................... 208 1.3 173 0.9
Corporate overhead................................. 629 3.9 856 4.4
Depreciation and amortization...................... 7,006 43.6 8,955 45.7
------- ----- ------- -----
Loss from operations..................... $ (547) (3.4)% $ (893) (4.6)%
======= ===== ======= =====
</TABLE>
Revenues. Revenues increased $3.5 million, or 22%, for the three months
ended March 31, 1999, as compared to the corresponding prior year period. Basic
revenues increased by $3.0 million due to increased subscribers of approximately
24,000 and basic rate increases. The increase in subscribers was due to the
acquisition of systems from Cable One in July 1998. 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 6.3% from $27.09 to $28.81 quarter to quarter. 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 $3.9 million, or 23%, for
the three months ended March 31, 1999, as compared to the corresponding prior
year period. Programming expense increased $1.1 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. Depreciation and amortization
expense for the three months ended March 31, 1999 was $9.0 million, an increase
of $1.9 million over the same period in 1998. The increase represents the effect
of acquisitions and capital expenditures.
35
<PAGE> 39
Other Income and Expenses. Interest expense increased $2.4 million, or 49%,
for the three months ended March 31, 1999, as compared to the corresponding
prior year period. This increase is primarily the result of the debt issued in
conjunction with the July 1998 financing.
Income Tax Benefit. The income tax benefit decreased $0.7 million for the
three months ended March 31, 1999, as compared to the corresponding prior year
period. No tax benefit was recognized in 1999. The effective tax rates for the
three months ended March 31, 1999 and March 31, 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 Classic's
results of operations, the net loss of $8.3 million for the three months ended
March 31, 1999 increased by $3.5 million, as compared to the net loss of $4.8
million for the corresponding prior year period.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------- -----------------------
AMOUNT % OF REVENUES AMOUNT % OF REVENUES
------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $60,995 100.0% $69,802 100.0%
Operating expenses:
Programming................................... 14,916 24.5 17,840 25.6
Plant and operating........................... 7,622 12.5 8,437 12.1
General and administrative.................... 9,257 15.2 11,295 16.2
Marketing and advertising..................... 438 0.7 850 1.2
Corporate overhead............................... 4,322 7.1 3,648 5.2
Depreciation and amortization.................... 27,832 45.6 30,531 43.7
------- ----- ------- -----
Loss from operations..................... $(3,392) (5.6)% $(2,799) (4.0)%
======= ===== ======= =====
</TABLE>
Revenues. Revenues for the year ended December 31, 1998 were $69.8 million,
an improvement of $8.8 million over revenues for the year ended December 31,
1997. Basic revenues improved by $7.4 million, or 14.7%, while average monthly
basic revenues per subscriber increased from $25.22 to $27.87, or 10.5%. The
improvement was due primarily to basic rate increases in February 1998 affecting
234 systems and serving approximately 114,000 subscribers, or 69% of total
subscribers, as well as revenue generated from the systems acquired from Cable
One on July 29, 1998. The majority of the remaining systems also had rate
increases during 1998. The change in basic subscribers for the year ended
December 31, 1998 is primarily due to the acquisition of systems from Cable One
in 1998 and the sale of certain Kansas and Oklahoma systems serving
approximately 4,000 basic subscribers during the second quarter of 1997, as well
as bulk account equivalent basic unit conversion calculations following the
basic rate increases, the increased availability and affordability of
competitive video services, non-pay disconnects, and other terminations of
service. Other revenues increased 13.7%, from $10.2 million for the year ended
December 31, 1997 to $11.6 million for the year ended December 31, 1998, due in
large part to continued promotion of pay-per-view events.
Operating Expenses. Operating expenses for the year ended December 31, 1998
were $38.4 million, an increase of $6.2 million, or 19.2%, over operating
expenses for the year ended December 31, 1997. An escalation in rates charged by
certain programming vendors as well as increases in copyright fees and premium
units were largely responsible for the $2.9 million increase in programming
costs over programming costs for the year ended December 31, 1997. Plant and
operating expenses increased from $7.6 million for the year ended December 31,
1997 to $8.4 million for the year ended December 31, 1998, reflecting increases
in technical wages and benefits, plant power, and amounts paid to outside
contractors to update our subscriber database. General and administrative
expenses increased from $9.3 million for the year ended December 31, 1997 to
$11.3 million for the year ended December 31, 1998 due to increases in
36
<PAGE> 40
administrative wages and benefits, telephone, property taxes and bad debt
expense. General and administrative expense as a percentage of revenue increased
during this period from 15.2% to 16.2%. Marketing expenses for the year ended
December 31, 1998 were $0.9 million, an increase of 94.1% over marketing
expenses for the year ended December 31, 1997. The majority of this increase
relates to increased spending associated with our marketing initiatives. As a
percentage of revenues, operating expenses increased slightly from 52.8% for the
year ended December 31, 1997 to 55.0% for the year ended December 31, 1998.
Corporate Overhead. Corporate overhead decreased $0.7 million, or 15.6%,
from $4.3 million for the year ended December 31, 1997 to $3.6 million for the
year ended December 31, 1998 due primarily to a reduction in litigation costs
compared to the year ended December 31, 1997.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1998 was $30.5 million, an increase of $2.7 million
over depreciation and amortization expense for the year ended December 31, 1997.
The increase is largely reflective of the inclusion of fixed assets placed into
service during 1997 and 1998.
Income Tax Benefit. The income tax benefit decreased from $7.3 million for
year ended December 31, 1997 to $1.9 million for the year ended December 31,
1998. The pre-tax loss increased in 1998. However, the effective tax rate
decreased. The effective tax rate decreased from 34.2% for the year ended
December 31, 1997 to 7.1% for the year ended December 31, 1998. This decrease is
primarily due to an increase in the valuation allowance against deferred tax
assets.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------- -----------------------
AMOUNT % OF REVENUES AMOUNT % OF REVENUES
------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $59,821 100.0% $60,995 100.0%
Operating expenses:
Programming................................... 15,106 25.3 14,916 24.5
Plant and operating........................... 7,308 12.2 7,622 12.5
General and administrative.................... 8,688 14.5 9,257 15.2
Marketing and advertising..................... 238 0.4 438 0.7
Corporate overhead................................. 2,213 3.7 4,322 7.1
Depreciation and amortization...................... 27,510 46.0 27,832 45.6
------- ----- ------- -----
Loss from operations..................... $(1,242) (2.1)% $(3,392) (5.6)%
======= ===== ======= =====
</TABLE>
Revenues. Revenues for the year ended December 31, 1997 were $61.0 million,
an improvement of $1.2 million, or 2.0%, over revenues of $59.8 million for the
year ended December 31, 1996. In 1997, basic revenues increased by $1.8 million,
or 3.7%, due to basic rate increases implemented primarily during the first
quarter of the year. Average monthly basic revenues per subscriber increased
from $22.77 to $25.22 or 10.8% over the same period in 1996. The decrease in
basic subscribers for the period ended December 31, 1997 is largely reflective
of the sale of Kansas and Oklahoma systems serving approximately 4,000 basic
subscribers during the second quarter of 1997 as well as bulk account equivalent
basic unit conversion calculations following the basic rate increases, the
increased availability and affordability of competitive video services, non-pay
disconnects, and other terminations of service. In 1997, Classic Cable launched
a coordinated array of marketing techniques to attract and retain customers and
to increase premium service penetration, including door-to-door and direct mail
solicitation, telemarketing, media advertising, local promotional events and
cross-channel promotions of new services and pay-per-view events. Net of the
system sales, premium subscribers increased by 2,975 units or 4.9% during 1997
with a corresponding 2.2% increase in penetration, from 36.4% in 1996 to 38.5%
at December 31, 1997. The corresponding premium
37
<PAGE> 41
revenue decreased, however, 3.2% from $6.5 million in 1996 to $6.3 million in
1997 due in large part to the system divestitures and discounted pricing offered
in connection with the various marketing campaigns. Other revenues also
decreased 11.0%, from $4.1 million in 1996 to $3.6 million in 1997, largely as a
function of the system divestitures and free or heavily-discounted installation
marketing promotions. The decrease was partially offset by $196,698 or 181%,
increase in pay-per-view event revenue.
Operating Expenses. Operating expenses increased $893,000, or 2.8%, from
$31.3 million in 1996 to $32.2 million in 1997. Programming costs for the year
ended December 31, 1997 decreased $190,000, or 1.3%, over the year ended
December 31, 1996 to $14.9 million. Increases in copyright fees, premium units
and rates charged by certain programming vendors were offset by the
renegotiation of certain programming contracts wherein rate concessions, launch
fees and other marketing support totaling $564,000 were obtained. Plant and
operating expenses increased $314,000, or 4.3%, to $7.6 million during 1997 due
to the hiring of additional technical personnel as well as increases in
technical wages and benefits and vehicle operating expenses. General and
administrative expenses for 1997 were $9.3 million, an increase of $569,000, or
6.5%, over 1996. The increase was due primarily to the addition of certain key
management and administrative personnel, an increase in bad debt expense, and
the write-off of certain costs related to the termination of the purchase
agreement and operations associated with the proposed acquisition of telephone
exchanges in Kansas. Marketing and advertising expenses for the year ended
December 31, 1997, were $438,000, an increase of $200,000, or 84.0%, over the
year ended December 31, 1996, relating directly to increased spending associated
with our aforementioned new marketing initiatives. As a percentage of revenues,
operating expenses increased slightly, from 52.4% for the year ended December
31, 1996 to 52.9% for the year ended December 31, 1997.
Corporate Overhead. Corporate overhead for the year ended December 31,
1997, was $4.3 million, an increase of $2.1 million over the year ended December
31, 1996. The increase was largely reflective of costs incurred in conjunction
with divorce proceedings with one of Classic's officers. Classic agreed to
repurchase certain stock of Classic in which the officer's wife held a community
property interest and provide monetary consideration for the release of certain
claims. Legal, consultant and other fees of approximately $1.4 million were
charged to corporate overhead for 1997 in connection with this matter. The
remainder of the increase was due primarily to the hiring of the Vice President
of Operations in February 1997 as well as other increases in executive
compensation, travel and entertainment.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1997, was $27.8 million, an increase of $322,000
over the year ended December 31, 1996. The increase is due primarily to the
inclusion of fixed assets placed into service during the year. The increase was
partially offset by the sales of certain systems during 1996 and 1997.
Income Tax Benefit. The benefit for income taxes increased from $6.8
million in 1996 to $7.3 million in 1997, primarily due to the increase in the
pre-tax loss from operations in 1997 and an increase in the effective tax rate
from 34.1% to 34.2% in 1996 and 1997, respectively.
Total deferred tax liabilities and total deferred tax assets decreased by
$12.9 million and $6.3 million, respectively, from 1996 to 1997. Approximately
$8.1 million of the decrease in deferred tax liabilities relates to taxable
temporary differences, primarily recurring book depreciation, and amortization
in excess of tax. The remaining $4.8 million decrease in deferred tax
liabilities relates to the increase in tax basis of assets held by one of our
subsidiaries as a result of a deferred intercompany gain recognized during 1997.
Approximately $4.9 million of the decrease in total deferred tax assets relates
primarily to the utilization of net operating losses to offset taxable income
generated by the taxable temporary differences noted above. Total deferred tax
assets also decreased by $1.5 million due to the expiration of certain net
operating losses in 1997.
The expiration of net operating losses in 1997 had no impact on the
provision for income taxes since a valuation allowance had previously been
provided for these loss carryforwards. The deferred tax asset for the expired
net operating loss carryforwards and the related valuation allowance were
reduced accordingly.
38
<PAGE> 42
The net effect of the above item resulted in a current federal tax expense
of $0.3 million for alternative minimum tax and a deferred tax benefit of $7.6
million for the reduction in net deferred tax liabilities.
RESULTS OF OPERATIONS -- BUFORD
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Revenues. Revenues for the three months ended March 31, 1999 were $18.9
million, an improvement of $3.6 million, or 23.5%, over revenues of $15.3
million for the corresponding prior year period. Revenues for the three months
ended March 31, 1999 included the revenues for the systems acquired in late
April 1998. Average monthly basic revenue per basic subscriber increased 7.0%
from $27.15 in the first three months of 1998 to $29.06 in the first three
months of 1999.
Operating Expenses. Operating expenses increased $1.6 million from $9.6
million for the three months ended March 31, 1998 to $11.2 million for the three
months ended March 31, 1999. Programming costs for the three months ended March
31, 1999 increased $1.1 million, or 26.8%, over the corresponding prior year
period to $5.2 million. As a percentage of revenue, programming costs increased
from 26.8% for the three months ended March 31, 1998 to 27.5% for the three
months ended March 31, 1999. The increase was due primarily to the acquisition
of subscribers in late April 1998 and an increase in the number and quality of
programming services offered by Buford. Plant and operating expenses totaled
$1.7 million for the three months ended March 31, 1999 and March 31, 1998. Plant
and operating expenses as a percent of revenues decreased from 11.1% for the
three months ended March 31, 1998 to 9.0% for the three months ended March 31,
1999 reflecting the continued benefits derived from Buford's cluster strategy.
General and administrative expenses for the three months ended March 31, 1999
were $4.2 million, up $0.5 million, or 13.5%, over the corresponding prior year
period. The increase was due primarily to cable systems and subscribers acquired
in 1998. As a percentage of revenues, general and administrative expenses
decreased from 24.2% for the three months ended March 31, 1998 to 22.2% for the
three months ended March 31, 1999. Marketing and advertising expenses for the
three months ended March 31, 1999 and 1998 were relatively flat at $0.1 million.
Corporate Overhead. Corporate overhead for the three months ended March
31, 1999 was $0.4 million, a decrease over the three months ended March 31, 1998
of approximately $1.7 million due primarily to compensation expense related to
employee stock appreciation rights in 1998. The management group's appreciation
rights are tied to the appreciation in the market value of Buford's common
stock. The value of the appreciation rights at December 31, 1998 approximated
the proposed sales price that Classic offered for the company, therefore, no
additional compensation expense was recorded in 1999.
Depreciation and Amortization. Depreciation and amortization expense for
the three months ended March 31, 1999 was $5.7 million, an increase of $0.8
million or 16.3% over the corresponding prior year period. The increase is due
primarily to the inclusion of the tangible and intangible assets acquired during
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues in 1998 were $70.5 million, an improvement of $12.4
million, or 21.3%, over revenues in 1997. The improvement was due primarily to
basic rate increases during the first half of 1998 as well as revenue generated
from the systems acquired in late April 1998. Buford has historically increased
rates in the majority of its systems during the first half of the year in order
to offset increases in its operating costs such as programming which occur in
January of each year. Average monthly basic revenue per basic subscriber
increased 7.1%, from $26.31 for the year ended December 31, 1997 to $28.17 for
the year ended December 31, 1998.
Operating Expenses. Operating expenses in 1998 were $41.8 million, an
increase of $5.8 million, or 16.1%, over operating expenses for the year ended
December 31, 1997. The continued escalation in rates charged by programming
vendors as well as increases in copyright fees and premium units were largely
39
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responsible for the $4.0 million increase in programming costs over 1997. Plant
and operating expenses increased from $6.6 million for the year ended December
31, 1997 to $6.9 million for the year ended December 31, 1998, reflecting
increases in technical wages and benefits and amounts paid to outside
contractors. General and administrative expenses increased from $14.9 million
for the year ended December 31, 1997 to $16.2 million for the year ended
December 31, 1998 due to increases in administrative wages and benefits and
utility expense. Marketing and advertising expenses for the year ended December
31, 1998 were $0.3 million, an increase of 50.0% over marketing and advertising
expenses for the year ended December 31, 1997. The majority of this increase
relates to increased spending associated with Buford's marketing initiatives.
Corporate Overhead. Corporate overhead increased $4.5 million, or 91.8%,
from $4.9 million for the year ended December 31, 1997 to $9.4 million for the
year ended December 31, 1998 due primarily to an increase in compensation
expense related to employee stock appreciation rights from $3.5 million for the
year ended December 31, 1997 to $7.9 million for the year ended December 31,
1998.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1998 was $21.4 million, an increase of $3.6 million
over depreciation and amortization expense for the year ended December 31, 1997.
The increase is largely reflective of the inclusion of fixed assets acquired and
those placed into service during 1997 and 1998.
Income Tax Benefit. Income tax benefit of $0.2 million was recorded for
the year ended December 31, 1998 versus $0.3 million for the year ended December
31, 1997. This decrease is primarily due to an increase in the valuation
allowance against deferred tax assets.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the year ended December 31, 1997 were $58.1
million, an improvement of $8.5 million, or 17.1%, over revenues of $49.6
million for the year ended December 31, 1996. This increase was primarily due to
basic rate increases implemented during the first half of the year, and
acquisitions of cable systems in Arkansas and Texas. Average monthly basic
revenue per basic subscriber increased 6.1% from $24.80 for the year ended
December 31, 1996 to $26.31 for the year ended December 31, 1997.
Operating Expenses. Operating expenses increased $6.0 million, or 20.0%,
from $30.0 million for the year ended December 31, 1996 to $36.0 million for the
year ended December 31, 1997. Programming costs for the year ended December 31,
1997 were 14.3 million, an increase of $2.7 million, or 23.3%, over the year
ended December 31, 1996. This increase was due to the acquisition of several
cable systems, increased subscriber rates and the expanded channel lineups in
many of Buford's markets. Plant and operating expenses increased $0.9 million,
or 15.8%, to $6.6 million during 1997 due to the hiring of additional technical
personnel as well as increases in technical wages and benefits and vehicle
operating expenses. General and administrative expenses for the year ended
December 31, 1997 were $14.9 million, an increase of $2.3 million, or 18.3%,
over general and administrative expenses for the year ended December 31, 1996.
The increase was due primarily to an increase in bad debt expense and telephone
expense which were related to the consolidation of regional offices into the
Buford Call Center facility in Tyler, Texas. Marketing and advertising expenses
for the year ended December 31, 1997 and December 31, 1996 were flat at $0.2
million.
Corporate Overhead. Corporate overhead for the year ended December 31,
1997 was $4.9 million, an increase of $2.0 million over the year ended December
31, 1996. The increase was largely reflective of an increase in compensation
expense related to employee stock appreciation rights from $1.5 million for the
year ended December 31, 1996 to $3.5 million for the year ended December 31,
1997.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1997, was $17.8 million, an increase of $0.6 million
over depreciation and amortization expense for the year ended December 31, 1996.
The increase is due primarily to the inclusion of fixed assets placed into
service during the year.
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Income Tax Benefit. The benefit for income taxes was $0.3 million for the
year ended December 31, 1997 versus tax expense of $0.1 million for the year
ended December 31, 1996, primarily due to the increase in the pre-tax loss from
operations in 1997.
LIQUIDITY AND CAPITAL RESOURCES
CLASSIC -- HISTORICAL
Since Classic's inception, Classic has been supported through debt
financings and equity raised through sales of equity to institutional equity
investors. Capital stock of Classic is owned by institutional investors,
including Austin Ventures, L.P., NationsBanc Capital Corp., The Texas Growth
Fund, BT Capital Partners, Inc., and certain members of its bank group led by
The Chase Manhattan Bank and Union Bank Ventures. These institutional investors
have contributed approximately $34.1 million of total equity financing to
Classic. At March 31, 1999, Classic had aggregate consolidated indebtedness of
approximately $290.4 million. This debt and equity financing was utilized
primarily in the acquisition of cable television systems.
Our net cash provided by operations was $14.3 million in 1998 compared to
$7.9 million in 1997 and $7.9 million in 1996. Our net cash provided by (used
in) investing activities was $(57.2) million, $(1.3) million and $3.4 million in
1998, 1997 and 1996, respectively. Our net cash provided by (used in) financing
amounted to $45.1 million, $(6.6) million and $(12.2) million, in 1998, 1997 and
1996, respectively. Our Adjusted EBITDA increased to $28.8 million in 1998 from
$25.5 million in 1997 and $27.3 million in 1996. Adjusted EBITDA as a percentage
of revenue changed to 41.3% in 1998 from 41.8% in 1997, and 45.7% in 1996.
Included in Adjusted EBITDA for the year ended December 31, 1997 were charges of
$1.4 million for divorce litigation costs and $0.4 million for special bonuses
paid to executive officers. Included in Adjusted EBITDA for the year ended
December 31, 1998 were special bonuses paid to executive officers of $0.8
million.
For the three years ended December 31, 1998, our capital expenditures,
other than those related to acquisitions, were approximately $32.1 million.
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.
BUFORD -- HISTORICAL
For the three years ended December 31, 1998, Buford's capital expenditures,
other than those related to acquisitions, were approximately $58.1 million.
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 services to new subscribers.
Since its inception, Buford has been supported by commercial banking
institutions and insurance company funding. At March 31, 1999, Buford had
aggregate consolidated indebtedness of $118.0 million, all of which will be
repaid on the date of acquisition. Borrowings bear interest at the banks'
floating rates, LIBOR, or a combination thereof as selected by Buford, plus a
margin dependent on Buford's leverage ratio. The weighted average effective
interest rate at March 31, 1999 was 6.125%. The bank credit agreement has a
final maturity date of June 30, 2005, with quarterly principal payments
beginning September 30, 1999.
Buford's net cash provided by operations was $20.3 million in 1998 compared
to $16.9 million in 1997 and $13.6 million in 1996. Buford's net cash provided
by (used in) investing activities was ($53.2 million), ($39.7 million) and $20.3
million in 1998, 1997 and 1996, respectively. Buford's net cash provided by
(used in) financing amounted to $32.8 million, $24.9 million and ($10.9 million)
in 1998, 1997 and 1996, respectively. Buford's Adjusted EBITDA increased to
$27.2 million in 1998 from $20.8 million in 1997 and $18.1 million in 1996.
Adjusted EBITDA as a percentage of revenue changed to 38.6% in 1998 from 35.8%
in 1997 and 36.5% in 1996.
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PRO FORMA FOR THE BUFORD ACQUISITION AND OTHER COMPLETED ACQUISITIONS
The cable television industry is a capital intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. In addition, we have pursued, and continue to pursue,
a business strategy that includes selective acquisitions. We have funded our
working capital requirements, capital expenditures and acquisitions through a
combination of internally generated funds, long- and short-term borrowings, and
equity contributions. We intend to continue to finance these expenditures from
similar sources.
We have formulated a capital expenditures plan to spend by August 2003
approximately:
- $100.0 million to establish a technical standard of 550-750 MHz bandwidth
capacity, or 78 analog channels, in cable television systems serving
approximately 75% of our basic subscribers and headend consolidation;
- $45.0 million for ongoing maintenance and replacement, for installations
and extensions to improve the cable plant related to customer growth; and
- $15.0 million for the purchase of additional addressable converters and
headend equipment to support the deployment of digital services. See
"Business."
Following the Buford acquisition, we have debt service requirements
increasing from approximately $40 million a year to $54 million over the next
eight years. During this time, we anticipate capital expenditures averaging
approximately $40 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 March 31,
1999, we had $71.3 million available under Classic Cable's line of credit
subject to some limitations.
Upon consummation of the Brera Classic equity investment, a change of
control will occur and we will be required to offer to repurchase the exchange
notes at a purchase price equal to 101% of the accreted value of the notes plus
accrued and unpaid interest. Because these notes are trading at a premium
substantially higher than 101%, we have made no provision to repurchase the
outstanding notes in the event the holders require us to repurchase them. See
"Description of Other Indebtedness." Although we do not expect that the holders
will require us to repurchase these notes, we cannot assure you that some or all
of them will not do so.
Our ability to make payments on and to refinance our indebtedness,
including the exchange notes, and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control.
Based on Classic Cable's current level of operations and anticipated cost
savings and operative improvements, we believe Classic Cable's cash flow from
operations, available cash and available borrowings under its credit facility,
will be adequate to meet our future liquidity needs for at least the next few
years.
We cannot assure you, however, that Classic Cable's business will generate
sufficient cash flow from operations, that currently anticipated cost savings
and operative improvements will be realized on schedule or that future
borrowings will be available to us under Classic Cable's credit facility in an
amount sufficient to enable us to pay our indebtedness, including these notes,
or to fund our other liquidity needs. We may need to refinance all or a portion
of our indebtedness, including these notes on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness, including
Classic Cable's credit facility and these notes, on commercially reasonable
terms or at all. See "Risk Factors."
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INFLATION
Certain of our 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 our 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. We have begun taking measures to address this problem. However,
we have not yet completed the assessment of the potential impact of Year 2000 on
our key business applications, operational systems, or relationships with key
business partners. We have initiated an extensive assessment of Year 2000
readiness relative to our information system and communications technology. In
addition, we have engaged an outside consultant in performing this evaluation
and expect that it will be completed by the end of the third quarter of 1999. We
cannot estimate what the total cost will be to implement our remediation efforts
for our critical operational systems, but it is possible that such costs will be
material.
We have also started an ongoing program to review the status of key
supplier Year 2000 compliance efforts. While we believe we are taking all
appropriate steps to insure Year 2000 compliance, there can be no assurance that
these key partners, which may include third-party vendors and service providers,
will complete their own Year 2000 compliance projects in a timely manner and
that failure to do so will not have an adverse impact on our business. Further,
until we have completed our Year 2000 assessment, we cannot determine whether a
contingency plan is required nor the timetable for establishment of such a plan.
The lack of contingency plans could prevent us from resolving Year 2000 issues
in a timely and efficient manner, and could heighten the risk that the Year 2000
problem may have a material adverse effect on our financial condition and
results of operations.
The Year 2000 problem is pervasive as virtually every computer operation
will be affected in some way. Consequently, 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.
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BUSINESS
COMPANY OVERVIEW
We are a growth oriented cable operator focused on non-metropolitan markets
in the central United States. We have experienced growth in subscribers,
revenues and cash flows, primarily through the successful execution and
integration of over 20 acquisitions of clustered cable systems in nine
contiguous states. Pro forma for the pending acquisition of Buford Group, Inc.
and after giving effect to other recently announced cable transactions, we are
the 14th largest cable operator in the United States, with systems that pass
approximately 609,000 homes and serve approximately 360,000 basic subscribers.
We believe that there are significant operating, competitive and economic
advantages in acquiring and owning systems in non-metropolitan markets. In
pursuing our business strategy, we have focused our acquisition efforts on cable
television systems in growing non-metropolitan markets and have sought to build
geographic clusters of these systems. Because of poor reception of broadcast
television signals, customers often require cable television service in these
markets to receive a full complement of off-air broadcast stations, such as ABC,
NBC, CBS, and FOX. These off-air broadcast stations represent approximately 31%
of overall television viewing. In addition, there are typically fewer
competitive entertainment alternatives in these markets. As the leading
multi-channel video provider in our markets, we have capitalized on these market
characteristics by generating predictable revenue streams and EBITDA.
Approximately 80% of our cable subscribers reside in a county seat or are
located within a 30-mile radius of a county seat. These markets typically have
(A) larger populations, (B) more favorable demographics, (C) higher growth
characteristics, and (D) stronger economic activity than do other non-
metropolitan markets. We have created clusters of cable television systems
around these markets and believe that clustering cable systems provides
significant operating and cost advantages. We own and manage 539 cable systems
in nine contiguous states. Approximately 70% of our customers are located on
approximately 26% of our headends. This level of clustering allows us to deploy
our technical staff, vehicle fleet, and shared resources more efficiently,
resulting in lower operating and capital costs and improved customer response
time. Clustering also allows us to:
- manage the workforce and allocate personnel more effectively;
- address the specific customer service and programming needs of our
customers;
- introduce digital cable services and other new services in a cost
effective manner;
- increase the number of households reached with existing marketing
budgets;
- increase the benefits of local and regional community relations efforts;
and
- manage political relationships at the local and state level.
We believe that providing superior customer service and developing strong
community relations are key elements to our long-term success and enable us to
maintain our subscribers, support our rates, and foster good working
relationships with local administrators. We seek to achieve a high level of
customer satisfaction by employing a well-trained staff of customer service
representatives and experienced field technicians. We operate two call centers
located in Tyler, Texas, and Plainville, Kansas, which offer 24-hour, 7-day per
week coverage to all of our customers on a toll-free basis. We believe that the
combination of these call centers provides us with redundancy safeguards and a
platform for further growth.
J. Merritt Belisle, our Chief Executive Officer, and Steven E. Seach, our
President and Chief Financial Officer, founded Classic in 1992 and have
assembled a management team with significant business experience operating cable
television systems and providing quality customer service to cable subscribers.
Messrs. Belisle and Seach have 20 years of collective experience in acquiring,
operating, integrating and developing cable television systems and have worked
together for over ten years.
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As a result of the Buford acquisition, our management team will be further
enhanced by the addition of several key members of Buford's management team,
including Ron Martin, who will become our Executive Vice President of Operations
and Kay Monigold, who will become our Executive Vice President of
Administration. Mr. Martin and Ms. Monigold have been in the cable industry for
over 25 years and 18 years, respectively.
Members of our management team collectively own or have the right to
acquire approximately 15% of our common stock and up to an additional 10% of our
common stock will be set aside for issuance to management pursuant to options
granted to them.
Since our inception, we have been supported through debt financings and
equity raised through sales to institutional equity investors. Our capital stock
is owned by institutional investors, including Austin Ventures, L.P.,
NationsBanc Capital Corp., The Texas Growth Fund, BT Capital Partners, Inc., and
certain members of our existing bank group led by The Chase Manhattan Bank and
Union Bank Ventures. These institutional investors have contributed
approximately $34.1 million of total equity financing to us. At March 31, 1999,
we had long-term debt of approximately $290.4 million. This debt and equity
financing was utilized primarily in the acquisition of cable television systems.
OUR STRATEGY
FOCUS ON ATTRACTIVE NON-METROPOLITAN MARKETS
We have followed a systematic approach to acquiring, consolidating,
operating and developing cable television systems based on the primary goal of
increasing our operating cash flow while maintaining the quality of our
services. Our business strategy has focused on serving growing non-metropolitan
communities in the central United States. For example, approximately 80% of our
cable subscribers reside in a county seat or within a 30-mile radius of a county
seat. These markets generally tend to have more serviceable households per mile,
more robust household growth, higher income per household, more disposable
income per household and a stronger business foundation than do other
non-metropolitan markets. According to Equifax National Decisions Systems and
Claritus, Inc., total households in the top 97 systems owned by us are projected
to grow by approximately 9.4%, versus the national average of 5.7%, from 1997 to
2002. Those 97 systems currently serve approximately 60.1% of our total
subscribers. We believe that our cable systems generally involve less
competition than systems serving large urban cities, especially for services
such as high speed Internet access. It is our goal to continue to focus on
growing non-metropolitan areas.
EXPAND AND IMPROVE CLUSTERS THROUGH SELECTIVE ACQUISITIONS
To date, we have sought to acquire cable television systems in communities
that are in close geographic proximity to other cable television systems owned
or managed by us in order to maximize the economies of scale and operating
efficiencies associated with "clusters" of systems. We plan to continue our
clustering strategy by pursuing opportunities to purchase cable television
systems in our existing markets as well as by entering contiguous or surrounding
markets, if and when attractive acquisition opportunities become available. In
addition to system acquisition opportunities, we expect to pursue opportunities
to exchange certain of our cable systems for other cable television properties
to promote our clustering strategy further. Factors likely to be considered by
us in evaluating the desirability of a potential acquisition or asset exchange
opportunity include valuation, subscriber densities, growth potential, in terms
of both market and cash flow, and whether the target system can be readily
integrated into our operations.
In order to offer Internet access on a full-scale residential and
commercial basis in the communities we serve, we are actively seeking to acquire
incumbent Internet service providers in and around our markets. We believe that
acquiring the expertise from an incumbent Internet service provider would allow
us to offer services in the most effective and timely manner enabling us to
capitalize on the immediate, viable Internet opportunities in our markets. We
are also interested in acquiring or aligning with other companies that provide
other telecommunications services including local and long distance telephone,
utility, and direct-to-home, in addition to other Internet technology and
software firms.
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FOCUS ON COMMUNITY RELATIONS AND CUSTOMER SATISFACTION
We believe that providing superior customer service and enhancing the
quality of life in the communities we serve are the key elements to our ultimate
long-term success. Our high level of service enables us to maintain subscribers
and support our rates. It is our goal to achieve a high level of customer
satisfaction by employing a well-trained staff of customer service
representatives and experienced field technicians.
Our Tyler, Texas call center offers 24-hour, 7-day per week coverage to
existing Buford customers on a toll-free basis. The call center utilizes four
T-1 lines and can handle up to 80 incoming calls at any given time. We believe
the call center can accommodate 250,000 subscribers with our current facilities.
The call center complex, including hardware and software, was designed to be
rapidly and cost-effectively increased in scale to manage up to approximately
2.0 million subscribers.
The Tyler, Texas call center administers all phases of on-site service at a
customer's home, including dispatching the order, confirming that service has
been completed and updating the billing system and the customer's records to
reflect completion of the service. We utilize a satellite-based system to track
and dispatch our service vehicles throughout the service territory. The Qualcomm
OmniTRACS system provides real-time, constant two-way communications between the
call center and service vehicles. The system utilizes a base unit at the call
center that sends and receives messages via satellite from receiver/transmitters
installed atop each service vehicle.
Our call center in Plainville, Kansas also offers 24-hour, 7-day per week
coverage to existing Classic customers on a toll-free basis. The customer
service center is supported by three T-1 lines and can handle up to 60 incoming
calls at any given time through a telephone switch we own. The switch is
complemented by a software package that can track call statistics ranging from
average answer time to the number of calls by type, as well as individual and
group performance statistics. This sophisticated software facilitates the
movement of customer service and field service agents in order to minimize
answer times. Data is recorded daily and reports can be generated to track
trends in call volume.
We believe customer service is further enhanced by our 44 local offices'
ability to coordinate technical service and installation appointments more
effectively and to respond quickly to customer inquiries. We also believe that
local offices increase the effectiveness of our customer retention efforts,
community relations endeavors, and marketing campaigns. Our customer service and
technical staff attend ongoing workshops led by both a full-time, in-house
training specialist and outside customer service and technical training firms
that emphasize first time quality, point-of-sale subscriber acquisition, upgrade
and retention, technical support, and other pertinent customer service issues.
In addition, we employ bilingual customer service representatives to serve our
Spanish-speaking subscriber base.
We are dedicated to fostering strong community relations in the communities
we serve. The cornerstone of our community relations strategy is our Classic
Scholarship Fund, which has provided meaningful financial assistance to hundreds
of graduating high school seniors within our service areas over the past three
years. We install and provide free cable television service and Internet access
to public schools, government buildings, and public libraries in our franchise
areas. We believe that our relations with the communities we serve are good.
We maintain a site on the World Wide Web (http://www.classic-cable.com) to
help communicate and interact with our online customers. Our website was
designed to help our customers make intelligent television viewing choices and
to acquaint our customers with us and our corporate mission.
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INCREASE THE REVENUE-GENERATING BANDWIDTH OF OUR CABLE PLANT
Through our capital improvement program, we plan to upgrade our cable plant
aggressively and systematically utilizing cost-effective and appropriate
technology for the market served. These upgrades include:
- Traditional rebuild to a 550-750 MHz bandwidth capacity in selected
systems;
- The deployment of digital compression services such as Headend in The
Sky(R), known as HITS, a digital compression service developed by
National Digital Television Center, Inc., a subsidiary of
Tele-Communications, Inc., and TVN Entertainment Digital Service, known
as TVN;
- The deployment of fiber optic cable; and
- The consolidation of headends.
We believe that these technical upgrades create additional revenue
opportunities, enhance operating efficiencies, increase customer satisfaction,
improve franchise relationships and solidify our position as the dominant
provider of multi-channel video services in our markets. We seek to benefit from
the capital improvement program by generating additional revenue from:
- Expanded tiers of basic programming;
- Multiplexed premium services;
- Pay-per-view movies and events;
- Digital music;
- On-screen navigators;
- Home shopping services;
- High-speed data services;
- Internet access; and
- Advertising.
IMPLEMENT OUR BROADBAND SERVICES
Digital services. Depending on the size of the system, we intend to offer
digital video services through either a digital headend or through
direct-to-home solution. In larger systems, we provide enhanced digital video in
our upgraded and certain other systems using either HITS or TVN. HITS enables us
to deliver video services such as:
- pay-per-view programming;
- on-screen programming navigators;
- multiplexed premium channels such as HBO-Family and HBO-Signature;
- digital music; and
- multiple tiers of niche satellite basic programming.
TVN also offers a similar digital compression service which provides a
robust line up of pay-per-view programming, digital quality music channels, and
the on-screen programming navigator. This digital delivery method provides for a
more flexible, customized product and improved channel lineups and may
potentially allow for more flexibility in pricing and packaging.
For systems with fewer than 2,000 subscribers, or other systems whose
headends are uneconomical to upgrade, we intend to use a digital satellite
alternative to provide a more robust cable product offering. Whether through the
resale of digital programming from a DBS provider or HITS-2-Home, we can offer
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<PAGE> 51
customers over 140 additional channels. For example, HITS has recently developed
a seamlessly delivered digital satellite programming overlay product direct to
the home. This product, HITS-2-Home, is expected to offer customers a comparable
programming selection currently offered by HITS to the headend.
We believe that these enhanced digital video services will allow us to
provide digital services comparable to DBS at a lower cost. We have introduced
the HITS or TVN digital product in 7 systems which in the aggregate pass
approximately 64,000 homes, representing approximately 39,000 cable subscribers.
As of March 31, 1999, we had approximately 2,600 digital customers. We plan to
offer digital cable service in 23 additional markets, serving approximately
63,000 additional subscribers over the next few months.
Internet services. We believe that additional revenue opportunities exist
in non-metropolitan markets by providing advanced telecommunication services,
such as Internet access and the delivery of high-speed data services, including
local- and wide-area network applications, for residential and commercial
customers. We believe that these markets have limited appeal to the larger
telecommunications companies and that our technical platform will provide these
services at higher speeds and lower cost, giving us a competitive advantage over
other telecommunication providers in the markets in which we operate. For
example, a 10 megabit cable modem provides Internet access at download speeds
350 times faster than typical 28.8 kilobit dial-up telephone modem connections.
We have introduced Internet access via the cable modem in selected systems and
will seek to complement this service with the telephone modem connection through
acquisitions of local Internet service providers.
As part of our strategy to deliver Classic-branded advanced data services
in communities we serve, we have entered into a non-exclusive agreement with
High Speed Access Corporation, known as HSA. HSA provides a comprehensive
turnkey solution for high speed Internet access via cable modems to residential
and commercial end users. HSA will provide speed to market, call center/help
desk support, national and local marketing assistance, engineering and network
design, cable modems and supporting headend equipment. The Com21 modem that HSA
currently uses is system flexible, capable of being deployed in a one-way, or
telco return, or two-way scenario. In return for these services, we will receive
a 50% split of gross customer revenue. Our initial launch plan will include 43
additional systems representing approximately 253,000 homes passed within the
next twelve months. Presently, we have six active sites passing approximately
17,000 homes.
SYSTEM LOCATION
We operate cable television systems in non-metropolitan markets across nine
contiguous states in the central United States. The following table illustrates
our relative rank in each of the states we operate based on total number of
subscribers:
<TABLE>
<CAPTION>
EQUIVALENT
HOMES BASIC BASIC STATE
STATE PASSED UNITS PENETRATION RANK
- ----- ------------ ---------- ----------- -----
<S> <C> <C> <C> <C>
Texas......................................... 275,325 148,706 54.0% 5
Arkansas...................................... 95,728 58,034 60.0 4
Oklahoma...................................... 81,270 50,932 62.7 6
Missouri...................................... 67,288 38,757 57.6 6
Kansas........................................ 50,965 35,412 69.5 3
Louisiana..................................... 27,381 16,376 59.8 8
Colorado...................................... 5,157 5,383 104.4 7
Nebraska...................................... 3,389 2,102 62.0 12
New Mexico.................................... 2,604 1,697 65.2 11
------- ------- -----
Subtotals................................ 609,107 357,399 58.7%
=====
CCT...................................... 3,748
------- -------
Totals.............................. 609,107 361,147
======= =======
</TABLE>
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As part of the Buford acquisition, we will acquire Correctional Cable
Television, Inc., known as CCT. CCT is the largest provider of programming
services to the prison market, serving 90 correctional facilities in 18 states,
reaching more than 70,000 inmates. CCT provides programming services through
company-owned and installed modified headends under three to five year
contracts. CCT's EBITDA has grown at a compounded annual rate of approximately
40% during the last three years. CCT's continued growth will be driven by
increased penetration of the prison market, which consists of approximately
2,000 federal, state and juvenile facilities.
MARKETING, PROGRAMMING AND RATES
Our marketing programs and campaigns are based upon a variety of cable
services creatively packaged and tailored to appeal to our different markets and
segments within each market. We routinely survey our customer base to ensure
that it is meeting the demands of our customers and stays abreast of our
competition in order to counter competitors' promotional campaigns effectively.
We use a coordinated array of marketing techniques to attract and retain
customers and to increase premium service penetration, including door-to-door
and direct mail solicitation, telemarketing, media advertising, local
promotional events typically sponsored by programming services and cross-channel
promotion of new services and pay-per-view.
We have various contracts to obtain basic, satellite and premium
programming for our cable systems from program suppliers, including, in limited
circumstances, some broadcast stations, with compensation generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures
and/or offer marketing support. In addition, we are a member of a programming
consortium consisting of small to medium sized multiple cable systems operators
and individual cable systems serving, in the aggregate, over ten million cable
subscribers. The consortium helps create efficiencies in the areas of securing
and administering programming contracts, as well as to establish more favorable
programming rates and contract terms for small and medium sized cable operators.
We do not have long-term programming contracts for the supply of a substantial
amount of our programming. In cases where we do have such contracts, they are
generally for fixed periods of time ranging from one to five years and are
subject to negotiated renewal. While we believe that our relations with our
programming suppliers are generally good, the loss of contracts with certain of
our programming suppliers would have a material adverse effect on our results of
operations. Cable programming costs are expected to continue to increase due to
additional programming being provided to customers, increased costs to purchase
cable programming, inflationary increases and other factors. For the year ended
December 31, 1998 and the three months ended March 31, 1999, programming costs
as a percentage of revenues were 25.8% and 27.2%, respectively. We cannot assure
you that our programming costs will not increase substantially in the near
future or that other materially adverse terms will not be added to our
programming contracts.
Our cable systems offer our customers programming that includes the local
network, independent and educational television stations, a limited number of
television signals from distant cities, numerous satellite-delivered,
non-broadcast channels such as CNN, MTV, USA, ESPN and TNT, and in some systems
local information and public access channels. The programming offered by us
varies among the cable systems depending upon each system's channel capacity and
viewer interests. Primarily for competitive reasons, we generally attempt to
offer a single level of basic service containing all broadcast and
satellite-delivered programming. In a few systems, however, we do offer multiple
tiers of cable television programming. We also offer premium programming
services, both on a per-channel basis and in many systems as part of premium
service packages designed to enhance our customer's perception of value.
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided and competitive factors. At
March 31, 1999, our monthly full basic service rates for residential customers
ranged from $18.00 to $35.45 and per-channel premium service rates, not
including special promotions, ranged from $5.95 to $12.00 per service. At March
31, 1999, the weighted average price for our monthly full basic service was
approximately $30.28.
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A one-time installation fee, which we may wholly or partially waive during
a promotional period, is usually charged to new customers. We charge monthly
fees for converters and remote control tuning devices. In addition, we also
charge administrative fees for delinquent payments for service. Customers are
free to discontinue service at any time without additional charge but may be
charged a reconnection fee to resume service. Commercial customers, such as
hotels, motels and hospitals, are charged a negotiated, non-recurring fee for
installation of service and monthly fees. Multiple dwelling unit accounts may be
offered a bulk rate in exchange for single-point billing and basic service to
all units.
In addition to customer fees, we derive modest revenues from the sale of
local spot advertising time on locally originated and satellite-delivered
programming. We also derive modest revenues from affiliations with home shopping
services, which offer merchandise for sale to customers and compensate system
operators with a percentage of their sales receipts.
We also derive revenue from the sale of programming featuring movies and
special events to customers on a pay-per-view basis. We believe that we will be
able to further increase our pay-per-view penetration rates and revenue as we
continue to deploy addressable technology in upgraded systems and in systems
where we launch a digital compression service.
While we plan to offer advanced telecommunications services in certain of
our cable systems, we anticipate that monthly customer fees derived from
multi-channel video services will continue to constitute the large majority of
our total revenues for the foreseeable future.
TECHNICAL OVERVIEW
We endeavor to maintain high technical performance standards in all of our
cable systems. To accomplish this, we have embarked on our capital improvement
plan to upgrade our cable systems selectively. This program, which involves the
use of fiber optic technology, will (A) expand channel capacities, (B) enhance
signal quality, (C) improve technical reliability, (D) augment address ability,
and (E) provide a platform to develop high-speed data services and Internet
access. We believe that such technical upgrades create additional revenue
opportunities, enhance operating efficiencies, increase customer satisfaction,
improve franchising relations and solidify our position as the dominant provider
of video services in the markets in which we operate. Before committing the
capital to upgrade or rebuild a system, we carefully assess:
- the existing technical reliability and picture quality of the system;
- basic subscribers' demand for more channels;
- requirements in connection with franchise renewals;
- programming alternatives offered by our competitors;
- customers' demand for other cable television and broadband
telecommunications services; and
- the return on investment of any such capital outlay.
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Currently, our subscribers, on average, are served by systems with an
analog capacity of 44 channels with 33 channels in use. The table below
summarizes our existing technical profile, as of March 31, 1999:
<TABLE>
<CAPTION>
UP TO 29 30 TO 39 40 TO 49 50 TO 59 OVER 60
CHANNELS CHANNELS CHANNELS CHANNELS CHANNELS TOTAL
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of systems.............. 18 240 124 62 95 539
Miles of plant................. 169 4,578 4,596 3,097 4,144 16,584
Homes passed................... 7,001 145,782 164,570 99,536 192,218 609,107
Basic subscribers.............. 3,492 78,022 99,324 55,914 120,647 357,399(1)
% of total basic subscribers... 1.0% 21.8% 27.8% 15.6% 33.8% 100.0%
Basic subscribers per plant
mile......................... 20.7 17.0 21.6 18.1 29.1 21.6
Premium subscribers............ 1,033 38,603 42,824 39,156 72,762 194,378
Premium penetration............ 29.6% 49.5% 43.1% 70.0% 60.3% 54.4%
</TABLE>
-------------------------
(1) Does not include approximately 3,700 equivalent basic units
related to CCT.
Our capital improvement plan contemplates the investment of approximately
$160.0 million over the next four years as follows:
- $100.0 million to establish a technical standard of 550-750 MHz bandwidth
capacity in cable television systems serving approximately 75% of our
basic subscribers and headend consolidation;
- $45.0 million for ongoing maintenance and replacement, for installations
and extensions to the cable plant related to customer growth; and
- $15.0 million for the purchase of additional addressable converters and
headend equipment to support the deployment of digital services.
The table below summarizes our expected technical profile upon completion
of the capital improvement program:
<TABLE>
<CAPTION>
UP TO 29 30 TO 39 40 TO 49 50 TO 59 OVER 60
CHANNELS CHANNELS CHANNELS CHANNELS CHANNELS TOTAL
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of systems(1)........... -- 205 112 38 184 539
Miles of plant................. -- 3,016 1,634 891 11,043 16,584
Homes passed................... 89,358 61,497 26,778 431,474 609,107
Basic subscribers.............. -- 44,910 30,659 12,176 269,654 357,399(2)
% of total basic subscribers... -- 12.6% 8.6% 3.4% 75.4% 100.0%
Basic subscribers per plant
mile......................... -- 14.9 18.8 13.7 24.4 21.6
Premium subscribers............ -- 20,295 11,781 8,666 153,636 194,378
Premium penetration............ -- 45.2% 38.4% 71.2% 57.0% 53.8%
</TABLE>
-------------------------
(1) The analysis above does not reflect the impact of anticipated
headend consolidations achieved through the selective deployment
of fiber optic technology.
(2) Does not include approximately 3,700 equivalent basic units
related to CCT.
With the exception of 11 systems, we do not currently use addressable
technology. We utilize a "trap" scheme whereby a technician installs filters, or
traps, at each cabled home enabling the technician to configure the programming
received by each subscriber. The cable system improvement program contemplates
the use of addressable set-top boxes in selected analog upgraded systems, in
addition to digital addressable technology. This service transmits digitally
compressed signals of niche satellite programming, multiplexed premium services,
pay-per-view movies and digital music for reception by cable systems, which in
turn deliver them to their subscribers.
Our active use of fiber optic technology as an alternative to coaxial cable
is playing a major role in expanding channel capacity and improving the
performance of our cable television systems. Fiber optic
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strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal amplification typically required
for coaxial cable. We expect to use fiber backbone architecture selectively to
eliminate headend facilities and to reduce amplifier cascades, thereby improving
picture quality, system reliability and headend and maintenance expenditures.
Recently, high-speed cable modems and set-top boxes using digital
compression technology have become commercially viable. These developments allow
for the introduction of high-speed data services and Internet access and will
increase programming services available to customers. Digital compression
technology has the potential to expand channel capacity significantly given that
up to 12 digital channels can be carried in the bandwidth of one analog channel
(6 MHz).
We own or lease 617 towers that are used to receive off-air broadcast
signals from the nearest urban transmit site or via intermittent microwave relay
stations. Our towers range from 15 feet to 600 feet in height and 138 of our
towers are at least 200 feet in height. We lease tower space to cellular
telephone, personal communications services paging and other transmission
companies for a fixed monthly charge typically dictated by long-term contract.
FRANCHISES
Cable television systems are typically constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain conditions, such as:
- time limitations on commencement and completion of construction;
- conditions of service, including number of channels, types of programming
and the provision of free service to schools and certain other public
institutions; and
- the maintenance of insurance and indemnity bonds.
Certain provisions of local franchises are subject to federal regulation
under both the 1984 Cable Act and the 1992 Cable Act. See "Legislation and
Regulation -- Federal Regulation -- Cable Rate Regulation."
At March 31, 1999, pro forma for the Buford acquisition, we held 695
franchises. These franchises, all of which are non-exclusive, generally provide
for the payment of fees to the issuing authority. Annual franchise fees imposed
on the cable systems range from 0% to 5% of the gross revenues generated by the
cable systems. With limited exceptions, franchise fees are passed directly
through to the customers on their monthly bills. The 1984 Cable Act prohibits
franchising authorities from imposing franchise fees in excess of 5% of gross
revenues, and permits a cable operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances. Our franchises can
be terminated by the franchising authority prior to the stated expiration date
for uncured breaches by us of material provisions.
The following table sets forth the number of franchises by year of
franchise expiration and the approximate number and percentage of basic
subscribers at March 31, 1999:
<TABLE>
<CAPTION>
NUMBER % OF NUMBER % OF
OF TOTAL OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
---------------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Prior to 2000............................... 29 4.2% 26,395 7.3%
2000 to 2003................................ 177 25.5 84,695 23.5
After 2003.................................. 489 70.3 250,057 69.2
--- ----- ------- -----
Total............................. 695 100.0% 361,147 100.0%
=== ===== ======= =====
</TABLE>
The Cable Acts provide, among other things, comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications. See "Legislation and Regulation." We believe that we
have good relationships with our franchising communities. To date, we have never
had a franchise revoked or
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terminated. Additionally, no request made by us for franchise renewals or
extensions has been denied although the renewal or extended franchises have
frequently resulted in franchise modifications on satisfactory terms. The Cable
Acts also establish the conditions for sale of a cable system in the event that
the franchise is not renewed or is revoked "for cause" by the franchising
authority.
The 1992 Cable Act provides that a franchising authority may not grant an
exclusive franchise, may not unreasonably refuse to award an additional
competitive franchise, and may operate cable systems itself without franchises.
Under the 1992 Cable Act, franchising authorities are immunized from monetary
damages awards arising from regulation of cable television systems or decisions
made on franchise grants, renewals, transfers and amendments. See "Legislation
and Regulation -- Federal Regulation -- Cable Rate Regulation."
INDUSTRY OVERVIEW
A cable television system receives television, radio and data signals at
the system's "headend" site by means of off-air antennas, microwave relay
systems and satellite earth stations. These signals are then modulated,
amplified and distributed through coaxial and fiber optic distribution systems
to deliver a wide variety of channels of television programming to subscribers
who pay fees on a monthly basis for this service. A cable television system may
also originate its own television programming and other information services for
distribution through its system. Cable television systems generally are
constructed and operated pursuant to non-exclusive franchises or similar
licenses granted by local governmental authorities for a specified period of
time.
The cable television industry developed in the United States in the late
1940's and early 1950's in response to the needs of residents in predominantly
rural and mountainous areas of the country where the quality of off-air
television reception was inadequate due to factors such as unfavorable
topography and remoteness from television broadcast towers. In the 1960's, cable
systems also developed in non-metropolitan markets that had limited availability
of off-air television station signals. All of these markets are regarded within
the cable industry as "classic cable" television system markets.
Cable television systems offer customers programming consisting of
broadcast television signals of local network affiliates, independent and
educational television stations, a limited number of television signals from
so-called "super stations" originating from distant cites, such as WGN from
Chicago, various channels, such as Cable News Network, Music Television, the USA
Network, Turner Network Television, and Entertainment and Sports Programming
Network, programming originated locally by the cable television system, such as
public, government and education access programs, and informational displays
featuring news, weather and public service announcements. For an additional
monthly charge, cable television systems also offer "premium" television
services to customers on a per-channel basis. These services, such as Home Box
Office, Cinemax, Showtime, The Movie Channel and selected regional sports
networks, are channels that consist principally of feature films, live sporting
events, concerts and other special entertainment features, usually presented
without commercial interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic and premium television services and for other services, such as
the rental of converters and remote control devices. These monthly service fees
constitute the primary source of revenues for cable television systems. In
addition to customer revenues from these services, cable television systems
generate revenues from additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. Cable television systems
also frequently offer their customers home shopping services for a share of the
revenues from products sold in their service areas. The cable television
industry is changing rapidly due to new technology and new alliances between
cable television and other telecommunications companies. Providing traditional
cable television programming is only one aspect of the industry as potential
opportunities to expand into Internet, broadband data, telephone, and other
telecommunications services continue to develop and become more commercially
viable.
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COMPETITION
Cable television systems face competition from (A) alternative methods of
receiving and distributing television signals, such as off-air television
broadcast programming, direct broadcast satellite services, known as "DBS,"
wireless cable services, and (B) other sources of news, information and
entertainment, such as newspapers, movie theaters, live sporting events, on-line
computer services and home video products. Our competitive position depends, in
part, upon reasonable prices to customers, greater variety of programming and
other communications services, and superior technical performance and customer
service. Accordingly, cable operators in rural areas, where off-air reception is
more limited, generally achieve higher penetration rates than cable operators in
major metropolitan areas, where numerous, high quality off-air signals are
available.
Cable television systems generally operate pursuant to franchises granted
on a nonexclusive basis, so that more than one cable television system may be
built in the same area, known as an "overbuild," with potential loss of revenue
to the operator of the original system. It is possible that a franchising
authority might grant a second franchise to another company containing terms and
conditions more favorable than those afforded to us. The 1992 Cable Act
prohibits franchising authorities from unreasonably denying requests for
additional franchises and permits franchising authorities to operate cable
television systems without a franchise. Although a private competitor ordinarily
would seek a franchise from a local jurisdiction, municipalities have built and
operated their own systems. Overbuilds historically have been relatively rare,
as constructing and developing a cable television system is capital-intensive,
and it is difficult for the new operator to gain a marketing advantage over the
incumbent operator. We currently face direct competition from traditional
overbuilds in two systems passing approximately 2,500 homes.
In recent years, the FCC and Congress have adopted policies providing a
more favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
television systems. These technologies include, among others, DBS service,
whereby signals are transmitted by satellite to satellite dishes as small as 18
inches located on customer premises. Programming is currently available to the
owners of DBS dishes through conventional, medium and high-powered satellites.
DBS systems provide movies, broadcast stations, and other program services
comparable to those of cable television systems. DBS systems can also provide
high speed Internet access. DBS service can be received anywhere in the United
States through installation of a small rooftop or side-mounted antenna. This
technology has the capability of providing more than 100 channels of programming
over a single high-powered satellite with significantly higher capacity if
multiple satellites are placed in the same orbital position. DBS is currently
being heavily marketed on a nationwide basis by two DBS providers. DBS providers
are significant competition to cable service providers, including us.
The 1992 Cable Act contains provisions, which the FCC has implemented with
regulations, to enhance the ability of cable competitors to purchase and make
available to home satellite dish owners certain satellite delivered cable
programming at competitive costs. The FCC also adopted regulations that preempt
certain local restrictions on satellite and over-the-air antenna reception of
video programming services, including zoning, land-use or building regulations,
or any private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user. Digital
satellite service, known as DSS, offered by DBS systems has certain advantages
over cable systems with respect to programming and digital quality, as well as
disadvantages that include high up-front costs and a lack of local programming,
service and equipment distribution. Our strategy of providing pay-per-view and
perhaps satellite niche programming via digital services in certain of our cable
systems is designed to combat digital satellite service competition. "Bundling"
of our video service with advanced telecommunications services in certain of the
cable systems may also be an effective tool for competing with DSS. DBS does
suffer certain significant operating disadvantages compared to cable television,
however, including the subscriber's present inability to view different
programming on different television sets, line-of-sight reception requirements,
up-front costs associated with the dish antenna, and the lack of local
programming. DBS currently faces technical and legal obstacles to providing
local broadcast signals, although both DBS providers are now attempting to do so
in certain major markets, and legislation is now pending that may remove the
existing legal obstacle.
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Cable television systems also compete with wireless program distribution
services such as multichannel multipoint distribution service, or MMDS, which
use low power microwaves to transmit video programming and high speed data
services, including Internet access, over the air to customers. Additionally,
the FCC licensed new frequencies in the 28 MHz band for a new multichannel
wireless video service similar to MMDS, known as Local Multipoint Distribution
Service, or LMDS. LMDS is also suited for providing wireless data services,
including the possibility of Internet access. Wireless distribution services
generally provide many of the programming services provided by cable systems,
and digital compression technology may significantly increase the channel
capacity of these wireless distribution services. Because MMDS service requires
unobstructed "line of sight" transmission paths, the ability of MMDS systems to
compete may be hampered in some areas by physical terrain and foliage.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Act eliminated
this cross-ownership restriction, making it possible for companies with
considerable resources to overbuild existing cable systems. Congress has also
repealed the prohibition against national television networks owning cable
systems. Various local exchange carriers, commonly referred to as LECs,
currently are seeking to provide video programming services within their
telephone service areas through a variety of distribution methods, primarily
through the deployment of broadband wire facilities, but also through the use of
wireless or MMDS transmission. Several telephone companies have begun seeking
cable television franchises from local governmental authorities and constructing
cable television systems. Cable television systems could be placed at a
competitive disadvantage if the delivery of video programming services by LECs
becomes widespread, since LECs may not be required, under certain circumstances,
to obtain local franchises to deliver such video services or to comply with the
variety of obligations imposed upon cable television systems under such
franchises. The entry of telephone companies as direct competitors is likely to
continue and could adversely affect the profitability and valuation of our cable
systems. Issues of cross-subsidization by LECs of video and telephony services
also pose strategic disadvantages for cable operators seeking to compete with
LECs that provide video services. We believe, however, that the non-metropolitan
markets in which we provide or expect to provide cable services are unlikely to
support competition in the provision of video and telecommunications broadband
services given the lower population densities and higher costs per subscriber of
installing a plant.
The 1996 Telecom Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger markets, and its prohibition of
buyouts and joint ventures between incumbent cable operators and LECs exempts
small operators and carriers meeting certain criteria. See "Legislation and
Regulation." We believe that significant growth opportunities exist for us by
establishing cooperative rather than competitive relationships with LECs within
our service areas, to the extent permitted by law.
The entry of electric utility companies into the cable television business,
as now authorized by the 1996 Telecom Act, could also have an adverse effect on
our business. Well-capitalized businesses from outside the cable industry may
also become competitors for franchises or providers of competing services.
Other new technologies may become competitive with non-entertainment
services offered by cable television systems. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and noncommercial FM
stations to use their sub-carrier frequencies to provide non-broadcast services
including data transmissions. The FCC has established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. The expansion of fiber optic systems and the introduction of new xDSL
services by LECs and other common carriers provide facilities for the
transmission and distribution to homes and businesses of video services,
including interactive computer-based services like the Internet, data and other
non-video services. The FCC has held spectrum auctions for licenses to provide
PCS. PCS will enable license holders, including cable operators, to provide
voice and data services.
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Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environments are constantly occurring. Thus,
it is not possible to predict the effect that ongoing or future developments
might have on the cable industry or on our operations.
EMPLOYEES
At March 31, 1999, Classic Cable and Buford employed approximately 707
full-time employees and 49 part-time employees. None of our employees is
represented by a labor union. We consider our relations with our employees to be
good.
PROPERTIES
A cable television system consists of four principal operating components.
The first component, known as the headend, receives television, radio and
information signals by means of special antennas and satellite earth stations.
The second component, the distribution network, which originates at the headend
and extends throughout the system's service area, consists of microwave relays,
coaxial or fiber optic cables placed on utility poles or buried underground and
associated electronic equipment. The third component of the system is a "drop
cable," which extends from the distribution network into each customer's home
and connects the distribution system to the customer's television set. The
fourth component, a converter, is the home terminal device that expands channel
capacity to permit reception of more than 12 channels of programming.
Our principal physical assets consist of cable television systems,
including signal-receiving, encoding and decoding apparatus, headends,
distribution systems and subscriber house drop equipment for each of the cable
systems. The signal receiving apparatus typically includes a tower, antenna,
ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, are located near the
receiving devices. Our distribution systems consist primarily of coaxial cable
and related electronic equipment. As the upgrades are completed, the cable
systems will incorporate fiber optic cable. Subscriber equipment consists of
taps, house drops and converters. We own our distribution systems, various
office fixtures, test equipment and certain service vehicles. The physical
components of the cable systems require maintenance and periodic upgrading to
keep pace with technological advances.
Our cables generally are attached to utility poles under pole rental
agreements with local public utilities, although in some areas the distribution
cable is buried in underground ducts or trenches. The FCC regulates most pole
attachment rates under the federal Pole Attachment Act.
We own or lease parcels of real property for signal reception sites, such
as antenna towers and headends, microwave complexes and business offices,
including our principal executive offices. We believe that our properties, both
owned and leased, are in good condition and are suitable and adequate for our
business operations as presently conducted.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are or Classic
Cable is a party or to which any of our or their respective properties are
subject.
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past materially affected, and
may in the future materially affect, us and the cable television industry. The
following is a summary of federal laws and regulations affecting the growth and
operation of the cable television industry and a description of certain state
and local laws. We believe that the regulation of our industry remains a matter
of interest to Congress, the FCC and other regulatory authorities. There can be
no assurance as to what, if any, future actions such legislative and regulatory
authorities may take or the effect thereof on our operations.
FEDERAL REGULATION
The primary federal statute dealing with the regulation of the cable
television industry is the Communications Act. The three principal amendments to
the Communications Act that shaped the existing regulatory framework for the
cable television industry were the 1984 Cable Act, the 1992 Cable Act and the
1996 Telecom Act. The 1996 Telecom Act, which became effective in February 1996,
was the most comprehensive reform of the nation's telecommunications laws since
the Communications Act. Although the long term goal of the 1996 Telecom Act is
to promote competition and decrease regulation of various communications
industries, in the short term, the law delegates to the FCC, and in some cases
to the states, broad new rulemaking authority. The FCC and state regulatory
agencies are required to conduct numerous rulemaking and regulatory proceedings
to implement the 1996 Telecom Act and such proceedings may materially affect the
cable television industry.
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations to implement the provisions
contained in the Communications Act. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. Below, you will find
a brief summary of certain of these federal regulations as adopted to date.
Cable Rate Regulation
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry. Under that regime, local franchise authorities had primary
responsibility for administering the basic service tier. The FCC directly
administered rate regulation of cable programming service tiers, which included
all video programming distributed over a system that is not part of the basic
service tier. Although the 1996 Telecom Act preserves local franchise authority
to regulate the basic service tier, it eliminated FCC authority to regulate
cable programming service tier rates as of March 31, 1999. Accordingly, the FCC
is no longer able to act on cable programming service tier rate increases that
occur after that date.
Federal law nonetheless continues to govern certain aspects of local rate
regulation. For example, federal law requires that the basic service tier be
offered to all cable subscribers. Recent FCC regulations adopted pursuant to the
1996 Telecom Act define "effective competition" and "small cable operator" for
purposes of exempting certain cable systems' basic tier from rate regulation.
Additional federal regulations require cable systems to permit customers to
purchase video programming on a per channel or per program basis without
subscribing to any tier of service, other than the basic service tier, unless
the cable system is technically incapable of doing so. Generally this exemption
is available until a cable system obtains the technical capability, but not
later than December 2002.
Although the 1996 Telecom Act eliminated FCC rate regulation of the higher
tiers, local franchising authorities, known in the industry as LFAs, continue to
have authority over the regulation of the lowest level of cable -- the basic
service tier, commonly known as BST. For regulatory purposes, the BST contains
local broadcast stations and public, educational, and government, or PEG, access
channels and other services the system operator chooses to include in the same
package with these channels. Before an LFA begins BST rate regulation, it must
certify to the FCC that it will follow applicable federal rules, and
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many LFAs have voluntarily declined to exercise this authority. LFAs also have
primary responsibility for regulating cable equipment rates. Under federal law,
charges for various types of cable equipment must be unbundled from each other
and from monthly charges for programming services. The 1996 Telecom Act allows
operators to aggregate costs for broad categories of equipment across geographic
and functional lines. This change should facilitate the introduction of new
technology. Few of the LFAs in the communities in which we operate have elected
to certify to regulate rates, and we believe that the FCC's existing "small
systems order" will afford us additional flexibility to adjust our rates. The
small systems order, and related FCC rules, provides a more simplified and
liberal cost of service rate justification to eligible small system operators,
such as us. However there can be no assurance that our revenues and results of
operations will not be adversely affected in the future by regulation of cable
system rates.
Franchise Fees
Federal law allows franchising authorities to impose franchise fees, but
such payments cannot exceed 5% of a cable system's annual gross revenues derived
from the operation of the cable system in providing cable service. Under the
1996 Telecom Act, franchising authorities may not exact franchise fees from
revenues derived from telecommunications services, however, many LFA's seek
analogous fees under separate telecommunications service franchises. LFA
authority to collect these telecommunications franchise fees is the subject of
litigation.
Renewal of Franchises
The 1984 Cable Act established renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of renewal. While these
formal procedures are not mandatory unless timely invoked by either the cable
operator or the franchising authority, they can provide substantial protection
to incumbent franchisees. Even after the formal renewal procedures are invoked,
franchising authorities and cable operators remain free to negotiate a renewal
outside the formal process. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards. Even if a franchise is
renewed, a franchising authority may impose new and more onerous requirements
such as upgrading facilities and equipment, although the municipality must take
into account the cost of meeting such requirements. The 1992 Cable Act made
several changes to the process under which a franchise is renewed, some of which
could make it easier in some cases for a franchising authority to deny renewal.
Competing Franchises
The 1992 Cable Act prohibits franchising authorities from unreasonably
refusing to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request within 120 days after receipt of all information required by
FCC regulations and by the franchising authority. Approval is deemed to be
granted if the franchising authority fails to act within such period.
Cable Entry Into Telecommunications and Broadband Services
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles beginning in 2001 pursuant to an FCC
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prescribed formula if the operator provides telecommunications service, as well
as cable service, over its plant. The FCC has clarified that a cable operator's
favorable pole rates are not endangered by the provision of non-cable services
such as Internet access.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers, including cable operators, is the interconnection
obligation imposed on all telecommunications carriers. The FCC adopted
regulations implementing the 1996 Telecom Act requirement that LECs open their
telephone networks to competition by providing competitors interconnection,
access to unbundled network elements and retail services at wholesale rates.
These regulations were upheld by the U.S. Supreme Court in January 1999,
although the unbundled network element requirements are subject to an FCC
proceeding. The ultimate outcome of the litigation and the FCC's rulemakings,
and the ultimate impact of the 1996 Telecom Act or any final regulations adopted
pursuant to the new law on us or our business cannot be determined at this time.
Cable entry into markets for broadband services such as Internet access may
be affected by the regulatory landscape now being fashioned by the FCC and state
and local regulators. In recent months, some local franchise authorities have
imposed conditions on their approval of transfers of control, including those
involving such major transactions as AT&T's acquisition of TCI's cable
franchises. For example, the City of Portland, Oregon required AT&T to provide
competing Internet and other on-line service providers with open access to its
newly acquired cable platforms. This decision was upheld on appeal before a
federal district court, although that decision is on appeal. Numerous other
franchise authorities are considering imposing similar requirements, either
during transfer or renewal processes or by promulgating regulations pursuant to
their general franchise authority. In addition, a petition for declaratory
ruling has been filed with the FCC requesting a determination that cable service
providers must provide leased access channels to Internet service providers.
Similar conditions could be imposed upon us, either pursuant to a local
franchising authority's approval of a merger or other transaction between us and
another company, through the franchise renewal process, or through future
developments at the federal, state or local level. Likewise, future regulatory
or legislative developments could limit or preempt the authority of franchise
authorities to impose mandated access conditions.
Telephone Company Entry Into Cable Television
The 1996 Telecom Act makes far reaching changes in the regulation of
telephone companies that provide video programming services. The new law
eliminates federal legal barriers to competition in the local telephone and
cable communications businesses, preempts state and local laws and regulations
which create competitive barriers and sets basic standards for relationships
between telecommunications providers. The 1996 Telecom Act also eliminates the
requirements that LECs obtain FCC approval under Section 214 of the
Communications Act before providing video services in their telephone service
areas and removes the statutory telephone company/cable television
cross-ownership prohibition, thereby allowing LECs to offer video services in
their telephone service areas. LECs may provide service as traditional cable
operators with local franchises, or they may opt to provide their programming
over unfranchised "open video systems," subject to certain conditions,
including, but not limited to, setting aside a portion of their channel capacity
for use by unaffiliated program distributors on a non-discriminatory basis. LECs
could be formidable competitors to traditional cable operators, and certain LECs
have begun offering cable services, both within and outside of their service
areas. We currently have telephone overbuilds in two systems passing
approximately 2,500 homes.
The 1996 Telecom Act generally limits acquisitions and prohibits certain
joint ventures between LECs and cable operators in the same market. There are
some statutory exceptions to the buy-out and joint venture prohibitions,
including exceptions for certain small cable systems as defined by Federal law
and for cable systems or telephone facilities serving certain rural areas, and
the FCC is authorized to grant waivers of the prohibitions under certain
circumstances.
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Electric Utility Entry Into Telecommunications/Cable Television
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television. Electric utilities must establish separate subsidiaries, known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Because of their resources, electric utilities could also be
formidable competitors to traditional cable systems.
Additional Ownership Restrictions
The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against LECs
providing video programming directly to customers within their local telephone
exchange service areas. However, with certain limited exceptions, a LEC may not
acquire more than a 10% equity interest in an existing cable system operating
within the LEC's service area. The 1996 Telecom Act also authorized LECs and
others to operate "open video systems" without obtaining a local cable franchise
under the 1984 Cable Act. However, in a January 1999 decision, the U.S. Court of
Appeals for the Fifth Circuit held that the 1996 Telecom Act did not preempt
state franchise laws that might be applicable to these systems. See
"Business -- Competition."
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour, a measure of a television
station's signal strength as defined by the FCC's rules, covers any portion of
the community served by the cable system. The 1996 Telecom Act eliminated the
statutory ban and directed the FCC to review its cross-ownership rule within two
years. Pursuant to the 1996 Telecom Act, the FCC eliminated its restrictions on
the cross-ownership of cable systems and national broadcasting networks, and has
commenced a proceeding to review its broadcast cable cross-ownership
restrictions. In order to encourage competition in the provision of video
programming, the FCC adopted a rule prohibiting the common ownership,
affiliation, control or interest in cable television systems and wireless cable
facilities having overlapping service areas, except in very limited
circumstances. The 1992 Cable Act codified this restriction and extended it to
co-located satellite master antenna television systems, or SMATV systems.
Permitted arrangements in effect as of October 5, 1992, were grandfathered. In
January 1995, the FCC adopted regulations which permit cable operators to own
and operate SMATV systems within their franchise areas, provided that such
operation is consistent with local cable franchise requirements. The 1996
Telecom Act exempts cable systems subject to effective competition from the
wireless cable and SMATV restrictions. In addition, a cable operator can
purchase an SMATV system located within its franchise areas and technically
integrate it into its cable system. The 1992 Cable Act permits states or local
franchising authorities to adopt certain additional restrictions on the
ownership of cable television systems.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services and has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more, unless there is another single holder of
more than 50% of the voting stock, officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of its 30%
horizontal ownership rule pending the outcome of the appeal from a U.S. District
Court decision holding the multiple ownership limit provision of the 1992 Cable
Act unconstitutional, but maintains certain reporting requirements for multiple
system operators, known as MSOs, passing more than 20% of homes nationwide and
initiated a proceeding to examine its current horizontal ownership limitations
rule and whether it should be modified. The FCC also has initiated a rulemaking
proceeding to review its attribution rules which define what constitutes a
"cognizable interest" triggering application of various FCC rules relating to
the provision of cable services such as cross-ownership, programing access and
channel occupancy rules, and horizontal ownership limitations. In addition, a
rulemaking proceeding to examine, among other issues, whether any limitations
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on cable-DBS cross-ownership are warranted in order to prevent anticompetitive
conduct in the video services market remains pending before the FCC.
There are no federal restrictions on non-U.S. entities having an ownership
interest in cable television systems or the FCC licenses commonly employed by
such systems. Section 310(b)(4) of the Communications Act does, however, limit
direct and indirect foreign ownership of interests in FCC broadcast and common
carrier radio licenses, although the FCC may conclude that this indirect foreign
ownership is consistent with the public interest.
Technical Requirements
The FCC has imposed technical standards applicable to the cable channels on
which broadcast stations are carried, and has prohibited franchising authorities
from adopting standards which are in conflict with or more restrictive than
those established by the FCC. Those standards are applicable to all classes of
channels which carry downstream National Television System Committee, known as
NTSC, video programming. The FCC also has adopted additional standards
applicable to cable television systems using frequencies in the 108-137 MHz and
225-400 MHz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. Periodic testing by cable operators for compliance with
the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to update its technical standards periodically to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable system's use of any
type of subscriber equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable systems and consumer
electronics equipment. Among other things, these regulations generally prohibit
cable operators from scrambling their basic service tier. The 1996 Telecom Act
directs the FCC to rely on the marketplace and set only minimal standards to
assure compatibility between television sets, VCRs and cable systems.
Pursuant to the requirements of the 1996 Telecom Act, the FCC recently
reaffirmed an order implementing regulations intended to promote the commercial
availability of navigation devices, including set-top converters. The rules
apply generally to all multichannel video programming distributors, or MVPDs,
and to all equipment used to receive multichannel video programming, including
VCRs and even computers if used for that purpose. The FCC has exempted from its
rules all analog equipment and navigation devices that operate throughout the
continental United States and are commercially available from unaffiliated
sources, such as equipment used by DBS services. The order requires that the
security functions presently integrated in set-top converters be separated from
their other functions and that separate security modules be available from cable
operators by July 2000. Cable operators will be allowed to provide integrated
set-top converters to their customers until January 1, 2005. After that time,
the sale of or lease by operators of new set-top converters with embedded
security functions will be prohibited, subject to the FCC's reassessment in
2000.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they regulate the rates, terms and conditions of
cable television pole attachments. In addition, cooperatively and municipally
owned utilities are not subject to the FCC's pole attachment regulations and in
most cases are not subject to the pole attachment regulations of the state. We
may operate systems that utilize poles owned by cooperatively and government
owned utilities. None of the states in which we operate cable systems has
certified to the FCC that it regulates the rates, terms and conditions for pole
attachments. With respect to Buford's operations, Louisiana has certified to the
FCC that it regulates pole attachments. In the absence of state regulation, and
except for cooperatively or government owned poles, the FCC administers such
pole attachment rates through use of a formula which it has devised. As directed
by the 1996 Telecom
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Act, the FCC has adopted a new rate formula for any attaching party, including
cable systems, which offers telecommunications services. This new formula will
result in significantly higher attachment rates for cable systems which choose
to offer such services, or permit their transmission on their cable systems, but
does not begin to take effect until 2001 and will be phased in by equal
increments over the ensuing five years. Various parties have requested the FCC
to reconsider these new regulations and several parties have filed petitions for
review at the FCC and in federal appellate courts. A 1997 proceeding to consider
whether certain elements of the existing rate formula should be adjusted also
remains pending before the FCC. If adopted, these adjustments may increase the
fees paid by cable operators to utilities for pole attachments and conduit
space. The ultimate outcome of these rulemakings and the ultimate impact of any
revised FCC rate formula or of any new pole attachment rate regulations on us or
our business cannot be determined at this time.
Must Carry/Retransmission Consent
The 1992 Cable Act contains broadcast signals carriage requirements that,
among other things, allow local commercial television broadcast stations to
elect once every three years between requiring a cable system to carry the
station, known as must carry, or negotiating for payments for granting
permission to the cable operator to carry the station, known as retransmission
consent. A cable system generally is required to devote up to one-third of its
activated channel capacity for the carriage of local commercial television
stations whether pursuant to the mandatory carriage or retransmission consent
requirements of the 1992 Cable Act. Local non-commercial television stations are
also given mandatory carriage rights, subject to certain exceptions, within the
larger of: (A) a 50-mile radius from the station's city of license; or (B) the
station's Grade B contour, a measure of signal strength. Unlike commercial
stations, noncommercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
systems must obtain retransmission consent for the carriage of all "distant"
commercial broadcast stations, except for certain "superstations," i.e.,
commercial satellite-delivered independent stations, such as WGN. Must carry
requests can limit a cable systems' programming offerings, and retransmission
consent demands may require substantial payments or other concessions. Either
option has a potentially adverse affect on our business. The burden associated
with "must carry" may increase substantially as broadcasters proceed with
planned conversion to digital transmission and if the FCC determines that cable
systems must carry all analog and digital broadcasts in their entirety. The FCC
has initiated a rulemaking proceeding concerning whether and under what
circumstances cable operators must carry digital broadcast signals.
Access Channels
LFAs can include franchise provisions requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. The 1984 Cable Act further requires cable television systems with
36 or more activated channels to designate a portion of their channel capacity
for commercial leased access by unaffiliated third parties. While the 1984 Cable
Act allowed cable operators substantial latitude in setting leased access rates,
the 1992 Cable Act requires leased access rates to be set according to a formula
determined by the FCC. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of the
designated channel capacity, but use of commercial leased access channels has
been relatively limited.
The FCC released revised rules in February 1997 mandating a modest rate
reduction. The reduction sparked some increase in part-time use, but did not
make commercial leased access substantially more attractive to third party
programmers. The FCC has initiated a proceeding to consider whether the leased
access requirement applies to cable modem internet access services offered by
cable operators.
Access to Programming
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes
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satellite distributed video programmers affiliated with cable companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors. This provision
limits the ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies. Recently, there has been increased
interest in further restricting the marketing practices of cable programmers,
including subjecting programmers who are not affiliated with cable operators to
all of the existing program access requirements. In an effort to increase
competition in the video marketplace, the FCC revised its program access
complaint procedures. Among other revisions, the order increased sanctions for
violation of the program access rules. The FCC has, in subsequent decisions,
declined to broaden the scope of the rules to include terrestrially delivered
programming.
Inside Wiring
In October 1997, the FCC adopted new procedural guidelines governing the
disposition of home run wiring, a line running to an individual subscriber's
unit from a common feeder or riser cable, in multi-dwelling units, or MDUs. The
rules allow MDU owners to attempt to force cable television operators without
contracts to either sell, abandon or remove home run wiring and terminate
service to MDU subscribers unless operators retain rights under common or state
law to maintain ownership rights in the home run wiring. In addition, the FCC is
reviewing the enforceability of contracts to provide exclusive video service
within an MDU complex. The FCC has sought comment on abrogating all such
contracts held by incumbent cable operators, but allowing such contracts when
held by new entrants. These changes, if ultimately adopted, will make it easier
for an MDU complex owner to terminate service from an incumbent cable operator
in favor of a new entrant and leave the already competitive MDU sector even more
challenging for incumbent cable operators unless operators retain rights under
common or state law to maintain ownership rights in the home run wiring.
Other FCC Regulations
The FCC continues to have rulemaking proceedings pending that will
implement various provisions of the 1996 Telecom Act. It also has adopted
regulations implementing various provisions of the 1992 Cable Act and the 1996
Telecom Act, many of which have been the subject of petitions requesting
reconsideration of various aspects of its rulemaking proceedings. In addition to
the FCC regulations noted above, there are other FCC regulations covering such
areas as:
- equal employment opportunity;
- syndicated program exclusivity;
- network program non-duplication;
- closed captioning of video programming;
- registration of cable systems;
- maintenance of various records and public inspection files;
- microwave frequency usage;
- lockbox availability;
- origination cablecasting and sponsorship identification;
- antenna structure notification;
- marking and lighting;
- carriage of local sports broadcast programming;
- application of rules governing political broadcasts;
- limitations on advertising contained in non-broadcast children's
programming;
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- programmer access to cable systems;
- programming agreements;
- technical standards;
- emergency alert system requirements;
- consumer electronics equipment compatibility; and
- DBS implementation.
The 1992 Cable Act, the 1996 Telecom Act and the FCC's rules implementing
these statutory provisions generally have increased the administrative and
operational expenses of cable systems and have resulted in additional regulatory
oversight by the FCC and local franchise authorities. We will continue to
develop strategies to attempt to minimize the adverse impact that the FCC's
regulations and the other provisions of the 1992 Cable Act and the 1996 Telecom
Act have on our business. However, no assurances can be given that we will be
able to develop and successfully implement such strategies to minimize the
adverse impact of the FCC's rate regulations, the 1992 Cable Act or the 1996
Telecom Act on our business.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
Cable systems are subject to federal copyright licensing covering carriage
of television and radio broadcast signals. In exchange for filing certain
reports and contributing a percentage of their revenue to a federal copyright
royalty pool, cable operators can obtain blanket permission to retransmit
copyrighted material on broadcast signals. The nature and amount of future
payments for broadcast signal carriage cannot be predicted at this time. In a
recent report to Congress, the Copyright Office recommended that Congress make
major revisions of both the cable television and satellite compulsory licenses
to make them as simple as possible to administer, to provide copyright owners
with full compensation for the use of their work, and to treat every
multichannel video delivery system the same, except to the extent that
technological differences or differences in the regulatory burdens placed upon
the delivery system justify different copyright treatment. The possible
simplification, modification or elimination of the compulsory copyright license
is the subject of continuing legislative review. The elimination or substantial
modification of the cable compulsory license could adversely affect our ability
to obtain suitable programming and could substantially increase the cost of
programming that remained available for distribution to our customers. We cannot
predict the outcome of this legislative activity.
Cable operators distribute programming and advertising that use music
controlled by the two major music performing rights organizations, ASCAP and
BMI. In October 1989, the special rate court of the U.S. District Court of the
Southern District of New York imposed interim rates on the cable industry's use
of ASCAP-controlled music. The same federal district court recently established
a special rate court for BMI. BMI and certain cable industry representatives
recently concluded negotiations for a standard licensing agreement covering the
usage of BMI music contained in advertising and other information inserted by
operators into cable programming and on certain local access and origination
channels carried on cable systems. ASCAP and cable industry representatives have
met to discuss the development of a standard licensing agreement covering ASCAP
music in local origination and access channels and pay-per-view programming.
Recently, the U.S. District Court of the Southern District of New York ruled
that, on an interim basis, cable operators must pay ASCAP the same fees paid to
BMI for locally originated programming, PEG, leased access and local
advertising. Although we cannot predict the ultimate outcome of these industry
negotiations and litigation or the amount of any license fees we may be required
to pay
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for past and future use of ASCAP-controlled music, we do not believe these
license fees will be material to our operations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in order to cross public rights-of-way. Federal law now prohibits franchise
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises. Cable franchises generally are granted for fixed
terms and in many cases include monetary penalties for non-compliance and may be
terminable if the franchisee fails to comply with material provisions. The terms
and conditions of franchises vary materially from jurisdiction to jurisdiction.
Each franchise generally contains provisions governing cable operations, service
rates, franchise fees, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service standards,
and indemnification protections. A number of states, such as Connecticut,
subject cable television systems to the jurisdiction of centralized state
governmental agencies, some of which impose regulation of a character similar to
that of a public utility. Although LFAs have considerable discretion in
establishing franchise terms, there are certain federal limitations. For
example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross
revenues, cannot dictate the particular technology used by the system, and
cannot specify video programming other than identifying broad categories of
programming.
The 1984 Cable Act places certain limitations on a franchising authority's
ability to control the operation of a cable system operator, and the courts have
from time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises, and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially in
the area of customer service and rate regulation. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation of
cable television systems or decisions made on franchise grants, renewals,
transfers and amendments.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a franchise authority's
consent is required for the purchase or sale of a cable system or franchise,
such authority may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for consent. Historically, franchises
have been renewed for cable operators that have provided satisfactory services
and have complied with the terms of their franchise. We have generally had good
experiences with our cable franchise renewals.
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public right-of-way when cable operators provide
telecommunications service.
Earlier this month the U.S. District Court for the District of Oregon held
that the City of Portland, Oregon had the authority to require AT&T Corp. to
provide cable modem services to competitors on a non-discriminatory basis. AT&T
has sought expedited review of this decision in the 9th Circuit Court of
Appeals.
OTHER MATTERS
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright
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licensing and, in many jurisdictions, state and local franchise requirements,
currently are the subject of a variety of judicial proceedings, legislative
hearings and administrative and legislative proposals which could change, in
varying degrees, the manner in which cable television systems operate. Neither
the outcome of these proceedings nor their impact upon the cable television
industry can be predicted at this time.
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MANAGEMENT
Executive officers, key operations managers and outside directors of
Classic are as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND
DIRECTORS OF CLASSIC COMMUNICATIONS AGE POSITION
- ----------------------------------- --- --------
<S> <C> <C>
Alberto Cribiore............................. 53 Director and Chairman of the Board
J. Merritt Belisle........................... 43 Director and Chief Executive Officer
Steven E. Seach.............................. 41 Director, President and Chief Financial
Officer
Ronald W. Martin............................. 47 Executive Vice President of Operations
Kevin P. McCabe.............................. 56 Executive Vice President and Chief
Accounting Officer
Elizabeth Kay Monigold....................... 46 Executive Vice President of
Administration
Lisa A. Hook................................. 41 Director
David Webb................................... 46 Director
Martin D. Payson............................. 63 Director
</TABLE>
Alberto Cribiore, founder and Managing Principal of Brera Capital Partners
will be appointed Chairman of the Board upon the closing of the Brera Classic
equity investment. Prior to forming Brera in 1997, Mr. Cribiore was Co-President
and Partner at Clayton, Dubilier & Rice, Inc. which he joined in 1985 as one of
three principal shareholders. He had previously been a Senior Vice President at
Warner Communications, where he was responsible for mergers, acquisitions and
divestitures. Mr. Cribiore is a cum laude graduate of Bocconi University in
Milan, Italy and holds degrees in Business Administration and Economics. He is
currently a Director of Riverwood International Corporation and Hansberger
Group, Inc. Mr. Cribiore also serves as the Chairman of the Board and Director
of Global Decisions Group, LLC, the parent company of Cambridge Energy Research
Associates and MCM Group, Inc.
J. Merritt Belisle, our Chief Executive Officer and Director, founded
Classic in March 1992. From January 1988 through August 1991, he was a Vice
President at Texas Commerce Investment Banking, a division of Texas Commerce
Bank, N.A., Houston, Texas. From April 1985 to January 1988, Mr. Belisle was
Chief Executive Officer of Community Cable Incorporated, a small multi-system
cable television operator based in Austin, Texas. Community Cable was sold to a
cable television subsidiary of Time Warner, Inc. Prior to founding Community
Cable, Mr. Belisle was a corporate and securities attorney with the Houston
office of Baker & Botts. Mr. Belisle received a BBA in 1977, a MPA in 1980, and
a JD in 1981 from The University of Texas at Austin.
Steven E. Seach, our President and Chief Financial Officer and Director,
assisted Mr. Belisle in the founding of Classic in March 1992. Mr. Seach became
a member of the Board of Classic in 1998. Mr. Seach became our President in
October 1996 and, through August 1998, was substantially responsible for our
operations. From March 1992 to June 1994, Mr. Seach served as an advisor to
Classic and its Board of Directors for strategic, operational and financial
matters. Mr. Seach became our Chief Financial Officer in July 1994. Prior to his
association with us, Mr. Seach spent 12 years in the corporate banking and
investment banking industries, primarily with Texas Commerce Bank, N.A.,
Houston, Texas. Mr. Seach received a BBA in finance from the University of
Houston in 1980.
Ronald W. Martin, who will become our Executive Vice President of
Operations upon the closing of the Buford acquisition, will be responsible for
all of our system operating and marketing functions. Since 1993, he has served
as Buford's Executive Vice President and Chief Operating Officer. A graduate of
Dakota Weslayan, he joined Buford in 1973 as Business Manager for KXON-TV in
Mitchell, South Dakota, later serving in the same position at KFSM-TV in Fort
Smith, Arkansas. He joined Buford's corporate staff in 1976, serving as Internal
Auditor and Personnel Administrator. In 1981, Mr. Martin was named Vice
President of Human Resources and Administration. Mr. Martin is a Board Member
and past Chairman of the National Cable Television Cooperative and serves on the
CTAM Digital Committee.
Kevin P. McCabe, our Executive Vice President and Chief Accounting Officer
joined us in February 1999. Mr. McCabe was an advisor to us from October 1998 to
February 1999. From October 1995 until
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February 1999, Mr. McCabe was a principal in The Austin Advisory, a financial
consulting firm. He was employed by Uniquest, Inc. from March 1994 to September
1995. From 1991 to 1994, Mr. McCabe was Vice President, Controller of Dell
Computer Corporation. Mr. McCabe spent 15 years at KPMG LLP, the last five years
as a partner. He subsequently held increasingly responsible financial management
positions at General Foods, Colgate-Palmolive and John Wiley & Sons. Mr. McCabe
received a BS in management from Boston College.
Elizabeth Kay Monigold, who will become our Executive Vice President of
Administration upon the closing of the Buford acquisition, will be responsible
for all of our human resources, legal, information systems and risk management
functions, as well as operating responsibility for CCT. Since 1993, she has
served as Buford's Executive Vice President and Chief Administrative Officer.
Ms. Monigold joined Buford in 1981 and served in numerous capacities including
the evaluation of new business opportunities such as data, telephony, digital
and other new technologies. Ms. Monigold earned a BBA in Business Management
from The University of Texas at Tyler.
Lisa A. Hook, a Principal of Brera Capital Partners, will be appointed
Director upon the closing of the Brera Classic equity investment. Prior to
joining Brera Classic in 1998, Ms. Hook was a Managing Director of Alpine
Capital Group, a telecommunications and media venture capital firm. From 1989 to
1996, Ms. Hook served in a number of senior executive level positions at Time
Warner Inc., including Executive Vice President/Chief Operating Officer of Time
Warner Telecom and Special Advisor to the Vice Chairman. From 1987 to 1989, Ms.
Hook served as the Legal Advisor to the Chairman of the Federal Communications
Commission. From 1985 to 1987, Ms. Hook served as a senior attorney at Viacom
International, responsible for Viacom Cable. Prior to joining Viacom, Ms. Hook
was an attorney with the law firm of Hogan & Hartson. Ms. Hook received her BA
from Duke University and her JD from the Dickinson School of Law.
David Webb, a Principal of Brera Capital Partners, will be appointed
Director upon the closing of the Brera Classic equity investment. Prior to
joining Brera Classic in 1999, Mr. Webb was a Managing Director in the
investment banking division of Merrill Lynch, which he joined in 1981. Mr. Webb
was the head of the firm's Global Financial Sponsors Group, and a member of the
investment banking division's U.S. Operating Committee. Mr. Webb received a BA
with honors from the University of North Carolina, where he was a Morehead
Scholar, and an MBA from the Darden School of the University of Virginia. He is
the director of the Homes for Homeless Inc.
Martin D. Payson, the Chairman of Latin Communications Group, Inc., a
privately-held Spanish language media company, will be appointed Director upon
the closing of the Brera Classic equity investment. Previously, Mr. Payson was
Vice Chairman of Time Warner Inc. and a member of its board of directors. Before
the merger of Warner Communications Inc. and Time, Inc., Mr. Payson held the
position of Office of the President and General Counsel of Warner
Communications. Mr. Payson is a director of Delta Financial Corp. and Panavision
Inc., as well as several privately-held companies and philanthropic
organizations. Mr. Payson received his AB from Cornell University and his LLB
cum laude from New York University School of Law.
Our Board of Directors currently has one vacancy. Our existing investor
group has the right to appoint an individual to this directorship.
OTHER CORPORATE PERSONNEL
Bryan D. Noteboom, our Vice President of Finance & Administration, has been
with us since our inception and coordinates our finance, human resources and
risk management functions. Mr. Noteboom has an extensive background in cable
television, accounting, and finance through prior work experience in the cable
industry and as a senior auditor with Coopers & Lybrand. Mr. Noteboom earned a
BBA in Accounting/Finance from the University of Texas at Austin in December
1985 and is a licensed Certified Public Accountant.
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<PAGE> 72
Mark Rowe, our Corporate Controller, joined us in 1998 and coordinates our
accounting function, including SEC reporting and budgeting. Prior to joining us,
Mr. Rowe worked as an audit manager at Ernst & Young, serving a number of
telecommunication industry clients. Mr. Rowe earned a BBA in Accounting from The
University of Texas at Austin in 1990 and is a licensed Certified Public
Accountant.
Ashley M. Kimery, our Corporate Treasurer, joined us in 1995 and currently
oversees our cash management and tax functions. Prior to joining us, Ms. Kimery
worked for seven years in both the audit and tax departments at Ernst & Young
LLP. Ms. Kimery earned a BBA in Accounting from Texas A&M University in 1987, an
MPA in Tax from The University of Texas at Austin in 1991 and is a licensed
Certified Public Accountant.
John Ellis, our Management Information Systems Manager, has over 25 years
experience in information technology and is responsible for the development,
implementation and operation of all software and hardware network interfaces for
us. Mr. Ellis joined Buford in 1981 and was instrumental in the network design
of the Tyler, Texas call center. Mr. Ellis is currently serving on the CableLabs
Year 2000 Committee.
Ronald G. Jansonius, our Advanced Technology Manager, has been with us
since 1996 and is responsible for directing our advanced technology initiatives.
Mr. Jansonius has over 6 years of computer, network, and broadband technology
expertise. He received a BS from Fort Hays State University in 1982.
KEY OPERATIONS PERSONNEL
Nita M. Basgall, our Regional Manager, has been with us since our inception
and oversees all operational, technical and local marketing aspects of our
systems in Kansas, Nebraska and Northwest Missouri. Ms. Basgall has over 24
years of experience in the cable television industry. Ms. Basgall serves on the
Board of Directors of the Kansas Cable Telecommunications Association.
Arl Cope, our Regional Manager, joined Buford in 1987 and is responsible
for the oversight of all operational, technical and local marketing aspects of
certain of our systems in Arkansas, southern Missouri, and northern Louisiana. A
30 year veteran of the cable television industry, Mr. Cope currently serves as
Secretary/Treasurer of the Arkansas Cable Telecommunications Association and has
been a Board Member since 1989.
William E. Flowers, Jr., our Regional Manager, has over 18 years of
experience in the cable television industry and oversees all operational,
technical and local marketing aspects of our systems in the western and
panhandle regions of Texas and in New Mexico. Mr. Flowers joined us in August
1998.
Steve Lowe, our Regional Manager, has over 25 years in the cable television
industry and oversees all operational, technical and local marketing aspects of
our systems in central and east Texas and central Louisiana. Prior to joining
Buford in 1988, Mr. Lowe constructed, owned and operated cable systems in
western Oklahoma. Mr. Lowe currently serves on the Board of Directors of the
Texas Cable Television Association.
Ron Schaeffer, our General Manager of CCT, is responsible for the operation
of existing business and the development of new business within CCT. Mr.
Schaeffer joined Buford in 1992 and has been instrumental in the development of
the Satellite Education Network, which is designed to provide interactive
educational services to prisons. Mr. Schaeffer is a graduate of New York
University.
David D. Walker, our Regional Manager, has over 28 years of experience in
the cable television industry and oversees all operational, technical and local
marketing aspects of certain of our systems in Missouri, Oklahoma, and Arkansas.
Mr. Walker serves on the Board of Directors of the Arkansas Cable
Telecommunications Association.
Rowdy O. Whittington, our Plant Integrity Manager, oversees our system
technical compliance standards. Mr. Whittington also manages the operations of a
select number of systems in Colorado. Mr. Whittington has over 12 years of
experience in the cable television industry.
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<PAGE> 73
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers are the executive officers of Classic Cable and hold
the same offices. Other than the executive officers of Classic and Classic Cable
who are also directors, no other directors of Classic or Classic Cable receive
any compensation for serving as a director. The following table summarizes the
compensation for services rendered which Classic paid to the Chief Executive
Officer, President and other executive officers as to whom the total annual
compensation exceeded $100,000 in 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------------------- RESTRICTED
OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2)(3)
--------------------------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
J. Merritt Belisle........... 1998 $200,000 $361,539(4) $6,607 $ 49,609
Chief Executive Officer
Steven E. Seach.............. 1998 $277,084 $258,302(5) $6,607 $659,471
President and Chief
Financial Officer
Gilbert W. Nichols(6)........ 1998 $103,332 $ 44,101 $3,563 $ --
Vice President of
Operations
</TABLE>
- ---------------
(1) Amounts reported as other annual compensation represent our contribution
under our 401(k) plan and/or vehicle fringe benefits.
(2) The executive officers of Classic received restricted stock, options, stock
appreciation rights or other compensation during 1996 under the 1996 Stock
Restricted Plan. See "-- 1996 Restricted Stock Plan." On July 29, 1998,
Messrs. Belisle and Seach held 229,050 shares and 67,283 shares of
restricted stock, respectively, and each of Messrs. Belisle and Seach
exchanged their existing shares of restricted stock for 242,209 new shares
of restricted stock with revised vesting terms and other restrictions. See
"-- 1998 Restricted Stock Plan." Long-term compensation amounts are
calculated by multiplying the number of 1998 restricted shares issued by the
per share value of Classic's unrestricted stock as of the date of issuance,
less an amount equal to the number of 1996 restricted shares exchanged
therefor multiplied by the per share value of Classic's unrestricted stock
on the date of issuance.
(3) As of December 31, 1998, Messrs. Belisle and Seach each owned 242,209
restricted shares of Classic's common stock. Such shares vest 33.3% per year
over three years commencing July 29, 1998, provided that upon the occurrence
of certain events, including the consummation of the Brera Classic equity
investment, this vesting may be accelerated. The total value of all
restricted stock owned by Messrs. Belisle and Seach was approximately
$913,000 each, computed without taking into consideration any of the
restrictions. Messrs. Belisle and Seach are entitled to dividends in respect
of their restricted shares in the same manner as the holders of unrestricted
shares, but only to the extent that such dividends exceed the distribution
thresholds applicable thereto. See "-- 1998 Restricted Stock Plan."
(4) Includes a transaction fee of $300,000 paid pursuant to a pre-existing
employment agreement in connection with the acquisition of certain
properties from Cable One in July 1998, and the related financings.
(5) Includes a transaction fee of $250,000 paid pursuant to a pre-existing
employment agreement in connection with the acquisition of certain
properties from Cable One in July 1998, and the related financings.
(6) Mr. Nichols resigned effective March 19, 1999.
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<PAGE> 74
1996 RESTRICTED STOCK PLAN
Certain members of management own restricted stock subject to the terms of
our 1996 Restricted Stock Plan. Pursuant to the 1996 Plan, we may, from time to
time, grant restricted stock to our officers and other key employees upon the
terms, conditions and provisions of the 1996 Plan. Concurrent with the adoption
of the 1996 Plan, we granted a total of 517,626 shares of common stock as of
such date, of which only 144,940 shares are currently outstanding. Pursuant to
the granting agreement, such shares of restricted stock were to vest 25.0% per
year over four years. One-half of such shares of restricted stock were subject
to a distribution threshold equal to $9.93 per share, i.e., the first $9.93 of
distributions with respect to such shares were to be withheld and distributed
instead to the other holders of common stock, and one-fourth of the shares were
subject to a distribution threshold of $19.06 per share and one-fourth to a
distribution threshold of $29.78 per share.
1998 RESTRICTED STOCK PLAN
We have adopted the 1998 Restricted Stock Plan. The terms of the 1998 Plan
are similar in all material respects to the 1996 Plan. In July 1998, each of
Messrs. Seach and Belisle exchanged all of his existing shares under the 1996
Plan for 242,209 shares of restricted common stock pursuant to the 1998 Plan,
each representing approximately 6.8% of common stock on a fully diluted basis.
Pursuant to the granting agreement, such shares of restricted common stock are
to vest 33.3% per year over three years. All of such shares of restricted common
stock are subject to a distribution threshold equal to $3.77 per share.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Upon the consummation of the Brera Classic equity investment, J. Merritt
Belisle and Steven E. Seach will each enter into an employment agreement with
us, on substantially similar terms with their current employment agreements.
Upon consummation of the Brera Classic equity investment, Mr. Belisle will be
paid $780,000 and Mr. Seach will be paid $700,000 under their current employment
agreements. Each of the employment agreements provides for their continued
employment with us for a continuing two year period at all times. Messrs.
Belisle and Seach are each to be paid an annual salary of $350,000 per year.
Each employment agreement provides that upon termination by us without cause,
the employee will be entitled to the pre-payment of all remaining compensation
and benefits under the agreement, i.e., two years' of base compensation and
benefits. Each employment agreement also prohibits the employee from competing
with us during his term of employment and for a period of two years thereafter.
The employment agreements provide that Messrs. Belisle and Seach will each
be granted a stock option to purchase 279,874 shares of common stock at an
exercise price of $14.57 per share, which vests on a monthly basis over a
three-year period, or immediately in the event of a sale of all the stock for
cash or securities by merger, tender offer, stock purchase or an initial public
offering of our common stock.
Messrs. Belisle and Seach will each also receive a second stock option to
purchase 279,874 shares of common stock, to vest over a three-year period
commencing on the date of a sale of all of the stock involving an initial public
offering or a stock-for-stock merger or immediately upon the closing of a sale
of all of the common stock for cash or a sale of substantially all of our
assets. The price of the second option is the gross sale price per share of
common stock in our initial public offering or, in connection with a sale of
stock or assets, an amount equal to $14.57 per share increased by 14% per annum
from the consummation of the Brera Classic equity investment to the date of such
a sale.
The employment agreements of Messrs. Belisle and Seach in effect prior to
the consummation of the Brera Classic equity investment provide a transaction
fee of 1% to be paid on the value of all mergers, acquisitions, or dispositions
of assets or subsidiaries by us that are consummated during their term of
employment. Messrs. Belisle and Seach will each receive a transaction fee of
$1.5 million upon the successful consummation of the Buford acquisition. The
employment agreements to be executed in connection with the Brera Classic
acquisition agreement do not contain a provision for transaction fees to be paid
to Messrs. Belisle and Seach.
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<PAGE> 75
Upon the consummation of the Buford acquisition, we expect to enter into
employment agreements with Ronald W. Martin and Elizabeth Kay Monigold. These
employment agreements will relate to their employment by us as the Executive
Vice President of Operations and the Executive Vice President of Administration,
respectively, and will be for a one year period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors as a whole determines the compensation of our
executive officers. J. Merritt Belisle, our Chief Executive Officer, and Steven
E. Seach, our President, as Board members, participate in deliberations of the
Board of Directors with respect to compensation of all executive officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO AFFILIATES
During 1998, Classic had outstanding subordinated indebtedness, including
accrued interest, in the amount of approximately $4.5 million to Austin
Ventures, L.P., The Texas Growth Fund, and BT Capital Partners, Inc. and
preferred stock, including accrued and unpaid dividends, in the amount of
approximately $29.4 million to NationsBanc Capital Corp. and BT Capital
Partners, Inc., each a stockholder. Approximately $3.9 million of such
indebtedness bore interest at the rate of 15.0% per annum and the remainder bore
interest at the rate of 7.5% per annum. All of such subordinated indebtedness
and preferred stock had been incurred or issued to fund the acquisition of
various cable properties acquired by us. We repaid such indebtedness and
redeemed the preferred stock from the holders thereof out of the proceeds
received from a previous issuance of senior subordinated notes.
In 1997, we advanced approximately $200,000 to Mr. Belisle, which has been
forgiven.
STOCKHOLDER VOTING AGREEMENTS
Brera Classic has entered into stockholder voting agreements with Austin
Ventures, L.P., BT Capital Partners, Inc., The Texas Growth Fund, BA SBIC
Management, L.L.C., as the successor in interest to NationsBanc Capital Corp.,
J. Merritt Belisle, Steven E. Seach, and Bryan Noteboom, who collectively hold
approximately 80.4% of the fully diluted common stock, before giving effect to
the Brera Classic equity investment. The stockholder voting agreements require
the stockholders to vote in favor of the Brera Classic equity investment. Each
of the stockholders which are a party to these stockholder voting agreements
have granted Brera Classic their irrevocable proxies to give effect to the
stockholder voting agreements.
1995 STOCKHOLDERS AGREEMENT
Each member of management holding shares of our common stock executed a
stockholders agreement with us and our other shareholders dated as of October
15, 1995. The stockholders agreement generally provides us with a right of first
refusal in the event of proposed sales of common stock owned by the members of
management, and upon any termination of a management stockholder's employment,
to repurchase any common stock owned by such management stockholder. The
stockholders agreement contains certain rights of the management stockholders to
participate in sales of common stock and certain obligations of the management
stockholders to sell their common stock in the case of a sale for cash of all
outstanding common stock. Finally, the management stockholders are required to
vote their common stock to elect to our Board of Directors the directors
nominated by the other stockholders under the stockholders agreement. This
stockholders agreement will terminate for our existing stockholders entering
into the 1999 stockholders agreement. The 1995 stockholders agreement, and all
rights and obligations of the management stockholders thereunder described
above, will also terminate following an initial public offering of common stock
meeting certain criteria.
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<PAGE> 76
1999 STOCKHOLDERS' AGREEMENT
Upon consummation of the Brera Classic equity investment, Classic, Brera
Classic, BT Capital Partners, Inc., Austin Ventures, L.P., BA SBIC Management,
L.L.C., as the successor in interest to NationsBanc Capital Corp., J. Merritt
Belisle, Steven E. Seach and certain other stockholders of Classic will enter
into the 1999 stockholders' agreement which subjects the equity securities these
stockholders hold in Classic to a right of first offer to us and other
stockholders party to the stockholders' agreement. The agreement also provides
that the other stockholders party to the agreement are entitled to participate
in any proposed sale under the right of first offer on a pro-rata basis. The
agreement contains preemptive purchase rights in favor of the stockholders party
to the stockholders' agreement in the event we issue or sell additional equity
securities in Classic, other than in an initial public offering. Further, until
such time as the parties to the stockholders' agreement together own less than
30% of the outstanding common stock of Classic, the parties have agreed to vote
their common stock to cause the board of directors to consist of seven members,
being four members designated by Brera Classic, the chief executive officer of
Classic, initially J. Merritt Belisle, and two other individuals to be
designated by Austin Ventures, L.P., Austin Ventures III-A, L.P., Austin
Ventures III-B, L.P., BA SBIC Management, L.L.C., BT Capital Partners, Inc., and
The Texas Growth Fund. One of the two individuals to be named by such
stockholders will be Steven E. Seach for so long as he is employed by us.
MANAGEMENT AND ADVISORY FEE AGREEMENT
As part of the Brera Classic equity investment, Classic and Brera Classic
have entered into an agreement that provides that Brera Classic will be paid a
transaction fee of $3 million upon closing of the Brera Classic equity
investment in consideration for arranging the equity investment. The agreement
further provides that we will pay Brera Classic an annual fee of $250,000 in
consideration for transactional assistance and advice provided to us until we
are sold or complete an initial public offering.
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<PAGE> 77
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, pro forma for the Brera
Classic equity investment, regarding the beneficial ownership of our common
stock by (A) each executive officer and director, (B) each stockholder known by
us to beneficially own 5.0% or more of such common stock, and (C) all directors
and officers as a group.
<TABLE>
<CAPTION>
PERCENT OF FULLY-
VOTING NON VOTING FULLY-DILUTED DILUTED
COMMON COMMON COMMON COMMON
BENEFICIAL OWNER(1) SHARES(3) SHARES(3) WARRANTS(4) SHARES STOCK(5)
- ------------------- --------- ---------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Brera Classic(2).................... 6,490,734 -- -- 6,490,734 64.4%
BT Capital Partners, Inc. .......... 1,326 735,986 30,225 767,537 7.6
Austin Ventures, L.P.(6)............ 735,987 -- -- 735,987 7.3
BA SBIC Management, L.L.C.(7)....... 6,631 542,995 152,418 702,044 6.9
J. Merritt Belisle.................. 244,862 -- -- 244,862 2.4
Steven E. Seach..................... 244,862 -- -- 244,862 2.4
Lisa A. Hook(8)..................... 6,490,734 -- -- 6,490,734 64.4
Alberto Cribiore(9)................. 6,490,734 -- -- 6,490,734 64.4
David Webb(10)...................... 6,490,734 -- -- 6,490,734 64.4
--------- --------- ------- --------- ----
All directors and officers as a
group............................. 7,724,402 1,278,981 182,643 9,185,576 91.0%
========= ========= ======= ========= ====
</TABLE>
- ---------------
(1) The address for Brera Classic, Lisa Hook, Alberto Cribiore, and David Webb
is 712 Fifth Avenue, 34th Floor, New York, New York 10009. The address for
Austin Ventures, L.P. is 1300 Norwood Tower, 114 West 7th Street, Austin,
Texas 78701. The address for BT Capital Partners, Inc. is 130 Liberty
Street, 25th Floor, New York, New York 10006. The address for BA SBIC
Management L.L.C. is 100 North Tryon Street, Charlotte, North Carolina
28255. The address for J. Merritt Belisle and Steven E. Seach is 515
Congress Ave., Suite 2626, Austin, Texas 78701.
(2) Brera Classic is considering selling non-voting equity interests in Brera
Classic and may sell these interests to affiliates of one or more of the
initial purchasers of our notes.
(3) All shares of non-voting common stock are convertible into shares of voting
common stock without cost and without advance notice by the holders
thereof. As a result, we believe that such shares should be taken into
account in considering voting interests in us.
(4) Warrants are for shares of common stock which may be acquired at $.001 per
share pursuant to a warrant which is exercisable at any time.
(5) Assumes exercise of all outstanding warrants.
(6) Austin Ventures, L.P. owns 323,832 shares, Austin Ventures III-A, L.P. owns
223,422 shares and Austin Ventures III-B, L.P. owns 188,733 shares. AV
Partners, L.P. is the general partner of each of these partnerships.
(7) BA SBIC Management L.L.C. is the successor in interest to NationsBanc
Capital Corp.
(8) Lisa Hook is a director of Classic and a manager of Brera Classic. Ms. Hook
is not the registered holder of any shares and disclaims the beneficial
ownership of the shares listed above except to the extent of her indirect
interest in the assets of the nominal shareholder, if any.
(9) Alberto Cribiore is a director of Classic and a manager of Brera Classic.
Mr. Cribiore is not the registered holder of any shares and disclaims the
beneficial ownership of the shares listed above except to the extent of his
indirect interest in the assets of the nominal shareholder, if any.
(10) David Webb is a director of Classic and a manager of Brera Classic. Mr.
Webb is not the registered holder of any shares and disclaims the
beneficial ownership of the shares listed above except to the extent of his
indirect interest in the assets of the nominal shareholder, if any.
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<PAGE> 78
DESCRIPTION OF OTHER INDEBTEDNESS
The description set forth below does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the definitive documents which will set forth the terms and conditions of our
new credit facility.
We have no operations of our own. Consequently, we will rely on dividends
from Classic Cable, and hence the cash flow of Classic Cable, in order to meet
our debt service obligations. In order to finance the Buford acquisition,
Classic Cable will borrow up to $250.0 million under a new credit facility,
agented by Goldman Sachs Credit Partners L.P., Union Bank of California, N.A.
and The Chase Manhattan Bank. The new credit facility consists of the following:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM ALTERNATE
LIBOR BASE RATE
NEW CREDIT FACILITY AMOUNT TENOR SPREAD(1) SPREAD(1)
- ------------------- ------ --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revolving Credit Facility............ $ 75.0 8.0 years 250 bps 150 bps
Term Loan A Facility................. 75.0 8.0 years 250 bps 150 bps
Term Loan B Facility................. 100.0 8.5 years 275 bps 175 bps
------
Total Facility............. $250.0
======
</TABLE>
- ---------------
(1) Pricing subject to a leverage-based pricing grid.
The $75.0 million 8.0 year revolving credit facility will be made available
to Classic Cable for working capital, capital expenditures, refinancing debt and
general corporate purposes, including acquisitions. Up to $25.0 million may be
used to redeem Classic Cable's 2008 notes put by the noteholders as a result of
the change of control. The $175.0 million in term loan facilities, comprised of
a $75.0 million 8.0 year Term loan A facility and a $100.0 million 8.5 year Term
loan B facility, will be drawn at the closing of the Buford acquisition to fund
Classic Cable's purchase of Buford and to refinance debt and pay certain other
costs associated with the Buford acquisition.
The new credit facility is secured by a perfected first priority security
interest in substantially all of Classic Cable's personal property, including,
without limitation, the capital stock of Classic Cable's direct and indirect
subsidiaries. The new credit facility is unconditionally guaranteed by each of
Classic Cable's direct and indirect domestic subsidiaries. In addition, the new
credit facility will be subject to several customary negative covenants as well
as financial covenants, including
- a maximum total debt ratio,
- a maximum senior debt ratio,
- a minimum interest coverage ratio,
- a pro forma debt service coverage ratio, and
- a maximum capital expenditures amount.
As part of the loan documentation, the new credit facility will provide an
additional $100.0 million incremental facility on a term loan basis, with
amortization no faster and interest rates no higher than those applicable to the
Term loan B facility. This incremental facility will share ratably and equally
in all collateral and guarantees which secure the new credit facility. The
incremental credit facility may be used to redeem Classic Cable's 2008 notes put
by the noteholders as a result of the change of control. Classic Cable's ability
to borrow under this incremental facility terminates on the earlier of 45 days
after the closing of the Brera Classic equity investment or the date on which
the 2008 indenture requires redemption to take place.
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<PAGE> 79
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
At the time we issued the old notes, we agreed to file a registration
statement to register the exchange of the old notes for the exchange notes on or
before September 27, 1998 and to use our reasonable best efforts to cause such
registration statement to become effective under the Securities Act on or before
November 26, 1998. In the event that applicable interpretations of the staff of
the SEC do not permit Classic to effect the exchange offer, or if certain
holders of the old notes notify Classic that they are not eligible to
participate in, or would not receive freely tradeable exchange notes in exchange
for tendered old notes pursuant to, the exchange offer, Classic will use its
reasonable best efforts to cause to become effective a shelf registration
statement with respect to the resale of the old notes and to keep the shelf
registration statement effective until two years after the issue date. If the
exchange offer registration statement is not effective on November 26, 1998,
Classic will be obligated to pay cash interest increases to holders of the old
notes.
Each holder of the old notes that wishes to exchange old notes for exchange
notes will be required to represent that
- any exchange notes received will be acquired in the ordinary course of
its business,
- it has no arrangement with any person to participate in the distribution
of the exchange notes, and
- it is not an "affiliate," as defined in Rule 405 of the Securities Act,
of Classic or, if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the SEC set forth in no-action
letters issued to third-parties, Classic believes that, except as described
below, exchange notes issued pursuant to the exchange offer in exchange for old
notes may be offered for resale, resold and otherwise transferred by any holder
thereof, other than a holder which is an "affiliate" of Classic within the
meaning of Rule 405 under the Securities Act, without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such exchange notes are acquired in the ordinary course of such holder's
business and such holder does not intend to participate and has no arrangement
or understanding with any person to participate in the distribution of such
exchange notes. Any holder who tenders in the exchange offer with the intention
or for the purpose of participating in a distribution of the exchange notes
cannot rely on such interpretation by the staff of the SEC and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This prospectus may be used for an offer to resell, resale or other
retransfer of exchange notes only as specifically set forth herein. Only
broker-dealers who acquired the old notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives exchange notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange
notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, Classic will accept for exchange any and all
old notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on , 1999. Classic will issue $1,000 principal
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amount of exchange notes in exchange for each $1,000 principal amount of
outstanding old notes surrendered pursuant to the exchange offer. Old notes may
be tendered only in $1,000 increments.
The form and terms of the exchange notes will be the same as the form and
terms of the old notes except that the exchange notes will be registered under
the Securities Act and will not bear legends restricting their transfer. The
exchange notes will evidence the same debt as the old notes. The exchange notes
will be issued under and entitled to the benefits of the indenture, which also
authorized the issuance of the old notes, such that both series will be treated
as a single class of debt securities under the indenture. See "Description of
the Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $114.0 million of the old notes are
outstanding. This prospectus, together with the letter of transmittal, is being
sent to all registered holders of old notes. There will be no fixed record date
for determining registered holders of old notes entitled to participate in the
exchange offer.
Classic intends to conduct the exchange offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Securities Exchange Act of 1934, and the rules and regulations of the SEC
thereunder. Old notes that are not tendered for exchange in the exchange offer
will remain outstanding and continue to accrue interest and will be entitled to
the rights and benefits such holders have under the indenture and the
Registration Rights Agreement.
Classic will be deemed to have accepted for exchange properly tendered
notes when, as and if Classic shall have given oral or written notice of
acceptance to the exchange agent and complied with the provisions of the
Registration Rights Agreement. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the exchange notes from Classic.
Classic expressly reserves the right to amend or terminate the exchange offer,
and not to accept for exchange any old notes not accepted for exchange, upon the
occurrence of any of the conditions specified below under "-- Certain Conditions
to the Exchange Offer."
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. Classic will pay all charges and expenses, other
than certain applicable taxes described below, in connection with the exchange
offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date is 5:00 p.m., New York City time on ,
1999, unless Classic, in its sole discretion, extends the exchange offer, in
which case the expiration date will mean the latest date and time to which the
exchange offer is extended.
In order to extend the exchange offer, Classic will notify the exchange
agent of any extension by oral or written notice and will issue a press release
notifying the registered holders of old notes of such extension, each prior to
9:00 a.m., New York City time, on the next business day after the expiration
date.
Classic reserves the right, in its sole discretion,
- to delay accepting any old notes for exchange, to extend the exchange
offer or to terminate the exchange offer if any of the conditions set
forth below under "-- Certain Conditions to the Exchange Offer" have not
been satisfied, by giving oral or written notice of such delay, extension
or termination to the exchange agent, or
- to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of old notes. If the exchange offer is
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amended in a manner determined by Classic to constitute a material change,
Classic will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and Classic will
extend the exchange offer, depending upon the significance of the amendment and
the manner of disclosure to the registered holders, if the exchange offer would
otherwise expire during such period.
Without limiting the manner in which Classic may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, Classic has no obligation to publish, advertise or otherwise communicate
any such public announcement, other than by making a timely release to an
appropriate news agency.
If Classic extends the period of time during which the exchange offer is
open, or if Classic is delayed in accepting for exchange of, or in issuing and
exchanging the exchange notes for, any old notes, or is unable to accept for
exchange of, or issue exchange notes for, any old notes pursuant to the exchange
offer for any reason, then, without prejudice to Classic's rights under the
exchange offer, the exchange agent may, on our behalf, retain all old notes
tendered, and such old notes may not be withdrawn except as otherwise provided
below in "-- Withdrawal of Tenders." The right to delay acceptance for exchange
of, or the issuance and the exchange of the exchange notes for, any old notes is
subject to applicable law, including Rule 14e-1(c) under the Exchange Act, which
requires that Classic either deliver the exchange notes or return the old notes
deposited by or on behalf of the holders thereof promptly after termination or
withdrawal of the exchange offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, Classic will not be
required to accept for exchange, or exchange any exchange notes for, any old
notes, and may terminate the exchange offer before the acceptance of any old
notes for exchange, if:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in Classic's reasonable judgment, might materially impair the
ability of Classic to proceed with the exchange offer; or
- any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the staff
of the SEC, which, in Classic's reasonable judgment, might materially
impair the ability of Classic to proceed with the exchange offer; or
- any governmental approval has not been obtained, which approval Classic
shall, in its reasonable discretion, deem necessary for the consummation
of the exchange offer as contemplated hereby.
If Classic determines in its sole discretion that any of these foregoing
conditions are not satisfied, Classic may
- refuse to accept any old notes and return all old notes to the tendering
holders,
- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes, or
- waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.
If such waiver constitutes a material change to the exchange offer, Classic
will promptly disclose such waiver by means of a prospectus supplement that will
be distributed to the registered holders of the old notes and Classic will
extend the exchange offer for a period of five to ten business days, depending
on the significance of the waiver and the manner of disclosure to the registered
holders, if the exchange offer would otherwise expire during such five to ten
day business period.
The foregoing conditions are for the sole benefit of Classic and may be
asserted by Classic regardless of the circumstances giving rise to any such
condition or may be waived by Classic in whole or in part at
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any time and from time to time in its sole discretion. The failure by Classic at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, Classic will not accept for exchange any old notes tendered,
and no exchange notes will be issued in exchange for any such old notes, if at
such time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Subject to the terms and conditions hereof and the letter of transmittal,
only a holder of old notes may tender such old notes in the exchange offer. To
tender in the exchange offer, a holder must complete, sign and date the letter
of transmittal, or facsimile thereof, have the signature thereon guaranteed if
required by the letter of transmittal, and mail or otherwise deliver such letter
of transmittal or such facsimile to the exchange agent prior to 5:00 p.m., New
York City time, on the expiration date or, in the alternative, comply with the
Depository Trust Corporation's Automated Tender Offer Program procedures
described below. In addition, either:
- old notes must be received by the exchange agent along with the letter of
transmittal, or
- a timely confirmation of book-entry transfer, which we call a book-entry
confirmation, of such old notes, if such procedure is available, into the
exchange agent's account at the Depository Trust Corporation, which we
call the Book-Entry Transfer Facility, pursuant to the procedure for
book-entry transfer described below or properly transmitted agent's
message, as defined below, must be received by the exchange agent prior
to the expiration date, or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the exchange agent at the address set forth below
under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date.
The tender by a holder which is not withdrawn prior to the expiration date
will constitute an agreement between such holder and Classic in accordance with
the terms and subject to the conditions set forth herein and in the letter of
transmittal.
The method of delivery of old notes, the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date. No
letter of transmittal or old notes should be sent to Classic. Holders may
request their respective brokers, dealers, commercial banks, trust companies or
other nominees to effect the above transactions for such holders.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of old notes to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the letter of transmittal and delivering
such owner's old notes, either make appropriate arrangements to register
ownership of the old notes in such owner's name or obtain a properly completed
bond power from the registered holder of old notes. The transfer of registered
ownership may take considerable time and may not be able to be completed prior
to the Expiration Date.
Signatures on a letter of transmittal and a notice of withdrawal described
below must be guaranteed by an eligible institution, as defined below, unless
the old notes are tendered (A) by a registered holder who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
on the letter of transmittal, or (B) for the account of an eligible institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, such guarantor must be an
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eligible institution, which means a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the letter of transmittal.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed therein, such old notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such old notes
with the signature thereon guaranteed by an eligible institution.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Classic, provide
evidence satisfactory to Classic of their authority to so act must be submitted
with the letter of transmittal.
The exchange agent and the Depository Trust Corporation have confirmed that
any financial institution that is a participant in the Depository Trust
Corporation's system may utilize the Depository Trust Corporation's Automated
Tender Offer Program to tender. Accordingly, participants in the Depository
Trust Corporation's Automated Tender Offer Program may, in lieu of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, electronically transmit their acceptance of the exchange offer
by causing the Depository Trust Corporation to transfer the old notes to the
exchange agent in accordance with the Depository Trust Corporation's Automated
Tender Offer Program procedures for transfer. The Depository Trust Corporation
will then send an agent's message to the exchange agent. The term "agent's
message" means a message transmitted by the Depository Trust Corporation
received by the exchange agent and forming part of the book-entry confirmation,
which states
- that the Depository Trust Corporation has received an express
acknowledgment from a participant in the Depository Trust Corporation's
Automated Tender Offer Program that is tendering old notes which are the
subject of such book entry confirmation,
- that such participant has received and agrees to be bound by the terms of
the letter of transmittal, or, in the case of an agent's message relating
to guaranteed delivery, that such participant has received, and
- agrees to be bound by the applicable notice of guaranteed delivery, and
that the agreement may be enforced against such participant.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by Classic in its sole discretion, which determination will
be final and binding. Classic reserves the absolute right to reject any and all
old notes not properly tendered or any old notes Classic's acceptance of which
would, in the opinion of counsel for Classic, be unlawful. Classic also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular old notes. Classic's interpretation of the terms and conditions of
the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of old notes must be cured within such
time as Classic shall determine. Although Classic intends to notify holders of
defects or irregularities with respect to tenders of old notes, neither Classic,
the exchange agent nor any other person shall incur any liability for failure to
give such notification. Tenders of old notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any old
notes received by the exchange agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holder, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
In all cases, issuance of exchange notes for old notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of old notes or a timely book-
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entry confirmation of such old notes into the exchange agent's account at the
book-entry transfer facility, a properly completed and duly executed letter of
transmittal and all other required documents. If any tendered old notes are not
accepted for exchange for any reason set forth in the terms and conditions of
the exchange offer or if old notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged old notes
will be returned without expense to the tendering holder thereof, or, in the
case of old notes tendered by book-entry transfer into the exchange agent's
account at the book-entry transfer facility pursuant to the book-entry transfer
procedures described below, such non-exchanged notes will be credited to an
account maintained with such book-entry transfer facility, as promptly as
practicable after the expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at the book-entry transfer facility for purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of old notes by causing the
book-entry transfer facility to transfer such old notes into the exchange
agent's account at the book-entry transfer facility in accordance with such
book-entry transfer facility's procedures for transfer. However, although
delivery of notes may be effected through book-entry transfer at the book-entry
transfer facility, the letter of transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the exchange agent at the address set
forth below under "-- Exchange Agent" on or prior to the expiration date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the book-entry transfer facility does not constitute delivery to the exchange
agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their old notes and (A) whose old notes are not
immediately available, or (B) who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:
- The tender is made through an eligible institution;
- Prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery,
setting forth the name and address of the holder, the registered
number(s) of such old notes and the principal amount of old notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three (3) New York Stock Exchange trading days after the
expiration date, the letter of transmittal, or facsimile thereof,
together with the old notes or a book-entry confirmation, as the case may
be, and any other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent; and
- Such properly completed and executed letter of transmittal, or facsimile
thereof, or properly transmitted agent's message as well as all tendered
old notes in proper form for transfer or a book-entry confirmation, as
the case may be, and all other documents required by the letter of
transmittal, are received by the exchange agent within three (3) New York
Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date.
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For a withdrawal to be effective, (A) a written notice of withdrawal must
be received by the exchange agent at one of the addresses set forth below
under "-- Exchange Agent," or (B) holders must comply with the appropriate
procedures of the Depository Trust Company's automated tender offer program
system. Any such notice of withdrawal must specify the name of the person having
tendered the old notes to be withdrawn, identify the old notes to be withdrawn,
including the principal amount of such old notes, and, where certificates for
old notes have been transmitted, specify the name in which such old notes were
registered, if different from that of the withdrawing holder. If certificates
for old notes have been delivered or otherwise identified to the exchange agent,
then, prior to the release of such certificates, the withdrawing holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution. If old notes have
been tendered pursuant to the procedure for book-entry transfer described above,
any notice of withdrawal must specify the name and number of the account at the
book-entry transfer facility to be credited with the withdrawn old notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility, including time of receipt, of such notices will
be determined by Classic, whose determination shall be final and binding on all
parties. Any old notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Any old notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder, or, in the case
of old notes tendered by book-entry transfer into the exchange agent's account
at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such old notes will be credited to an account
maintained with such book-entry transfer facility for the old notes, as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn old notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering" above at any time on or
prior to the expiration date.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. BankOne, N.A. has been appointed as exchange agent for the exchange
offer. Questions, requests for assistance and requests for additional copies of
this prospectus or of the letter of transmittal should be directed to the
exchange agent addressed as follows:
Deliver to:
BankOne, N.A., EXCHANGE AGENT
<TABLE>
<CAPTION>
By Registered or Certified Mail: By Overnight Courier: By Hand Delivery:
<S> <C> <C>
235 West Schrock Road 235 West Schrock Road 235 West Schrock Road
Westerville, Ohio 43271-0184 Westerville, Ohio 43271-0184 Westerville, Ohio 43271-0184
Attention: Corporate Trust Attention: Corporate Trust Attention: Corporate Trust
Operations Operations Operations
</TABLE>
Facsimile Transmission Number:
(For Eligible Institutions Only)
614/248-9987
Confirm Receipt of Facsimile by Telephone:
800/346-5153
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
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FEES AND EXPENSES
Classic will not make any payments to brokers, dealers, or others
soliciting acceptances of the exchange offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of Classic.
The estimated cash expenses to be incurred in connection with the exchange
offer will be paid by Classic and are estimated in the aggregate to be $175,000,
which includes fees and expenses of the exchange agent, accounting, legal,
printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
Classic to register exchange notes in the name of, or request that old notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of old notes who do not exchange their old notes for exchange notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of such old notes, as set forth (A) in the legend thereon as a
consequence of the issuance of the old notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws, and (B) otherwise set forth in the
offering memorandum dated July 29, 1998, distributed in connection with the
offering of the old notes. In general, the old notes may not be offered or sold
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Classic does not currently anticipate that it will
register the old notes under the Securities Act.
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DESCRIPTION OF THE NOTES
GENERAL
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Classic" refers only to Classic and not to any of its subsidiaries.
Classic will issue the notes under an indenture among itself, the
Subsidiary Guarantors and Bank One, N.A., as trustee. The terms of the notes
include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. Although we
believe that we have disclosed in this prospectus all the material provisions of
the indenture, we urge you to read the indenture because it, and not this
description, defines your rights as holders of these notes. We have filed copies
of the indenture as an exhibit to the registration statement which includes this
prospectus.
The Classic common stock issued in conjunction with the Classic private
offering is not being registered with the exchange notes. Until the occurrence
of the "Separability Date" as defined below, the shares are not separately
transferable from the old notes. The shares will not be separately transferable
until the earliest of
- February 1, 1999;
- the date on which a registration statement with respect to a registered
exchange offer for the exchange notes is declared effective under the
Securities Act;
- the occurrence of an Event of Default under the indenture; or
- such earlier date as determined by the initial purchaser in its sole
discretion. The date of the occurrence of an event specified above is
referred to as the "Separability Date."
BRIEF DESCRIPTION OF THE NOTES
The Notes
The notes:
- are senior unsecured obligations of Classic;
- rank equally in right of payment to all existing and future Senior
Indebtedness of Classic; and
- are senior in right of payment with all existing and future unsecured
senior subordinated and subordinated Indebtedness of Classic.
As of March 31, 1999, Classic had total Senior Indebtedness of
approximately $ million. As indicated above and as discussed in detail below
under the subheading "Ranking," payments on the notes rank equally in right of
payment to Senior Indebtedness. The indenture will permit us to incur additional
Senior Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
The notes will be issued in an aggregate principal amount at maturity of up
to $114.0 million and will mature on August 1, 2009. The old notes were, and the
exchange notes are, being offered at a substantial discount from their principal
amount at maturity. For United States federal income tax purposes, a significant
amount of original issue discount will be recognized by a holder as ordinary
income as such discount is amortized from the issuance date, but holders of the
notes will not receive any cash payments on the notes until February 1, 2004.
See "United States Federal Income Tax Considerations."
No cash interest will accrue on the notes until August 1, 2003.
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Beginning on August 1, 2003, cash interest on the notes will accrue at the
rate of 13 1/4% per annum and will be payable semiannually in arrears on
February 1 and August 1, commencing February 1, 2004, to holders of record at
the close of business on the January 15 and July 15 immediately preceding the
interest payment date. Cash interest will accrue from the most recent interest
payment date to which interest has been paid or duly provided for, or, if no
interest has been paid or duly provided for, from August 1, 2003. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency of
Classic maintained for such purpose in the Borough of Manhattan, The City of New
York, which initially shall be the corporate trust office of the trustee in care
of First Chicago Trust Company of New York, 14 Wall Street, 8th Floor, Suite
4607, New York, New York 10005, except that, at the option of Classic, payment
of interest, if any, may be made by check mailed to the registered holders of
the notes at their registered addresses.
The notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of the
notes, except in certain circumstances for any tax or other governmental charge
that may be imposed in connection therewith.
RANKING
The indebtedness evidenced by the notes:
- is a senior unsecured obligations of Classic,
- ranks without preference to all existing and future Senior Indebtedness,
and
- is senior in right of payment with all existing and future unsecured
senior subordinated and subordinated Indebtedness of Classic.
Classic, on an unconsolidated basis, has no Indebtedness outstanding other
than the old notes.
Substantially all of the operations of Classic are conducted through its
Subsidiaries and, therefore, Classic is dependent upon the cash flow of its
Subsidiaries to meet its obligations, including its obligations under the notes.
The notes are effectively subordinated to all Indebtedness and other liabilities
and commitments of Classic's Subsidiaries. Claims of creditors of Classic's
Subsidiaries, including trade creditors, secured creditors and creditors holding
Indebtedness and guarantees issued by the Subsidiaries, and claims of preferred
stockholders, if any, of the Subsidiaries generally will have priority with
respect to the assets and earnings of such Subsidiaries over the claims of
creditors of Classic, including holders of the notes. At December 31, 1998, the
total liabilities of Classic's Subsidiaries was approximately $239.3 million,
including trade payables.
Although the indenture limits the incurrence of Indebtedness of certain of
Classic's Subsidiaries, the limitation is subject to a number of significant
qualifications. In addition, the indenture does not impose any limitation on the
incurrence by the Subsidiaries of liabilities that are not considered
Indebtedness under the indenture. See "-- Certain Covenants -- Limitation on
Indebtedness."
The indenture limits, but does not prohibit, the incurrence by Classic and
its Subsidiaries of additional Indebtedness. Furthermore, the indenture
prohibits the incurrence by Classic of Indebtedness that is subordinated in
right of payment to any Senior Indebtedness of Classic and senior in right of
payment to the notes.
The holders of Senior Indebtedness are entitled to receive payment in full
before the noteholders are entitled to receive any payment upon:
- any payment or distribution of the assets of Classic upon a total or
partial liquidation, dissolution, reorganization or similar proceeding
relating to Classic; or
- in a bankruptcy, insolvency, receivership or similar proceeding relating
to Classic.
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Until the Senior Indebtedness is paid in full, any payment or distribution
to which the noteholders would be entitled, but for the subordination provisions
of the indenture, will be made to the holders of the Senior Indebtedness.
As a result of the subordination provisions in the indenture, creditors of
Classic who are holders of Senior Indebtedness may recover more, ratably, than
the noteholders in the event of insolvency.
OPTIONAL REDEMPTION
The notes are redeemable, at Classic's option, in whole or in part, at any
time after August 1, 2003 and prior to maturity. The notes may be redeemed at
the following redemption prices, expressed as percentages of the principal
amount at maturity, if redeemed during the twelve-month period beginning with
August 1 of the year indicated below, in each case together with accrued and
unpaid interest, if any, thereon to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003..................................................... 106.63%
2004..................................................... 104.42
2005..................................................... 102.21
2006 and thereafter...................................... 100.00
</TABLE>
In addition, under this provision on or prior to August 1, 2001, Classic
may on one or more occasions redeem all of the notes with the Net Cash Proceeds
of one or more Equity Offerings of or Strategic Equity Investment in Classic, at
a redemption price in cash equal to 113.25% of the Accreted Value to be redeemed
plus accrued and unpaid interest, if any, to the date of redemption. Any
redemption under this provision must occur within 45 days following the closing
of any such Equity Offering or Strategic Equity Investment.
Upon the occurrence of a Change of Control, Classic may redeem all, but not
less than all, the notes in cash, at a redemption price equal to the Accreted
Value thereof plus accrued and unpaid interest to the date of redemption plus
the Applicable Premium. Classic may not redeem notes pursuant to this paragraph
if it has made a Change of Control Offer with respect to such Change of Control.
In the event that less than all of the notes are redeemed pursuant to an
optional redemption, the trustee will select the notes to be redeemed, if the
notes are listed on a national securities exchange, in accordance with the rules
of such exchange or, if the notes are not so listed, on a pro rata basis or by
lot or by such other method that the trustee deems to be fair and equitable to
holders. If any note is to be redeemed in part only, the notice of redemption
that relates to such note will state the portion of the principal amount to be
redeemed and a new note or notes in principal amount equal to the unredeemed
principal portion will be issued. No notes of a principal amount of $1,000 or
less shall be redeemed in part. On and after the redemption date, interest will
cease to accrue on notes or portions thereof called for redemption as long as
Classic has deposited with the paying agent for the notes funds in satisfaction
of the applicable redemption price pursuant to the indenture.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a change of control, each holder of notes shall have
the right to require Classic to repurchase all or any part of such holder's
notes pursuant to an offer described below at a
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purchase price equal to 101% of the Accreted Value thereof plus any accrued and
unpaid interest, if any, thereon to the date of repurchase.
A "change of control" means the occurrence of any of the following events:
- any Person, as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(1)
under the Exchange Act, other than one or more Permitted Holders, is or
becomes the "beneficial owner," as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right
to acquire, whether such right is exercisable immediately or only after
the passage of time, upon the happening of an event or otherwise,
directly or indirectly, of more than 35% of the total voting power of the
then outstanding Voting Equity Interest of Classic;
- Classic consolidates with, or merges with or into, another Person, other
than a Wholly Owned Restricted Subsidiary, or Classic or any its
Subsidiaries sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of the assets of Classic and its
Subsidiaries, determined on a consolidated basis, to any Person, other
than Classic or any Wholly Owned Restricted Subsidiary;
- Classic is liquidated or dissolved or adopts a plan of liquidation or
dissolution, whether or not otherwise in compliance with the provisions
of the indenture; or
- a majority of the members of the Board of Directors of Classic shall
consist of Persons who are not Continuing Members.
Within 30 days of the occurrence of a change of control, Classic is
required to mail, to the trustee and to each holder of the notes a notice
stating:
- that the change of control offer is being made pursuant to this covenant
and that all notes tendered will be accepted for payment;
- the purchase price and the purchase date, which shall be a business day
no earlier than 30 days nor later than 60 days from the date such notice
is mailed;
- that any note not tendered will continue to accrue interest;
- that, unless Classic defaults in the payment of the change of control
payment, any notes accepted for payment pursuant to the change of control
offer will cease to accrue interest after the change of control payment
date;
- that holders accepting the offer to have their notes purchased pursuant
to a change of control offer will be required to surrender the exchange
notes to the paying agent at the address specified in the notice prior to
the close of business on the business day preceding the change of control
payment date;
- that holders will be entitled to withdraw their acceptance if the paying
agent receives, not later than the close of business on the third
Business Day preceding the change of control payment date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the notes delivered for purchase, and a
statement that such holder is withdrawing its election to have such notes
purchased;
- that holders whose notes are being purchased only in part will be issued
new notes equal in principal amount to the unpurchased portion of the
notes surrendered, provided that each note purchased and each such
exchange note issued shall be in an original principal amount in
denominations of $1,000 and integral multiples thereof; (8) any other
procedures that a holder must follow to accept a change of control offer
or effect withdrawal of such acceptance; and
- the name and address of the paying agent.
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On the change of control payment date, Classic will be required, to the
extent lawful, to
- accept for payment notes or portions thereof tendered pursuant to the
change of control offer,
- deposit with the paying agent money sufficient to pay the purchase price
of all notes or portions thereof so tendered, and
- deliver or cause to be delivered to the trustee notes so accepted
together with an officers' certificate stating the notes or portions
thereof tendered to Classic.
The paying agent will promptly mail to each holder of notes so accepted
payment in an amount equal to the purchase price for such notes, and Classic
shall execute and issue, and the trustee shall promptly authenticate and mail to
such holder, a new note equal in principal amount to any unpurchased portion of
the notes surrendered; provided that each such new note shall be issued in an
original principal amount in denominations of $1,000 and integral multiples
thereof. Classic will send to the trustee and the holders of notes on or as soon
as practicable after the change of control payment date a notice setting forth
the results of the change of control offer.
Classic will not be required to make a change of control offer if a third
party makes the change of control offer in the manner, at the time and otherwise
in compliance with the requirements set forth in the indenture and purchases all
notes or portions thereof validly tendered and not withdrawn under such change
of control offer. Classic will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes pursuant to this
covenant.
The definition of change of control includes a phrase relating to the sale,
assignment, conveyance, transfer, lease or other disposition of "all or
substantially all" of the assets of Classic and its Subsidiaries. Although there
is a developing body of case law interpreting the phrase "substantially all,"
there is not a precise or established definition of the phrase under applicable
law. Accordingly, the ability of a holder of the notes to require Classic to
repurchase such notes as a result of a sale, assignment, conveyance, transfer,
lease or other disposition of less than all of the assets of Classic and its
Subsidiaries to another Person or group may be uncertain.
If a change of control offer is made, we cannot assure you that Classic
will have available funds sufficient to pay the change of control purchase price
for all of the notes that might be delivered by holders of the notes seeking to
accept the change of control offer. The indenture governing the notes issued by
Classic Cable restricts Classic Cable from paying dividends or making
distributions to Classic. See "-- Ranking." The failure of Classic to make or
consummate the change of control offer or pay the change of control purchase
price when due will give the trustee and the holders of the notes the rights
described under "Events of Default."
The existence of a holder's right to require Classic to repurchase such
holder's notes upon a change of control may deter a third party from acquiring
Classic in a transaction which constitutes a change of control.
The provisions of the indenture do not afford holders of the notes the
right to require Classic to repurchase the notes in the event of a highly
leveraged transaction or certain transactions with Classic's management or its
Affiliates, including a reorganization, restructuring, merger or similar
transaction, including, in certain circumstances, an acquisition of Classic by
management or its affiliates, involving Classic that may adversely affect
holders of the notes, if such transaction is not a transaction defined as a
change of control. A transaction involving Classic's management or its
Affiliates, or a transaction involving a recapitalization of Classic, will
result in a change of control if it is the type of transaction specified by such
definition.
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Asset Sales
The Classic Indenture provides that Classic shall not, and shall not permit
any Restricted Subsidiary to, consummate an Asset Sale unless (A) Classic or
such Restricted Subsidiary, as the case may be, receives consideration at the
time of such sale or other disposition at least equal to the fair market value
thereof, as determined in good faith by the Board of Directors of Classic and
evidenced in a board resolution; and (B) not less than 75% of the consideration
received by Classic or such Restricted Subsidiary, as the case may be, is in the
form of cash or Cash Equivalents.
Within 365 days after the receipt of any Net Available Cash from an Asset
Sale, Classic or the applicable Restricted Subsidiary may apply such Net
Available Cash to: (A) acquire all or substantially all of the assets of a
Related Business; (B) acquire Voting Stock of a Related Business from a Person
that is not a Subsidiary of Classic; provided, that,
- after giving effect thereto, Classic or its Restricted Subsidiary owns a
majority of such Voting Stock and
- such acquisition is otherwise made in accordance with the Classic
Indenture, including, without limitation, the "Limitation on Restricted
Payments" covenant;
(C) make a capital expenditure or acquire other long-term assets that are used
or useful in a Related Business; or (D) prepay, repay, redeem or purchase
Indebtedness outstanding under the Senior Credit Agreement. To the extent of the
balance of such Net Available Cash after application in accordance with clauses
(A), (B), (C) or (D) ("Excess Proceeds"), Classic shall make an Offer to holders
of the notes to purchase notes and an offer to holders of Pari Passu
Indebtedness to repurchase such indebtedness pursuant to and subject to the
conditions set forth below.
Notwithstanding the foregoing provisions, Classic and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Sales which are not applied in accordance with this covenant exceeds $10
million. Pending application of Net Available Cash pursuant to this covenant,
such Net Available Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash:
(1) the assumption by the transferee of Indebtedness of Classic, other than
Indebtedness that is subordinated to the notes and other than any
Disqualified Equity Interest of Classic, or Indebtedness of any
Restricted Subsidiary and the release of Classic or such Restricted
Subsidiary from all liability on such Indebtedness in connection with
such Asset Sale;
(2) securities received by Classic or any Restricted Subsidiary from the
transferee that are converted by Classic or such Restricted Subsidiary
into cash within 20 days of the applicable Asset Sale, to the extent of
the cash received; and
(3) any liabilities, as shown on Classic's or such Restricted Subsidiary's
most recent balance sheet, of Classic or any Restricted Subsidiary,
other than contingent liabilities and liabilities that are by their
terms subordinated to the notes or any guarantee thereof, that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Classic or any such Restricted
Subsidiary from further liability.
When the aggregate amount of Excess Proceeds exceeds $10 million or more,
Classic will apply the Excess Proceeds to the repayment of the notes and any
other Pari Passu Indebtedness outstanding with similar provisions requiring
Classic to make an offer to purchase such Indebtedness with the proceeds from
any Asset Sale as follows:
- Classic will make an offer to purchase (an "Offer") from all holders of
the Discount notes in accordance with the procedures set forth in the
indenture in the maximum principal amount, expressed as a multiple of
$1,000, of notes that may be purchased out of an amount (the "Note
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Amount") equal to the product of such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount of
the notes, and the denominator of which is the sum of the outstanding
principal amount of the notes and such Pari Passu Indebtedness, subject
to proration in the event such amount is less than the aggregate Offered
Price, as defined herein, of all notes tendered, and
- to the extent required by such Pari Passu Indebtedness to permanently
reduce the principal amount of such Pari Passu Indebtedness, Classic will
make an offer to purchase or otherwise repurchase or redeem Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt
Amount") equal to the excess of the Excess Proceeds over the Note Amount;
provided that in no event will Classic be required to make a Pari Passu
Offer in a Pari Passu Debt Amount exceeding the principal amount of such
Pari Passu Indebtedness.
The offer price for the notes will be payable in cash in an amount equal to
100% of the principal amount of the notes plus accrued and unpaid interest, if
any, to the date (the "Offer Date") such Offer is consummated (the "Offered
Price"), in accordance with the procedures set forth in the indenture. To the
extent that the aggregate Offered Price of the notes tendered pursuant to the
Offer is less than the Note Amount relating thereto or the aggregate amount of
Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than the
Pari Passu Debt Amount, Classic may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of discount notes
and Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the notes to be purchased on a pro
rata basis. Upon the completion of the purchase of all the notes tendered
pursuant to an Offer and the completion of a Pari Passu Offer, the amount of Net
Available Cash, if any shall be reset at zero.
If Classic is required to make an Offer, Classic shall mail, within 30 days
following the Reinvestment Date, a notice to the holders of notes stating, among
other things:
(1)that such holders have the right to require Classic to apply the Excess
Proceeds to repurchase such notes at a purchase price in cash equal to
100% of the Accreted Value thereof plus accrued and unpaid interest, if
any, to the date of purchase;
(2)the purchase date, which shall be no earlier than 30 days and not later
than 60 days from the date such notice is mailed;
(3)the instructions, determined by Classic, that each holder must follow in
order to have such notes repurchased; and
(4)the calculations used in determining the amount of Excess Proceeds to be
applied to the repurchase of such notes.
Classic will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant.
The indenture governing the notes issued by Classic Cable restricts Classic
Cable from paying dividends or making any distribution to Classic. If Classic is
unable to obtain dividends or receive distributions from Classic Cable
sufficient to permit repurchase of the notes pursuant to an Offer, Classic will
not have the financial resources to make an Offer.
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EVENTS OF DEFAULT
An Event of Default is defined in the indenture as
(1)a default in any payment of interest on any note when due, continued for
30 days,
(2)a default in the payment of principal, or premium, if any, on, of any
note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise,
(3)the failure by Classic to comply with its obligations under "-- Certain
Covenants -- Merger or Sales of Assets,"
(4)the failure by Classic to comply for 30 days after notice with any of
its obligations under the covenants described under "-- Repurchase at
the Option of Holders -- Change of Control" or "-- Certain Covenants,"
in each case, other than a failure to purchase notes,
(5)the failure by Classic to comply for 60 days after notice with its other
agreements contained in the indenture,
(6)the failure by Classic or any Restricted Subsidiary of Classic to pay
any Indebtedness within any applicable grace period after final maturity
or the acceleration of any such Indebtedness by the holders thereof
because of a default if the total amount of such Indebtedness unpaid or
accelerated exceeds $5 million or its foreign currency equivalent (the
"cross acceleration provision"),
(7)certain events of bankruptcy, insolvency or reorganization of Classic or
any Restricted Subsidiary of Classic (the "bankruptcy provisions"), or
(8)any judgment or decree for the payment of money in excess of $5 million
is rendered against Classic or any Restricted Subsidiary of Classic and
either (A) an enforcement proceeding has been commenced by any creditor
upon such judgment or decree or (B) such judgment or decree remains
outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed within 10 days of after notice (the
"judgment default provision").
The indenture provides that if an Event of Default, other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization, shall have occurred and be continuing, the trustee or the
holders of not less than 25% in principal amount of the notes then outstanding
may declare the Accreted Value of all the notes to be due and payable
immediately. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization shall occur, such amount with respect
to all of the notes shall be due and payable immediately without any declaration
or other act on the part of the trustee or the holders of the notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the trustee, the holders of a
majority in aggregate principal amount of Discount notes outstanding by written
notice to Classic and the trustee, may rescind and annul such declaration and
its consequences if (A) Classic has paid or deposited with the trustee a sum
sufficient to pay
(1)all sums paid or advanced by the trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the
trustee, its agents and counsel,
(2)all overdue interest on all notes then outstanding,
(3)the principal of and premium, if any, on any notes then outstanding
which have become due otherwise than by such declaration of acceleration
and interest thereon at the rate borne by the notes, and
(4)to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the notes;
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(B) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (C) all Events of Default, other than the
non-declaration of acceleration, have been cured or waived as provided in the
indenture. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
The holders of not less than a majority in aggregate principal amount of
the notes outstanding may on behalf of the holders of all outstanding notes
waive any past default under the indenture and its consequences, except a
default (A) in the payment of the principal of, premium, if any, or interest on
any note, which may only be waived with the consent of each holder of notes
effected, or (B) in respect of a covenant or provision which under the indenture
cannot be modified or amended without the consent of the holder of each note
affected by such modification or amendment.
No holder of any of the notes has any right to institute any proceedings
with respect to the indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding notes have made
written request, and offered reasonable indemnity, to the trustee to institute
such proceeding as trustee under the notes and the indenture, the trustee has
failed to institute such proceeding within 15 days after receipt of such notice
and the trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding notes. Such limitations do not, however,
apply to a suit instituted by a holder of a note for the enforcement of the
payment of the principal of, premium, if any, or interest on such note on or
after the respective due dates expressed in such note.
Classic is required to notify the trustee within five business days of the
occurrence of any Default. Classic is required to deliver to the trustee, on or
before a date not more than 60 days after the end of each fiscal quarter and not
more than 120 days after the end of each fiscal year, a written statement as to
compliance with the indenture, including whether or not any Default has
occurred.
The holders of a majority in principal amount of the notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee subject to certain
limitations specified in the indenture. Subject to the provisions of the
indenture relating to the duties of the trustee, in case an Event of Default
shall occur and be continuing, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request or
direction of any of the holders of the notes, unless such holders have offered
to the trustee reasonable indemnity.
CERTAIN COVENANTS
Limitation on Restricted Payments
The indenture provides that, so long as any of the notes remain
outstanding, Classic shall not, and shall not permit any Restricted Subsidiary
to, make any Restricted Payment if
(1)immediately before or immediately after giving effect to such Restricted
Payment, a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence of such Restricted Payment;
(2)immediately after giving effect to such Restricted Payment, Classic
would not be able to incur $1.00 of additional Indebtedness under the
Debt to Operating Cash Flow Ratio of the first paragraph of
"-- Limitation on Indebtedness" below; or
(3)immediately after giving effect to any such Restricted Payment, the
aggregate of all Restricted Payments which shall have been made on or
after the date of the indenture, the amount of any Restricted Payment,
if other than cash, to be based upon the fair market value thereof on
the date of such Restricted Payment, would exceed an amount equal to the
difference between (A) the Cumulative Credit and (B) 1.4 times
Cumulative Interest Expense.
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"Restricted Payment" means
(1)any dividend, whether made in cash, property or securities, on or with
respect to any Equity Interests of Classic or of any Restricted
Subsidiary, other than any dividend made to Classic or another Wholly
Owned Restricted Subsidiary or any dividend payable in Equity Interests
of Classic or any Restricted Subsidiaries; or
(2)any distribution, whether made in cash, property or securities, on or
with respect to any Equity Interests of Classic or of any Restricted
Subsidiary, other than any distribution made to Classic or another
Wholly Owned Subsidiary or any distribution payable in Equity Interests
of Classic or any Restricted Subsidiary; or
(3)any redemption, repurchase, retirement or other direct or indirect
acquisition of any Equity Interests of Classic or a Restricted
Subsidiary, or any warrants, rights or options to purchase or acquire
any such Equity Interests or any securities exchangeable for or
convertible into any such Equity Interests; or
(4)any redemption, repurchase, retirement or other direct or indirect
acquisition for value or other payment of principal, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund
payment, of any Subordinated Obligations; or
(5)any Investment, other than a Permitted Investment.
The provisions of the first paragraph of this covenant shall not prevent
(1)the retirement of any of Classic's Equity Interests in exchange for, or
out of the proceeds of, the substantially concurrent sale, other than to
a Subsidiary of Classic or an employee stock ownership plan or to a
trust established by Classic or any Subsidiary of Classic for the
benefit of its employees, of Equity Interests of Classic, other than any
Disqualified Equity Interest, provided that the Net Cash Proceeds from
the issuance are excluded from clause (A) of the definition of
Cumulative Credit;
(2)the payment of any dividend or distribution on, or redemption of Equity
Interests within 60 days after the date of declaration of such dividend
or distribution or the giving of formal notice of such redemption, if at
the date of such declaration or giving of such formal notice such
payment or redemption would comply with the first paragraph of this
covenant and the other provisions of the Classic indenture;
(3)investments constituting Restricted Payments made as a result of the
receipt of non-cash consideration from any Asset Sale made pursuant to
and in compliance with the provisions described under "-- Repurchase at
the Option of Holders -- Asset Sales" above;
(4)the redemption, repurchase, retirement, defeasance or other acquisition
of any Subordinated Obligations in exchange for, or out of Net Cash
Proceeds of the substantially concurrent sale, other than to a
Subsidiary of Classic or any employee stock ownership plan or to a trust
established by Classic or any Subsidiary of Classic, for the benefit of
its employees, of Equity Interests of Classic, other than any
Disqualified Equity Interest; and
(5)the making and consummation of (A) an Offer in accordance with the
provisions of the indenture with any Excess Proceeds or (B) a Change of
Control Offer with respect to the notes in accordance with the
provisions of the Classic Indenture; provided, however, that in the case
of clause (2) above, no Default or Event of Default shall have occurred
and be continuing at the time of such Restricted Payment or as a result
thereof. In determining the aggregate amount of Restricted Payments made
on or after the date of the indenture, Restricted Payments made pursuant
to clause (2) above shall be included in such calculation.
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Limitation on Indebtedness
The indenture provides that Classic shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, incur any Indebtedness,
including Acquired Indebtedness, except for Permitted Indebtedness; provided,
however, that Classic or any Restricted Subsidiary which is a Subsidiary
Guarantor may incur Indebtedness if, at the time of and immediately after giving
pro forma effect to such incurrence of Indebtedness and the application of the
proceeds therefrom, the Debt to Operating Cash Flow Ratio would be less than or
equal to 8.0 to 1.0.
The foregoing limitations will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(1)Indebtedness under the notes and the indenture;
(2)Indebtedness of Classic and the Restricted Subsidiaries outstanding on
the Issuance Date and listed on a schedule to the Classic Indenture,
other than Indebtedness described in clauses (1), (3), (4), (6) and
(10) of this paragraph;
(3)Indebtedness of (A) any Wholly Owned Restricted Subsidiary owed to or
issued to and held by Classic or any Restricted Subsidiary and (B)
Classic owed to and held by any Wholly Owned Restricted Subsidiary
which is unsecured and subordinated in right of payment to the payment
and performance of Classic's obligations under the indenture and the
notes; provided, however, that an incurrence of Indebtedness that is
not permitted by this clause (3) shall be deemed to have occurred upon
(x) any sale or other disposition of any Indebtedness of Classic or a
Restricted Subsidiary referred to in this clause (3) to any Person,
other than Classic or a Wholly Owned Restricted Subsidiary, such that
such Restricted Subsidiary ceases to be a Restricted Subsidiary or (y)
any designation of a Restricted Subsidiary which holds Indebtedness of
Classic as an Unrestricted Subsidiary;
(4)Guarantees by any Restricted Subsidiary of Indebtedness of Classic
permitted in accordance with the provisions of the indenture;
(5)Indebtedness of any Restricted Subsidiary under the Senior Credit
Agreement in the aggregate principal amount at any one time outstanding
not to exceed $125 million;
(6) Indebtedness of Classic or any Restricted Subsidiary to the extent
representing a replacement, renewal, refinancing or extension
(collectively, a "refinancing") of outstanding Indebtedness of Classic
or any Restricted Subsidiary, as the case may be, incurred in
compliance with clause (1), (2), (5), (7), or (9) of this paragraph of
this covenant; provided, however, that
- Indebtedness of Classic may not be refinanced under this clause (6)
with Indebtedness of any Restricted Subsidiary,
- any such refinancing shall not exceed the sum of the principal amount
or liquidation preference or redemption payment value, or, if such
Indebtedness provides for a lesser amount to be due and payable upon a
declaration of acceleration thereof at the time of such refinancing,
an amount no greater than such lesser amount, of the Indebtedness
being refinanced plus the amount of accrued interest or dividends
thereon and such reasonable fees and expenses incurred in connection
therewith,
- Indebtedness representing a refinancing of Indebtedness of Classic
shall not mature prior to the stated maturity of the Indebtedness
refinanced and shall have a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of the
Indebtedness being refinanced,
- Subordinated Obligations of Classic may only be refinanced with
Subordinated Obligations of Classic, and
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- Other Pari Passu Debt which is unsecured may only be refinanced with
unsecured Indebtedness, which is either Other Pari Passu Debt or
Subordinated Obligations;
(7)Indebtedness of Classic or a Restricted Subsidiary represented by
Capitalized Lease Obligations, mortgage financings, performance bonds,
purchase money obligations or letters of credit, in each case incurred
for the purpose of financing all or any part of the purchase price or
cost of construction or improvement of property, plant or equipment
used in the business of Classic or such Restricted Subsidiary in an
aggregate principal amount not to exceed $10 million at any time
outstanding;
(8)Indebtedness incurred and outstanding on or prior to the date on which
such Restricted Subsidiary was acquired by Classic, other than
Indebtedness incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by
Classic; provided, however, that on the date of such acquisition and
after giving effect thereto, the Debt to Operating Cash Flow Ratio
would have been less than or equal to the Debt to Operating Cash Flow
Ratio immediately prior thereto;
(9)Indebtedness of Classic and any Restricted Subsidiary under a Hedging
Agreement related to floating interest on Indebtedness under the Senior
Credit Agreement provided that such Hedging Agreement is designed
solely to protect against fluctuations in interest rates and does not
increase the Indebtedness of the obligor outstanding at any time other
than as a result of fluctuations in interest rates;
(10)Indebtedness under the Classic Cable notes and the related indenture;
and
(11)In addition to any indebtedness described in clauses (1) through (10)
above, Indebtedness of Classic or any of the Restricted Subsidiary so
long as the aggregate principal amount of all such indebtedness
incurred pursuant to this clause does not exceed $5 million at any one
time outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (1) through (9) above
or is entitled to be incurred pursuant to the first paragraph of this covenant,
Classic shall classify such item of Indebtedness in any manner that complies
with this covenant and such item of Indebtedness shall be treated as having been
incurred pursuant to only one of such clauses or pursuant to the first paragraph
hereof.
Limitation on Transactions with Affiliates.
(A) Classic will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into or conduct any transaction or series of transactions,
including the purchase, sale, lease or exchange of any property, employee
compensation arrangements or the rendering of any service, with any Affiliate,
officers or directors of Classic (an "Affiliate Transaction") unless
(1)the terms of such transaction are no less favorable to Classic or such
Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a
Person who is not such an Affiliate;
(2)in the event such Affiliate Transaction involves an aggregate amount in
excess of $1.0 million, the terms of such transaction are set forth in
writing and shall have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate
Transaction (and such majority determines that such Affiliate
Transaction satisfies the criteria in clause (1) above, and
(3)in the event such Affiliate Transaction involves an aggregate amount in
excess of $10 million, Classic has received a written opinion from a
nationally recognized independent investment
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banking firm, or nationally recognized accounting or appraisal firm,
that such Affiliate Transaction is fair to Classic and its Restricted
Subsidiaries from a financial point of view.
(B) The provisions of the foregoing paragraph (A) shall not prohibit
(1)any Restricted Payment permitted to be made pursuant to the covenant
"-- Limitation on Restricted Payments,"
(2)any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the
Board of Directors and otherwise permitted under the indenture,
(3)the grant of stock options or similar rights to employees and directors
of Classic in the ordinary course of business pursuant to plans approved
by the Board of Directors, and otherwise permitted under the indenture,
(4)loans or advances to employees in the ordinary course of business in
accordance with the past practices of Classic or its Restricted
Subsidiaries, but in any event not to exceed $1.0 million in the
aggregate outstanding at any one time,
(5)the payment of reasonable fees to directors of Classic and its
Restricted Subsidiaries who are not employees of Classic or its
Restricted Subsidiaries,
(6)any transaction between Classic and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries, or
(7)the payment of Investment Banking Fees.
Limitation on Sale or Issuance of Capital Stock of Restricted Subsidiaries
Classic (A) will not, and will not permit any Restricted Subsidiary of
Classic to, directly or indirectly, transfer, convey, sell, lease or otherwise
dispose of any Equity Interest of any Restricted Subsidiary to any Person, other
than to Classic or a Wholly Owned Restricted Subsidiary, unless
- such transfer, conveyance, sale, lease or other disposition is of all the
Equity Interest of such Restricted Subsidiary, and
- the Net Cash Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the provision described
above under "-- Repurchase at the Option of Holders -- Asset Sales,"
and (B) will not permit any Restricted Subsidiary to issue any of its Equity
Interest, other than, if required under applicable law, shares of its Equity
Interest constituting directors' qualifying shares to any Person other than to
Classic or Wholly Owned Restricted Subsidiary.
Limitation on Sale/Leaseback Transactions
Classic will not, and will not permit any Restricted Subsidiary to, enter
into any Sale/Leaseback Transaction with respect to any property unless
(1)Classic or such Restricted Subsidiary would be entitled to (A) incur
Indebtedness in an amount equal to the Attributable Indebtedness with
respect to such Sale/Leaseback Transaction pursuant to the covenant
described under "-- Limitation on Indebtedness" and (B) create a Lien on
such property securing such Attributable Indebtedness without equally
and ratably securing the notes pursuant to the covenant described under
"-- Limitation on Liens,"
(2)the net cash proceeds received by Classic or any Restricted Subsidiary
in connection with such Sale/Leaseback Transaction are at least equal to
the fair value, as determined in good faith by the Board of Directors of
Classic and certified in an Officers' Certificate to the Trustee, of
such property, and
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(3)the transfer of such property is permitted by, and Classic or such
Restricted Subsidiary applies the proceeds of such transaction in
compliance with, the covenant described under "-- Repurchase at the
Option of Holders -- Asset Sales."
Limitation on Liens
The indenture provides that Classic shall not, and will not permit any
Restricted Subsidiary to, directly or indirectly incur any Indebtedness secured
by a Lien against or on any of its property or assets now owned or hereafter
acquired by Classic or any Restricted Subsidiary unless contemporaneously
therewith, (A) if such Indebtedness is not subordinated Indebtedness, effective
provision is made to secure the notes equally and ratably with such secured
Indebtedness, and (B) if such Indebtedness is subordinated Indebtedness, the
notes are secured by a lien against such assets or property that is senior in
priority to the liens securing such Subordinated Indebtedness. This restriction
does not, however, apply to Indebtedness secured by
(1) Liens securing the Indebtedness under the Senior Credit Agreement;
(2) Liens, if any, in effect on the date of the indenture;
(3) Liens in favor of governmental bodies to secure progress or advance
payments;
(4) Liens on Equity Interests or Indebtedness existing at the time of the
acquisition thereof, including acquisition through merger or
consolidation, provided that such Liens were not incurred in
anticipation of such acquisition;
(5) Liens securing the notes;
(6) Liens securing Indebtedness of Classic in an amount not to exceed $5
million at any time outstanding;
(7) Other Permitted Liens; and
(8) any extension, renewal or replacement of any Lien referred to in
clauses (1) through (7) above, inclusive, but only to the extent such
Liens do not extend to any other property or assets, other than
improvements.
Limitation on Guarantees of Certain Indebtedness
The indenture provides that Classic shall not (A) permit any Restricted
Subsidiary to guarantee any Indebtedness of Classic other than the notes (the
"Other Indebtedness"), or (B) pledge any intercompany Indebtedness representing
obligations of any of its Restricted Subsidiaries to secure the payment of Other
Indebtedness, in each case unless such Restricted Subsidiary, Classic and the
trustee execute and deliver a supplemental indenture causing such Restricted
Subsidiary to guarantee Classic's obligations under the indenture and the
exchange notes to the same extent that such Restricted Subsidiary guaranteed
Classic's obligations under the Other Indebtedness, including waiver of
subrogation, if any, except that
- such guarantee need not be secured unless required pursuant to
"-- Limitation on Liens" and
- if such Indebtedness is by its terms expressly subordinated to the notes,
any such assumption, guarantee or other liability of such Restricted
Subsidiary with respect to such Indebtedness shall be subordinated to
such Restricted Subsidiary's guarantee of the notes at least to the same
extent as such Indebtedness is subordinated to the notes.
Notwithstanding the foregoing, any guarantee by a Restricted Subsidiary of
the notes shall provide by its terms that it, and all Liens securing the same,
shall be automatically and unconditionally released and discharged upon any
sale, exchange or transfer, to any Person not an Affiliate of Classic, of all of
Classic's Equity Interest in, or all or substantially all the assets of, such
Restricted Subsidiary, which transaction is in compliance with the terms of the
indenture and such Restricted Subsidiary is released from all guarantees, if
any, by it of other Indebtedness of Classic or any Restricted Subsidiaries and,
with respect
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to any guarantees created after the date of the indenture, the release by the
holders of the Indebtedness of Classic described in clause (A) above of their
security interest or their guarantee by such Restricted Subsidiary, including
any deemed release upon payment in full of all obligations under such
Indebtedness, at such time as (A) no other Indebtedness of Classic has been
secured or guaranteed by such Restricted Subsidiary, as the case may be, or (B)
the holders of all such other Indebtedness which is secured or guaranteed by
such Restricted Subsidiary also release their security interest in or guarantee
by such Restricted Subsidiary, including any deemed release upon payment in full
of all obligations under such Indebtedness.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The indenture provides that Classic shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any Restricted Subsidiary to
(1) pay dividends in cash or otherwise or make any other distributions to
Classic or any Restricted Subsidiary on its Equity Interests;
(2) pay any Indebtedness owed to Classic or any Restricted Subsidiary;
(3) make loans or advances or guarantee any such loans or advances, to
Classic or any Restricted Subsidiary;
(4) transfer any of its properties or assets to Classic or any Restricted
Subsidiary;
(5) grant Liens on the assets of Classic or any Restricted Subsidiary in
favor of the holders of the notes; or
(6) guarantee the notes or any renewals or refinancings thereof (any of the
actions described above is referred to herein as a "Specified Action");
except for
(1) such encumbrances or restrictions arising by reason of Acquired
Indebtedness of any Restricted Subsidiary existing at the time such
Person became a Restricted Subsidiary, provided that such encumbrances
or restrictions were not created in anticipation of such Person
becoming a Restricted Subsidiary and are not applicable to Classic or
any other Restricted Subsidiary;
(2) such encumbrances or restrictions arising under refinancing
indebtedness permitted by clause (6) of the second paragraph under
"-- Limitation on Indebtedness" above; provided that the terms and
conditions of any such restrictions are not less favorable to the
holders of notes than those under the Indebtedness being refinanced;
(3) customary provisions restricting the assignment of any contract of
Classic or any Restricted Subsidiary;
(4) with respect to clause (4) above, restrictions in security agreements
or mortgages securing Indebtedness of a Restricted Subsidiary to the
extent the restriction restricts the transfer of property subject to
such security agreement or mortgage;
(5) restrictions pursuant to the senior credit agreement; and
(6) restrictions pursuant to the notes of Classic Cable and the indenture
under which such notes were issued.
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Limitation on Unrestricted Subsidiaries
Classic may designate after the Issuance Date any Subsidiary, other than a
Subsidiary which is a guarantor, as an "Unrestricted Subsidiary" under the
Classic Indenture (a "Designation") only if:
(1) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(2) Classic would be permitted to make an Investment, other than a
Permitted Investment, at the time of Designation, assuming the
effectiveness of such Designation, pursuant to the first paragraph of
"Limitation on Restricted Payments" above in an amount (the
"Designation Amount") equal to the greater of (A) the net book value of
Classic's interest in such Subsidiary calculated in accordance with
GAAP or (B) the Fair Market Value of Classic's interest in such
Subsidiary as determined in good faith by Classic's board of directors;
(3) Classic would be permitted under the Classic Indenture to incur $1.00
of additional Indebtedness, other than Permitted Indebtedness, pursuant
to the covenant described under "--Limitation on Indebtedness" at the
time of such Designation, assuming the effectiveness of such
Designation;
(4) such Unrestricted Subsidiary does not own any Equity Interest in any
Restricted Subsidiary of Classic which is not simultaneously being
designated an Unrestricted Subsidiary;
(5) such Unrestricted Subsidiary is not liable, directly or indirectly,
with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness, provided that an Unrestricted Subsidiary may provide a
guarantee for the notes; and
(6) such Unrestricted Subsidiary is not a party to any agreement, contract,
arrangement or understanding at such time with Classic or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Classic or such
Restricted Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of Classic or, in the event such
condition is not satisfied, the value of such agreement, contract,
arrangement or understanding to such Unrestricted Subsidiary shall be
deemed a Restricted Payment.
In the event of any such Designation, Classic shall be deemed to have made
an Investment constituting a Restricted Payment pursuant to the covenant
"-- Limitation on Restricted Payments" for all purposes of the Classic Indenture
in the Designation Amount.
The Classic Indenture also provides that Classic shall not and shall not
cause or permit any Restricted Subsidiary to at any time (A) provide credit
support for, or subject any of its property or assets, other than the Equity
Interest of any Unrestricted Subsidiary, to the satisfaction of, any
Indebtedness of any Unrestricted Subsidiary, including any undertaking,
agreement or instrument evidencing such Indebtedness, other than permitted
Investments in Unrestricted Subsidiaries, or (B) be directly or indirectly
liable for any Indebtedness of any Unrestricted Subsidiary. For purposes of the
foregoing, the Designation of a Subsidiary of Classic as an Unrestricted
Subsidiary shall be deemed to be the designation of all of the Subsidiaries of
such Subsidiary as Unrestricted Subsidiaries.
Classic may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(1) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation;
(2) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the indenture;
and
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(3) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding, other than Indebtedness that would be Permitted
Indebtedness, immediately after giving effect to such proposed
Revocation, and after giving pro forma effect to the incurrence of any
such Indebtedness of such redesignated Subsidiary as if such
Indebtedness was incurred on the date of the Revocation, Classic could
incur $1.00 of additional Indebtedness, other than Permitted
Indebtedness, pursuant to the covenant described under "-- Limitation
on Indebtedness."
All Designations and Revocations must be evidenced by a resolution of the
board of directors of Classic delivered to the trustee certifying compliance
with the foregoing provisions.
Reports
The indenture provides that, whether or not Classic is subject to Section
13(a) or 15(d) of the Exchange Act or any successor provision thereto, Classic
shall file with the SEC, if permitted by SEC practice and applicable law and
regulations, so long as the notes are outstanding the annual reports, quarterly
reports and other periodic reports which Classic would have been required to
file with the SEC pursuant to Section 13(a) or 15(d) or any successor provision
thereto if Classic was so subject on or prior to the respective dates (the
"Required Filing Dates") by which Classic would have been required to file such
documents if Classic was so subject. Classic shall also in any event (A) within
15 days of each Required Filing Date, whether or not permitted or required to be
filed with the SEC,
- transmit or cause to be transmitted by mail to all holders of notes, at
such holder's address appearing in the register maintained by the
registrar, without cost to such holders, and
- file with the trustee, copies of the annual reports, quarterly reports
and other documents which Classic is required to file with the SEC
pursuant to the preceding sentence, or if such filing is not so
permitted, information and data of a similar nature, and
(B) if, notwithstanding the preceding sentence, filing such documents by Classic
with the SEC is not permitted by SEC practice or applicable law or regulations,
promptly upon written request supply copies of such documents to any holder of
notes. Classic shall not be obligated to file any such reports with the SEC if
the SEC does not permit such filings for all companies similarly situated other
than due to any action or inaction by Classic. Classic will also comply with
Section 314(a) of the Trust Indenture Act of 1939. In addition, for so long as
any of the notes remain outstanding and prior to the later of the consummation
of the exchange offer and the effectiveness of the shelf registration statement,
if required, Classic shall furnish to holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Merger or Sales of Assets
The indenture provides that Classic shall not, in a single transaction or
through a series of related transactions, consolidate or merge with or into, or
sell, assign, convey, lease, transfer or otherwise dispose of, all or
substantially all of its assets to, another Person or a group of Persons, or
permit any Restricted Subsidiary to do so if such transaction would result in
the transfer of all or substantially all of the assets of Classic on a
consolidated basis, unless
(1) either (A) Classic shall be the continuing Person, or (B) the Person
formed by or surviving any such consolidation or merger, if other than
Classic, or to which any such transfer shall have been made, is a
corporation, limited liability company or limited partnership organized
and existing under the laws of the United States, any State thereof or
the District of Columbia;
(2) the surviving Person, if other than Classic, expressly assumes by
supplemental indenture all the obligations of Classic under the notes
and the indenture;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
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(4) immediately after giving effect to such transaction, the surviving
Person would be able to incur $1.00 of additional Indebtedness under
the Debt to Operating Cash Flow Ratio of the first paragraph of
"-- Limitation of Indebtedness" above; and
(5) Classic shall have delivered to the trustee prior to the proposed
transaction an officers' certificate and an opinion of counsel, each
stating that the proposed consolidation, merger or transfer and such
supplemental indenture will comply with the indenture.
In addition, each Subsidiary Guarantor shall not, and Classic shall not
permit a Subsidiary Guarantor to, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person
other than Classic or any Subsidiary Guarantor, or sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties and assets to any Person or group of Persons, other than Classic or
any Subsidiary Guarantor, unless clauses (1) through (5) above are satisfied
with respect to such Subsidiary Guarantor, rather than Classic.
In the event of any transaction, other than a lease, described in and
complying with the conditions listed in the immediately preceding paragraphs in
which Classic is not the Surviving Person and the Surviving Person is to assume
all the obligations of Classic under the notes and the indenture pursuant to a
supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of Classic and Classic
would be discharged from its obligations under the indenture and the notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the indenture. Reference is made to the indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Accreted Value" means with respect to any note, as of any specified date
on or prior to August 1, 2003, the amount provided below for each $1,000
principal amount at maturity of notes:
(A) if the specified date occurs on one of the following dates after
the issue date (each a "Semiannual Accrual Date"), the Accreted Value will
equal the amount set forth below for such Semiannual Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL ACCRUAL DATE ACCRETED VALUE
----------------------- --------------
<S> <C>
August 1, 1998.............................................. 526.85
February 1, 1999............................................ 561.75
August 1, 1999.............................................. 598.97
February 1, 2000............................................ 638.65
August 1, 2000.............................................. 680.96
February 1, 2001............................................ 726.08
August 1, 2001.............................................. 774.18
February 1, 2002............................................ 825.47
August 1, 2002.............................................. 880.16
February 1, 2003............................................ 938.47
August 1, 2003.............................................. 1,000.00
</TABLE>
(B) if the specified date occurs between two Semiannual Accrual Dates,
the Accreted Value will equal the sum of (1) the Accreted Value for the
Semiannual Accrual Date immediately preceding such specified date and (2)
an amount equal to the product of (x) the Accreted Value for the
immediately following Semiannual Accrual Date less the Accreted Value for
the immediately preceding Semiannual Accrual Date multiplied by (y) a
fraction, the numerator of which is the number of days from the immediately
preceding Semiannual Accrual Date to the specified date, using a 360-day
year of 12 30-day months.
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"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition from such Person and not incurred in connection with, or in
anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Affiliate" means (A) any Person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, Classic; (B) any spouse, immediate family member or other relative
who has the same principal residence as any Person described in clause (A)
above; (C) any trust in which any such Persons described in clauses (A) and (B)
above has a beneficial interest; and (D) any corporation or other organization
of which any such Persons described above collectively owns 5% or more of the
equity of such entity. For purposes of this definition, "control," including,
with correlative meaning, the terms "controlling," "controlled by" and "under
common control with," when used with respect to any specified Person includes
the direct or indirect beneficial ownership of more than 5% of the voting
securities of such Person or the power to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Applicable Premium" means, with respect to a note, the greater of
- 1.0% of the then outstanding principal amount of such note, and
- the excess of (A) the present value of the required interest and
principal payments due on such note to the first optional redemption
date, assuming all outstanding notes were called for redemption on such
date, or to the final maturity date of the notes at the option of
Classic, computed using a discount rate equal to the Treasury Rate plus
50 basis points, over (B) the then outstanding principal amount of such
note.
"Asset Acquisition" means (A) an Investment by Classic or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be consolidated or merged with or into Classic or
any Restricted Subsidiary, or (B) any acquisition by Classic or any Restricted
Subsidiary of the assets of any Person which constitute substantially all of an
operating unit, a division or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer,
lease, that has the effect of a disposition, or other disposition, including,
without limitation, any merger, consolidation or sale leaseback transaction, to
any Person other than Classic or any Wholly Owned Restricted Subsidiary, in one
transaction or a series of related transactions, of
(1) any Equity Interest of any Restricted Subsidiary,
(2) any material license, franchise or other authorization of Classic or
any Restricted Subsidiary,
(3) any assets of Classic or any Restricted Subsidiary which constitute
substantially all of an operating unit, a division or a line of
business of Classic or any Restricted Subsidiary, or
(4) any other property or asset of Classic or any Restricted Subsidiary
outside of the ordinary course of business.
For the purposes of this definition, the term "Asset Sale" shall not
include
(1) any transaction consummated in compliance with "-- Repurchase at the
Option of Holders -- Change of Control" above and "-- Certain
Covenants -- Merger or Sales of Assets" above, and the creation of any
Lien not prohibited under "-- Certain Covenants -- Limitation on Liens"
above,
(2) the sale of property or equipment that has become worn out, obsolete or
damaged or otherwise unsuitable for use in connection with the business
of Classic or any Restricted Subsidiary, as the case may be,
(3) any transaction consummated in compliance with "-- Certain
Covenants -- Limitation on Restricted Payments" above, and
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(4) sales, transfers or other disposition of assets with a fair market
value not in excess of $1 million in any transaction or series of
transactions.
"Attributable Debt" means in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value, discounted at the interest
rate borne by the notes, compounded annually, of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction, including any period for which such lease has
been extended.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with generally accepted accounting principles
and the amount of such Indebtedness shall be the capitalized amount of such
obligations determined in accordance with generally accepted accounting
principles consistently applied.
"Cash Equivalents" means
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof
having maturities of not more than six months from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition, bankers' acceptances
with maturities not exceeding six months and overnight bank deposits,
in each case with any domestic commercial bank that is a member of the
Federal Reserve System having capital and surplus in excess of $500.0
million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having a rating of at least P-1 from Moody's or a
rating of at least A-1 from S&P; and
(6) money market mutual or similar funds having assets in excess of $100.0
million, at least 95% of the assets of which are comprised of assets
specified in clauses (1) through (5) above.
"Consolidated Income Tax Expense" means, with respect to Classic for any
period, the provision for federal, state, local and foreign income taxes payable
by Classic and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with generally accepted accounting principles
consistently applied.
"Consolidated Interest Expense" means, with respect to Classic and the
Restricted Subsidiaries for any period, without duplication, the sum of (A) the
interest expense of Classic and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with generally accepted
accounting principles consistently applied, including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation and after taking into account the
effect of elections made under any Hedging Agreements, however denominated, with
respect to such Indebtedness; and (B) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by
Classic and the Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with generally accepted accounting principles
consistently applied. For purposes of this definition, interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by Classic to be the rate of interest implicit in such Capitalized
Lease Obligation in accordance with generally accepted accounting principles
consistently applied.
"Consolidated Net Income" means, with respect to any period, the net income
(loss) of Classic and the Restricted Subsidiaries for such period determined on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied, adjusted, to the extent included in calculating such net
income (loss), by excluding, without duplication,
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(1) all extraordinary, unusual or nonrecurring items of income or expense
and of gains or losses and all gains and losses from the sale or other
disposition of assets out of the ordinary course of business, net of
taxes, fees and expenses relating to the transaction giving rise
thereto, for such period;
(2) that portion of such net income (loss) derived from or in respect of
investments in Persons other than any Restricted Subsidiary, except to
the extent actually received in cash by Classic or any Restricted
Subsidiary;
(3) the portion of such net income (loss) allocable to minority interests
in unconsolidated Persons for such period, except to the extent
actually received in cash by Classic or any Restricted Subsidiary;
(4) net income (loss) of any other Person combined with Classic or any
Restricted Subsidiary on a "pooling of interests" basis attributable to
any period prior to the date of combination;
(5) net income (loss) of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that net income (loss) is not at the date of
determination permitted without any prior governmental approval, which
has not been obtained, or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule of governmental regulation applicable to that
Restricted Subsidiary or the holders of its Equity Interests;
(6) the cumulative effect of a change in accounting principles after the
date of the Indenture; and
(7) net income (loss) attributable to discontinued operations determined on
a consolidated basis in accordance with generally accepted accounting
principles consistently applied.
"Consolidated Total Indebtedness" means, as at any date of determination,
an amount equal to the aggregate amount of all outstanding Indebtedness of
Classic and the Restricted Subsidiaries outstanding as of such date of
determination, including the liquidation value of all Disqualified Equity
Interest, less the obligations of Classic or any Restricted Subsidiary under any
Hedging Agreement as of such date of determination that would appear as a
liability on the balance sheet of such Person, in each case determined on a
consolidated basis in accordance with generally accepted accounting principles
consistently applied.
"Continuing Members" means, as of the date of determination, any Person who
(A) was a member of the Board of Directors of Classic on the date of the
Indenture, (B) was nominated for election or elected to the Board of Directors
of Classic with the affirmative vote of a majority of the Continuing Members who
were members of the Board of Directors of Classic at the time of such nomination
or election of (C) is a representative of, or was approved by, a Permitted
Holder.
"Cumulative Credit" means the sum of (A) the aggregate Net Cash Proceeds
received by Classic from the issue or sale, other than to a Subsidiary, of
Equity Interests, other than Disqualified Equity Interest, of Classic on or
after the Issuance Date, plus (B) the principal amount, or, if less, accreted
amount determined in accordance with generally accepted accounting principles,
of any Indebtedness of Classic which has been converted into or exchanged for
Equity Interests of Classic on or after the Issuance Date, plus (C) cumulative
Operating Cash Flow on or after the Issuance Date, to the end of the fiscal
quarter immediately preceding the date of the proposed Restricted Payment, or,
if cumulative Operating Cash Flow for such period is negative, minus the amount
by which cumulative Operating Cash Flow is less than zero, plus (D) to the
extent not already included in Operating Cash Flow, if any Investment
constituting a Restricted Payment that was made after the date of the Classic
Indenture is sold or otherwise liquidated or repaid the initial dividend amount
of such Restricted Payment, less the cost of disposition, if any, on the date of
such sale, liquidation or repayment, as determined in good faith by the Board of
Directors.
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"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense paid or accrued of Classic and the Restricted Subsidiaries on
or after the Issuance Date, to the end of the fiscal quarter immediately
preceding the proposed Restricted Payment.
"Debt to Operating Cash Flow Ratio" means the ratio of (A) the Consolidated
Total Indebtedness as of the date of calculation (the "Determination Date") to
(B) four times the Operating Cash Flow for the latest three months for which
financial information is available immediately preceding such Determination Date
(the "Measurement Period"). For purposes of calculating Operating Cash Flow for
the Measurement Period immediately prior to the relevant Determination Date,
(1) any Person that is a Restricted Subsidiary on the Determination Date,
or would become a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Operating Cash Flow, will be deemed to have been a Restricted
Subsidiary at all times during the Measurement Period;
(2) any Person that is not a Restricted Subsidiary on such Determination
Date, or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Operating Cash Flow, will be deemed not to have
been a Restricted Subsidiary at any time during such Measurement
Period; and
(3) if Classic or any Restricted Subsidiary shall have in any manner (A)
acquired, including through an Asset Acquisition or the commencement of
activities constituting such operating business, or (B) disposed of,
including by way of an Asset Sale or the termination or discontinuance
of activities constituting such operating business, any operating
business during such Measurement Period or after the end of such period
and on or prior to such Determination Date, such calculation will be
made on a pro forma basis in accordance with generally accepted
accounting principles consistently applied, as if, in the case of an
Asset Acquisition or the commencement of activities constituting such
operating business, all such transactions had been consummated on the
first day of such Measurement Period, and, in the case of an Asset Sale
or termination or discontinuance of activities constituting such
operating business, all such transactions had been consummated prior to
the first day of such Measurement Period.
"Disqualified Equity Interest" means, with respect to any Person, any
Equity Interest which, by its terms, or by the terms of any security into which
it is convertible or for which it is exchangeable at the option of the holder
thereof, or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, or is exchangeable
into Indebtedness or Disqualified Equity Interest, on or prior to the earlier of
the maturity date of the notes or the date on which no notes remain outstanding.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in, however designated, corporate stock or other equity
participations, including partnership interests, whether general or limited, and
membership interests in such Person, including any Preferred Stock.
"Equity Offering" means an underwritten public offering by Classic for
cash, with gross proceeds to Classic of not less than $25 million, of its common
stock, pursuant to the Securities Act registration statement, not including
Forms S-4 or S-8.
"Hedging Agreement" means any interest rate swap agreement, interest rate
cap agreement, interest rate collar agreement or other similar agreement
providing for the transfer or mitigation of interest rate risks either generally
or under specific contingencies.
"Hedging Obligation" means the obligations of such Person pursuant to any
Hedging Agreement.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the
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payment of which such Person is responsible or liable, including, in
each case, any premium on such indebtedness to the extent such premium
has become due and payable;
(2) all Capitalized Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement, but excluding trade accounts payable arising in the ordinary
course of business;
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit
transaction, other than obligations with respect to letters of credit
securing obligations, other than obligations described in clauses (1)
through (3) above, entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the tenth Business Day following payment on the letter of credit;
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Equity
Interest or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock, but
excluding, in each case, any accrued dividends;
(6) all obligations of the type referred to in clauses (1) through (5)
above of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any guarantee;
(7) all obligations of the type referred to in clauses (1) through (6)
above of other Persons secured by any Lien on any property or asset of
such Person, whether or not such obligation is assumed by such Person,
the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so
secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Investment" in any Person means, directly or indirectly, any advance, loan
or other extension of credit, including by means of a guarantee, or capital
contribution to, by means of transfers of property to others, payments for
property or services for the account or use of others or otherwise, such Person,
the acquisition, by purchase or otherwise, of any stock, bonds, notes,
debentures, partnership, membership or joint venture interests or other
securities or other evidence of beneficial interest of any Person, and shall
include the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary. If Classic or any Restricted Subsidiary sells or otherwise disposes
of any Voting Equity Interest of any direct or indirect Restricted Subsidiary
such that, after giving effect to such sale or disposition, Classic no longer
owns, directly or indirectly, greater than 50% of the outstanding Voting Equity
Interests of such Restricted Subsidiary, Classic shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Voting Equity Interests of such former Restricted Subsidiary not
sold or disposed of.
"Investment Banking Fee" means pursuant to an agreement between J. Merritt
Belisle and Steven E. Seach, on the one hand, and Classic, on the other hand, a
fee to be paid by Classic to such individuals (A) upon the consummation of the
Financing Plan in the aggregate amount of $550,000 and (B) thereafter from time
to time in connection with the consummation of acquisitions or financings by
Classic in an amount equal to 1.0% of the purchase price paid for such
acquisitions.
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"Lien" means any mortgage, pledge, lien, charge, security interest,
hypothecation, assignment for security or encumbrance of any kind, including any
conditional sale or capital lease or other title retention agreement, any lease
in the nature thereof or any agreement to give a security interest.
"Moody's" means Moody's Investors Service, Inc., or any successor rating
agency.
"Net Available Cash" from an Asset Sale means cash payments received,
including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring Person of Indebtedness or other obligations
relating to such properties or assets or received in any other non cash form
therefrom, in each case net of
(1) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be paid or accrued as a liability under GAAP,
as a consequence of such Asset Sale,
(2) all payments made on any indebtedness which is secured by any assets
subject to such Asset Sale, in accordance with the terms of any Lien
upon or other security arrangement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Sale, or by applicable law, be repaid out of the
proceeds from such Asset Sale,
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries or joint ventures as a
result of such Asset Sale and
(4) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Sale and retained by Classic
or any Restricted Subsidiary after such Asset Sale.
"Net Cash Proceeds" means, with respect to any issuance or sale of Equity
Interests, the proceeds in the form of cash or Cash Equivalents received by
Classic or any Restricted Subsidiary of such issuance or sale net of attorneys'
fees, accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Recourse Indebtedness" means Indebtedness of a Person
(1) as to which neither Classic nor any of the Restricted Subsidiaries,
other than such Person or any Subsidiaries of such Person, (A) provides
any guarantee or credit support of any kind, including any undertaking,
guarantee, indemnity, agreement or instrument that would constitute
Indebtedness, or (B) is directly or indirectly liable, as a guarantor
or otherwise; and
(2) the incurrence of which will not result in any recourse against any of
the assets of either of Classic or the Restricted Subsidiaries, other
than to such Person or to any Subsidiaries of such Person and other
than to the Equity Interests in such Restricted Subsidiary or an
Unrestricted Subsidiary.
"Operating Cash Flow" means, with respect to Classic and the Restricted
Subsidiaries on a consolidated basis, for any period, an amount equal to the
lesser of (A) the amount of cash dividends received by Classic from Classic
Cable and (B) Consolidated Net Income for such period increased, without
duplication, by the sum of
(1) Consolidated Income Tax Expense accrued for such period to the extent
deducted in determining Consolidated Net Income for such period;
(2) Consolidated Interest Expense for such period to the extent deducted in
determining Consolidated Net Income for such period; and
(3) depreciation, amortization and any other non-cash items for such period
to the extent deducted in determining Consolidated Net Income for such
period, other than any non-cash item which
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requires the accrual of, or a reserve for, cash charges for any future
period, of Classic and the Restricted Subsidiaries, including, without
limitation, amortization of capitalized debt issuance costs for such
period,
all of the foregoing determined on a consolidated basis in accordance with
generally accepted accounting principles consistently applied, and decreased by
non-cash items to the extent they increased Consolidated Net Income, including
the partial or entire reversal of reserves taken in prior periods, for such
period, provided, that with respect to the definition of Debt to Operating Cash
Flow only, Operating Cash Flow shall always have the meaning ascribed in Section
(B) above. For purposes of this definition, the following items shall, to the
extent expensed in calculating Consolidated Net Income, be added to Consolidated
Net Income: (A) any amounts paid to employees of Classic in respect of
investment banking or transaction fees in connection with acquisitions or
financings of, or advisory services to, Classic, in an amount not to exceed 1.5
percent of the fair market value of such acquisition or the amount of such
financing, and (B) cancellation of debt to any employee of Classic in an
aggregate principal amount not to exceed $200,000.
"Other Pari Passu Debt" means Indebtedness of Classic that does not
constitute Subordinated Obligations and is not senior in right of payment to the
notes.
"Other Permitted Liens" means
(1) Liens imposed by law, such as carriers', warehousemen's and mechanics'
liens and other similar liens arising in the ordinary course of
business which secure payment of obligations that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which
an appropriate reserve or provision shall have been made in accordance
with generally accepted accounting principles consistently applied;
(2) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted
and for which an appropriate reserve or provision shall have been made
in accordance with generally accepted accounting principles
consistently applied;
(3) easements, rights of way, and other restrictions on use of property or
minor imperfections of title that in the aggregate are not material in
amount and do not in any case materially detract from the property
subject thereto or interfere with the ordinary conduct of the business
of Classic or its Subsidiaries;
(4) Liens related to Capitalized Lease Obligations, mortgage financings or
purchase money obligations, including refinancings thereof, in each
case incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property,
plant or equipment used in the business of Classic or any Restricted
Subsidiary or a Related Business, provided that any such Lien encumbers
only the asset or assets so financed, purchased, constructed or
improved;
(5) Liens resulting from the pledge by Classic of Equity Interests in any
Subsidiary in connection with the Senior Credit Agreement;
(6) Liens resulting from the pledge by Classic of Equity Interests in an
Unrestricted Subsidiary in any circumstance where recourse to Classic
is limited to the value of the Equity Interests so pledged;
(7) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
(8) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds, deposits to secure the performance of
bids, trade contracts, government contracts, leases or licenses or
other obligations of a like nature incurred in the ordinary course of
business, including without limitation, landlord Liens on leased
properties;
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(9) leases or subleases granted to third Persons not interfering with the
ordinary course of business of Classic;
(10) deposits made in the ordinary course of business to secure liability
to insurance carriers;
(11) Liens securing reimbursement obligations with respect to letters of
credit which encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(12) Liens on the assets of Classic to secure hedging agreements with
respect to Indebtedness permitted by the indenture to be incurred;
(13) attachment or judgment Liens not giving rise to a Default or an Event
of Default; and
(14) any interest or title of a lessor under any capital lease or operating
lease.
"Permitted Holders" means Austin Ventures, L.P., BT Capital Partners, Inc.,
NationsBank Capital Investors, J. Merritt Belisle and Steven E. Seach.
"Permitted Investments" means
(1) Cash Equivalents;
(2) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance
and other similar deposits;
(3) the extension of credit to vendors, suppliers and customers in the
ordinary course of business;
(4) Investments existing as of the date of the indenture, and any
amendment, modification, extension or renewal thereof to the extent
such amendment, modification, extension or renewal does not require
Classic or any Restricted Subsidiary to make any additional cash or
non-cash payments or provide additional services in connection
therewith;
(5) Hedging Agreements;
(6) any Investment for which the sole consideration provided is Equity
Interests of Classic;
(7) any Investment consisting of a guarantee permitted under clause (5) of
the second paragraph of "-- Certain Covenants -- Limitation on
Indebtedness" above;
(8) Investments in Classic, in any Wholly Owned Restricted Subsidiary or
any Person that, as a result of or in connection with such Investment,
becomes a Wholly Owned Restricted Subsidiary or is merged with or into
or consolidated with Classic or a Wholly Owned Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business;
(9) loans and advances to officers, directors and employees of Classic and
the Restricted Subsidiaries for business-related travel expenses,
moving expenses and other similar expenses in each case incurred in the
ordinary course of business not to exceed $1 million outstanding at any
time;
(10) any acquisition of assets solely in exchange for the issuance of
Equity Interests of Classic; and
(11) other Investments made after the date of the indenture, in addition to
any Permitted Investments described in clauses (1) through (10) above,
in an aggregate amount at any one time outstanding not to exceed $1
million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization, government or agency or political subdivision thereof or any other
entity.
"Preferred Stock" means, in any Person, an Equity Interest of any class or
classes, however designated, which is preferred as to the payment of dividends
or distributions, or as to the distribution of
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assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Equity Interests of any other class in such Person.
"Reinvestment Date" means the date which is 365 days after the receipt of
any Net Available Cash from an Asset Sale.
"Related Business" means a cable television, media and communications,
telecommunications or data transmission business, and businesses ancillary,
complementary or reasonably related thereto.
"Restricted Subsidiary" means any Subsidiary of Classic other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Classic or a Restricted Subsidiary transfers
such property to a Person and Classic or a Restricted Subsidiary leases it from
such Person.
"Semiannual Accrual Date" has the meaning ascribed under the definition of
Accreted Value.
"Senior Indebtedness" means the principal of, premium, if any, and
interest, including interest, whether or not allowable, accruing after the
filing of a petition initiating any proceeding under any state, federal or
foreign bankruptcy law, on any Indebtedness of Classic, other than as otherwise
provided in this definition, whether outstanding on the date of the indenture or
thereafter created, incurred or assumed, and whether at any time owing, actually
or contingent, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include
(1) Indebtedness evidenced by the notes,
(2) Indebtedness that is subordinate or junior in right of payment to any
Indebtedness of Classic,
(3) Indebtedness which when incurred and without respect to any election
under Section 1111(b) of Title 11 United States Code, is without
recourse to Classic,
(4) Indebtedness which is represented by Redeemable Capital Stock,
(5) any liability for foreign, federal, state, local or other taxes owed or
owing by Classic to the extent such liability constitutes Indebtedness,
(6) Indebtedness of Classic to a Subsidiary or any other Affiliate of
Classic or any of such Affiliate's Subsidiaries,
(7) to the extent it might constitute Indebtedness, amounts owing for
goods, materials or services purchased in the ordinary course of
business or consisting of trade accounts payable owed or owing by
Classic, and amounts owed by Classic for compensation to employees or
services rendered to Classic,
(8) that portion of any Indebtedness which at the time of issuance is
issued in violation of the indenture, and
(9) Indebtedness evidenced by any guarantee of any Subordinated
Indebtedness or Pari Passu Indebtedness.
"S&P" means Standard & Poor's Ratings Group, a division of the McGraw Hill
Company, Inc., or any successor rating agency.
"Strategic Equity Investment" means an investment in Classic by a company
which is primarily engaged in the media and communications industry or the
telecommunications industry and which has a market capitalization, if a public
company, on the date of such investment in Classic of more than $1 billion or,
if not a public company, had total revenues of more than $5 billion during its
previous fiscal year.
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"Subordinated Obligations" means, with respect to Classic, any Indebtedness
of Classic which is expressly subordinated in right of payment to the notes.
"Subsidiary" means a Person the majority of whose voting stock, membership
interests or other Voting Equity Interests is or are owned by Classic or a
Subsidiary. Voting stock in a corporation includes Equity Interests having
voting power under ordinary circumstances to elect directors.
"Subsidiary Operating Cash Flow" means, with respect to any Subsidiary for
any period, the "Operating Cash Flow" of such Subsidiary and its Subsidiaries
for such period determined by utilizing all of the elements of the definition of
"Operating Cash Flow" in the indenture, including the defined terms used in such
definition, consistently applied only to such Subsidiary and its Subsidiaries on
a consolidated basis for such period.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity, as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two business days prior to the date fixed
for redemption of the notes following a change of control, or, if such
Statistical Release is no longer published, any publicly available source of
similar market data, most nearly equal to the then remaining Weighted Average
Life to Maturity of the notes; provided, however, that if the Weighted Average
Life to Maturity of the notes is not equal to the constant maturity of a United
States Treasury security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation, calculated to the nearest one
twelfth of a year, from the weekly average yields of United States Treasury
securities from which such yields are given, except that if the Weighted Average
Life to Maturity of the notes is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Unrestricted Subsidiary" means any Subsidiary of Classic, other than a
Subsidiary Guarantor, designated as such pursuant to and in compliance with the
covenant described under "-- Certain Covenants -- Limitation on Unrestricted
Subsidiaries." Any such designation may be revoked by a resolution of the Board
of Directors of Classic delivered to the Trustee, subject to the provisions of
"-- Certain Covenants -- Limitation on Unrestricted Subsidiaries."
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (A) as to which neither Classic nor
any Restricted Subsidiary is directly or indirectly liable, by virtue of Classic
or any such Restricted Subsidiary being the primary obligor on, guarantor of, or
otherwise liable in any respect to, such Indebtedness, except guaranteed debt of
Classic or any Restricted Subsidiary to any Affiliate, in which case, unless the
incurrence of such guaranteed debt resulted in a Restricted Payment at the time
of incurrence, Classic shall be deemed to have made a Restricted Payment equal
to the principal amount of any such Indebtedness to the extent guaranteed at the
time such Affiliate is designated an Unrestricted Subsidiary and (B) which, upon
the occurrence of a default with respect thereto, does not result in, or permit
any holder of any Indebtedness of Classic or any Subsidiary to declare, a
default on such Indebtedness of Classic or any Subsidiary or cause the payment
thereof to be accelerated or payable prior to its Stated Maturity; provided that
notwithstanding the foregoing any Unrestricted Subsidiary may guarantee the
notes.
"Voting Equity Interests" means Equity Interests in any Person with voting
power under ordinary circumstances entitling the holders thereof to elect the
board of directors, board of managers or other governing body of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the sum of the products obtained by multiplying (A) the amount of each
then remaining installment, sinking fund, serial maturity or other
required scheduled payment of principal, including payment of final
maturity, in respect thereof by (B) the number of years, calculated to
the nearest one-twelfth that will elapse between such date and the
making of such payment, by
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(2) the then outstanding aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary of which
all of the outstanding Equity Interests, other than Equity Interests
constituting directors' qualifying shares to the extent mandated by applicable
law, are owned by Classic or by one or more Wholly Owned Restricted Subsidiaries
or by Classic and one or more Wholly Owned Restricted Subsidiaries.
Notwithstanding the foregoing, so long as Universal Cable Holdings, Inc. holds
at least 75% of the issued and outstanding shares of stock of Universal Cable
Communications, Inc., Universal Cable of Beaver, Oklahoma, Inc. and Universal
Cable Midwest, Inc., each of such entities shall be deemed to be a Wholly Owned
Subsidiary.
NO LIABILITY OF MANAGERS, OFFICERS, EMPLOYEES, OR SHAREHOLDERS
No manager, director, officer, employee, member, shareholder, partner or
incorporator of Classic or any Subsidiary, as such, will have any liability for
any obligations of Classic under the notes or the Classic Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and the SEC is of the view that such a waiver is against
public policy.
DEFEASANCE AND COVENANT DEFEASANCE
The indenture provides that Classic may elect either (A) to defease and be
discharged from any and all obligations with respect to the notes, except for
the obligations to replace temporary or mutilated, destroyed, lost or stolen
notes, to maintain an office or agency in respect of the notes and to hold
moneys for payment in trust, ("defeasance") or (B) to be released from its
obligations with respect to the notes under certain covenants, and related
Events of Default, contained in the indenture, including but not limited to
those described above under "Certain Covenants' ("covenant defeasance"), upon
the deposit with the trustee, or other qualifying trustee, in trust for such
purpose, of money and/or U.S. Government Obligations which through the payment
of principal and interest in accordance with their terms will provide money, in
an amount sufficient to pay the principal of, premium, if any, and interest, if
any, on the notes, on the scheduled due dates therefor. Such a trust may only be
established if, among other things,
(1) no Default or Event of Default has occurred and is continuing or would
arise therefrom, or, with respect to Events of Default resulting from
certain events of bankruptcy, insolvency or reorganization, would occur
at any time in the period ending on the 91st day after the date of
deposit, and
(2) Classic has delivered to the trustee an opinion of counsel, as
specified in the indenture, to the effect that (A) defeasance or
covenant defeasance, as the case may be, will not require registration
of Classic, the trustee or the trust fund under the Investment Company
Act of 1940, as amended, or the Investment Advisors Act of 1940, as
amended, and (B) the holders of the notes will recognize income, gain
or loss for Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred. Such opinion, in the case of
defeasance under clause (A) above, must refer to and be based upon a
private ruling concerning the notes of the Internal Revenue Service or
a ruling of general effect published by the Internal Revenue Service.
MODIFICATION OF INDENTURE
From time to time, Classic and the trustee may, without consent of holders
of the notes, enter into one or more supplemental indentures for certain
specified purposes, including
(1) providing for a successor or successors to Classic,
(2) adding guarantees, releasing guarantors when permitted by the
indenture,
(3) providing for security for the notes,
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<PAGE> 116
(4) adding to the covenants of Classic,
(5) surrendering any right or power conferred upon Classic,
(6) providing for uncertificated notes in addition to or in place of
certificated notes,
(7) making any change that does not adversely affect the rights of any note
holder, and
(8) complying with any requirement of the Trust Indenture Act or curing
certain ambiguities, defects or inconsistencies.
The indenture contains provisions permitting Classic and the trustee, with
the consent of holders of at least a majority in aggregate principal amount of
the notes at the time outstanding, to modify the indenture or any supplemental
indenture or the rights of the holders of the notes, except that no such
modifications shall, without the consent of each holder affected thereby
(1) change or extend the fixed maturity of the notes, reduce the rate or
extend the time of payment of interest thereon, reduce the principal
amount thereof or premium, if any, thereon or change the currency in
which the notes are payable;
(2) reduce the premium payable upon any redemption of notes in accordance
with the optional redemption provisions of the notes or change the time
before which no such redemption may be made;
(3) waive a default in the payment of principal or interest on the notes,
except that holders of a majority in aggregate principal amount of the
notes at the time outstanding may (A) rescind an acceleration of the
notes that resulted from a non-payment default and (B) waive the
payment default that resulted from such acceleration, or alter the
rights of note holders to waive defaults; or
(4) reduce the aforesaid percentage of notes, the consent of the holders of
which is required for any such modification.
Any existing Event of Default, other than a default in the payment of
principal or interest on the notes, or compliance with any provision of the
notes or the indenture, other than any provision related to the payment of
principal or interest on the notes, may be waived with the consent of holders of
at least a majority in aggregate principal amount of the notes at the time
outstanding.
COMPLIANCE CERTIFICATE
The indenture provides that Classic will deliver to the trustee within 120
days after the end of each fiscal year of Classic an officers' certificate
stating whether or not the signers know of any Event of Default that has
occurred. If they do, the certificate will describe the Event of Default and its
status.
BOOK-ENTRY; DELIVERY AND FORM
The exchange notes will be represented by one or more permanent global
exchange notes in definitive, fully registered form without interest coupons
(each a "Global Note") and will be deposited with the Trustee as custodian for,
and registered in the name of a nominee of, The Depositary Trust Corporation
("DTC").
Each Global note will be subject to certain restrictions on transfer set
forth therein as described under "Notices to Investors."
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee, with respect to interests of
participants, and the records of participants, with respect to interests of
persons other than participants. Qualified Institutional Buyers may
113
<PAGE> 117
hold their interests in a Global note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the exchange notes represented by such Global Note for
all purposes under the Indenture and the exchange notes. No beneficial owner of
an interest in a Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in additional to those provided for
under the Classic Indenture and, if applicable, those of Euroclear and Cedel
Bank.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither Classic, the trustee nor any paying agent will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Classic expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. Classic also expects that payments by participants to owners
of beneficial interests in such Global Note held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
Classic expects that DTC will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below, only at the direction of one or more participants to whose account the
DTC interests in a Global Note are credited and only in respect of such portion
of the aggregate principal amount of notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants and which may
be legended as set forth under the heading "Notices to Investors."
Classic understands that DTC is
- a limited purpose trust company organized under the laws of the State of
New York,
- a "banking organization" within the meaning of New York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, and
- a "Clearing Agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates and certain other
organizations. Indirect access to the DTC system is available to other such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interest in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither Classic nor the trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel Bank
or their respective
114
<PAGE> 118
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by Classic within
90 days, Classic will issue Certificated Notes, which may bear the legend
referred to under "Notices to Investors," in exchange for the Global Notes.
Holders of an interest in a Global Note may receive Certificated Notes, which
may bear the legend referred to under "Notices to Investors," in accordance with
the DTC's rules and procedures in addition to those provided for under the
indenture.
115
<PAGE> 119
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain U.S. federal income tax consequences
associated with the exchange of old notes for exchange notes pursuant to the
exchange offer, and does not purport to be a complete analysis of all potential
tax effects. This summary is based upon the Internal Revenue Code of 1986, as
amended, existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. The
summary is not binding on the Internal Revenue Service or on the courts, and no
ruling will be requested from the Internal Revenue Service on any issues
described below. There can be no assurance that the Internal Revenue Service
will not take a different position concerning the matters discussed below.
This summary applies only to those persons who are the initial holders of
old notes, who acquired old notes for cash and who hold old notes as capital
assets. It does not address the tax consequences to taxpayers who are subject to
special rules, such as financial institutions, tax-exempt organizations,
insurance companies and persons who are not "U.S. Holders", or the effect of any
applicable U.S. federal estate and gift tax laws or state, local or foreign tax
laws. For purposes of this summary, a "U.S. Holder" means a beneficial owner of
an old note who purchased the old note pursuant to the offering that is for U.S.
federal income tax purposes
- a citizen of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust, and (B) one or
more U.S. fiduciaries have the authority to control all substantial
decisions of the trust.
EXCHANGE OFFER
The exchange of old notes for exchange notes pursuant to the exchange offer
should not constitute a taxable exchange for U.S. federal income tax purposes.
Accordingly, a U.S. Holder should not recognize gain or loss upon the receipt of
exchange notes pursuant to the exchange offer, and a U.S. holder should be
required to include interest on the exchange notes in gross income in the manner
and to the extent interest income was includible under the old notes. A U.S.
holder's holding period for the exchange notes should include the holding period
of the old notes exchanged therefor, and such holder's adjusted basis in the
exchange notes should be the same as the basis of the old notes exchanged
therefor immediately before the exchange.
The foregoing discussion is included herein for general information only.
Accordingly, each holder should consult with its own tax advisors concerning the
tax consequences of the exchange offer with respect to its particular situation,
including the application and effect of state, local and foreign income and
other tax laws.
116
<PAGE> 120
PLAN OF DISTRIBUTION
Based on interpretations by the SEC set forth in no-action letters issued
to third parties, Classic believes that exchange notes issued pursuant to the
exchange offer in exchange for the old notes may be offered for resale, resold
and otherwise transferred by holders thereof, other than any holder which is (A)
an "affiliate" of Classic within the meaning of Rule 405 under the Securities
Act, (B) a broker-dealer who acquired notes directly from Classic, or (C)
broker-dealers who acquired notes as a result of market-making or other trading
activities, without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such exchange notes are acquired
in the ordinary course of such holders' business, and such holders are not
engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such exchange
notes. However, broker-dealers receiving exchange notes in the exchange offer
will be subject to a prospectus delivery requirement with respect to resales of
such exchange notes. To date, the SEC has taken the position that these
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as the exchange
pursuant to the exchange offer, other than a resale of an unsold allotment from
the sale of the old notes to the initial purchasers, with the prospectus
contained in the exchange offer registration statement. Pursuant to the exchange
and registration rights agreement, Classic has agreed to permit these
broker-dealers to use this prospectus in connection with the resale of such
exchange notes. Classic has agreed that, for a period of 120 days after the
expiration date, it will make this prospectus, and any amendment or supplement
to this prospectus, available to any broker-dealer that requests such documents
in the letter of transmittal.
Each holder of the old notes who wishes to exchange its old notes for
exchange notes in the exchange offer will be required to make certain
representations to Classic as set forth in "The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired as a result of
market-making activities or other trading activities. Classic has agreed that,
for a period of 120 days after the consummation of the exchange offer, it will
use its commercially reasonable efforts to make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until , 1999, all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus.
Classic will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 120 days after the consummation of the exchange offer,
Classic will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. Classic has agreed to pay all
expenses
117
<PAGE> 121
incident to the exchange offer, including the expenses of one counsel for the
holders of the notes, other than commissions or concessions of any
broker-dealers and will indemnify the holders of the Securities, including any
broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the exchange notes will be passed upon by Winstead Sechrest
& Minick P.C., Austin, Texas.
EXPERTS
The consolidated financial statements of Classic Communications, Inc. at
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Buford Group, Inc. and
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
118
<PAGE> 122
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CLASSIC COMMUNICATION, INC.
Audited Annual Financial Statements
Report of Independent Auditors......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997.................................................. F-3
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997, and 1996............... F-4
Consolidated Statements of Stockholders' Deficit for
the years ended December 31, 1998, 1997, and 1996..... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996............... F-6
Notes to Consolidated Financial Statements............. F-7
Unaudited Interim Financial Statements
Unaudited Consolidated Balance Sheet as of March 31,
1999.................................................. F-18
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998............ F-19
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998............ F-20
Notes to Unaudited Consolidated Financial Statements... F-21
BUFORD GROUP, INC.
Audited Annual Financial Statements
Independent Auditors' Report........................... F-22
Consolidated Balance Sheets as of December 31, 1998 and
1997.................................................. F-23
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997, and 1996............... F-24
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996......... F-25
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996............... F-26
Notes to Consolidated Financial Statements............. F-27
Unaudited Interim Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of
March 31, 1999........................................ F-35
Unaudited Condensed Consolidated Statements of
Operations for the three months ended March 31, 1999
and 1998.............................................. F-36
Unaudited Condensed Consolidated Statements of Cash
Flows for the three months ended March 31, 1999 and
1998.................................................. F-37
Notes to Unaudited Condensed Consolidated Financial
Statements............................................ F-38
</TABLE>
F-1
<PAGE> 123
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Classic Communications, Inc.
We have audited the accompanying consolidated balance sheets of Classic
Communications, Inc. and its subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 21(b). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Classic
Communications, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Austin, Texas
March 30, 1999
F-2
<PAGE> 124
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 2,779 $ 616
Accounts receivable, net.................................... 5,474 4,519
Prepaid expenses............................................ 424 607
Property, plant and equipment............................... 127,169 96,850
Less accumulated depreciation............................... (39,977) (28,211)
-------- --------
87,192 68,639
Deferred financing costs, net............................... 8,919 4,494
Intangible assets:
Subscriber relationships.................................. 95,180 82,364
Franchise rights.......................................... 71,464 59,149
Noncompete agreements..................................... 8,425 12,104
Goodwill.................................................. 40,435 39,695
Other..................................................... 140 228
-------- --------
215,644 193,540
Less accumulated amortization............................. (65,828) (52,253)
-------- --------
149,816 141,287
-------- --------
Total assets........................................ $254,604 $220,162
-------- --------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable.......................................... $ 647 $ 772
Subscriber deposits and unearned income................... 4,846 3,507
Other accrued expenses.................................... 6,106 5,922
Accrued interest.......................................... 5,883 1,534
Long-term debt............................................ 282,842 187,967
Subordinated debt......................................... -- 4,023
Deferred taxes, net....................................... 1,068 2,918
-------- --------
Total liabilities................................... 301,392 206,643
15% PIK Redeemable Senior Preferred Stock: $.01 par value;
redemption price -- $1,000 per share plus accrued and
unpaid dividends (1998 -- none; 1997 -- $1,880,159);
1998 -- 20,000 shares authorized, none issued and
outstanding; 1997 -- 20,000 shares authorized, 5,000
issued and outstanding at net issue price plus accrued PIK
stock dividends of 1,880 shares........................... -- 5,978
15% PIK Redeemable Junior Preferred Stock: $.01 par value;
redemption price -- $1,000 per share plus accrued and
unpaid dividends (1998 -- none; 1997 -- $5,585,969);
1998 -- 35,000 shares authorized, none issued and
outstanding; 1997 -- 35,000 shares authorized, 14,815
issued and outstanding at net issue price plus accrued PIK
stock dividends of 5,586 shares........................... -- 19,435
8% PIK Cumulative Redeemable Preferred Stock, Series A of
Television Enterprises, Inc. (a subsidiary): no par value;
redemption price -- $100 per share plus accrued and unpaid
dividends (1998 -- none; 1997 -- $25,548); 1998 -- 12,670
shares authorized, none issued and outstanding;
1997 -- 12,670 shares authorized, issued and outstanding
at net issue price........................................ -- 1,292
Stockholders' deficit:
Common Stock, Voting, convertible to Nonvoting Common
Stock: $.01 par value; 1998 -- 5,442,000 shares
authorized, 1,720,608 issued and outstanding;
1997 -- 3,142,922 authorized, 621,532 issued and
outstanding............................................. 17 6
Common Stock, Nonvoting, convertible to Voting Common
Stock: $.01 par value; 1998 -- 4,503,000 shares
authorized, 1,528,261 issued and outstanding;
1997 -- 2,600,108 authorized, 2,185,532 issued and
outstanding............................................. 15 22
Additional paid-in capital................................ 28,544 31,287
Accumulated deficit....................................... (75,364) (44,501)
-------- --------
Total stockholders' deficit......................... (46,788) (13,186)
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' deficit............................... $254,604 $220,162
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 125
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $ 69,802 $ 60,995 $ 59,821
Operating expenses:
Programming............................................... 17,840 14,916 15,106
Plant and operating....................................... 8,437 7,622 7,308
General and administrative................................ 11,295 9,257 8,688
Marketing and advertising................................. 850 438 238
Corporate overhead........................................ 3,648 4,322 2,213
Depreciation and amortization............................. 30,531 27,832 27,510
-------- -------- --------
Total operating expenses.......................... 72,601 64,387 61,063
-------- -------- --------
Loss from operations........................................ (2,799) (3,392) (1,242)
Interest expense............................................ (24,442) (21,299) (20,633)
Gain on sale of cable system................................ -- 3,644 4,901
Write-off of abandoned telephone operations and accrual of
related costs............................................. (220) (500) (2,994)
Other income................................................ 192 71 --
-------- -------- --------
Loss before income taxes and extraordinary item
(27,269) (21,476) (19,968)
Income tax benefit.......................................... 1,930 7,347 6,802
-------- -------- --------
Loss before extraordinary item.............................. (25,339) (14,129) (13,166)
Extraordinary loss on extinguishment of debt................ (5,524) -- --
-------- -------- --------
Net loss.......................................... $(30,863) $(14,129) $(13,166)
======== ======== ========
Loss applicable to common stockholders...................... $(35,274) $(18,209) $(16,734)
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 126
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
VOTING NONVOTING COMMON STOCK
COMMON STOCK COMMON STOCK CLASS A TOTAL
------------------ ------------------ ---------------- ADDITIONAL STOCKHOLDERS'
SHARES SHARES SHARES PAID-IN ACCUMULATED EQUITY
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------ --------- ------ ------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995..................... 646,901 $ 6 1,642,537 $17 10,075 $ -- $36,909 $(17,206) $ 19,726
Conversion of common
stock.................. (542,995) (5) 542,995 5 -- -- -- -- --
Restricted stock
awards................. 258,813 3 -- -- -- -- (3) -- --
Stock exchange........... 258,813 2 -- -- (10,075) -- (2) -- --
Compensation on
restricted stock....... 1,058 1,058
Expenses related to
equity transactions.... -- -- -- -- -- -- (85) -- (85)
Accretion of discount on
preferred stock........ -- -- -- -- -- -- (237) -- (237)
Dividends on preferred
stock.................. -- -- -- -- -- -- (3,331) -- (3,331)
Net loss................. -- -- -- -- -- -- -- (13,166) (13,166)
--------- --- --------- --- ------- ---- ------- -------- --------
Balance at December 31,
1996..................... 621,532 6 2,185,532 22 -- -- 34,309 (30,372) 3,965
Compensation on
restricted stock....... 1,058 1,058
Accretion of discount on
preferred stock........ -- -- -- -- -- -- (237) -- (237)
Dividends on preferred
stock.................. -- -- -- -- -- -- (3,843) -- (3,843)
Net loss................. -- -- -- -- -- -- -- (14,129) (14,129)
--------- --- --------- --- ------- ---- ------- -------- --------
Balance at December 31,
1997..................... 621,532 6 2,185,532 22 -- -- 31,287 (44,501) (13,186)
Issuance of common
stock.................. 355,258 4 -- -- -- -- 1,336 -- 1,340
Conversion of common
stock.................. 657,271 6 (657,271) (6) -- -- -- -- --
Compensation on
restricted stock....... -- -- -- -- -- -- 1,108 -- 1,108
Exchange of restricted
common stock........... 188,085 2 -- -- -- -- (2) -- --
Repurchase of treasury
stock.................. (101,538) (1) -- -- -- -- (773) -- (774)
Accretion of discount on
preferred stock........ -- -- -- -- -- -- (1,869) -- (1,869)
Dividends on preferred
stock.................. -- -- -- -- -- -- (2,542) -- (2,542)
Net loss................. -- -- -- -- -- -- -- (30,863) (30,863)
Other.................... -- -- -- (1) -- -- (1) -- (2)
--------- --- --------- --- ------- ---- ------- -------- --------
Balance at December 31,
1998..................... 1,720,608 $17 1,528,261 $15 -- $ -- $28,544 $(75,364) $(46,788)
========= === ========= === ======= ==== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 127
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (30,863) $(14,129) $(13,166)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for bad debts................................... 971 1,248 1,491
Depreciation.............................................. 12,041 10,285 9,491
Amortization of intangibles............................... 18,352 17,547 18,019
Amortization of deferred financing costs.................. 1,181 1,373 1,491
Discount accretion on bank debt........................... 3,589 457 490
PIK interest on senior subordinated promissory Notes...... 435 517 446
Gain on sales of cable systems............................ -- (3,644) (4,901)
Non-cash compensation..................................... 1,108 1,058 1,058
Deferred tax benefit...................................... (1,850) (7,593) (6,804)
Extraordinary loss........................................ 5,524 -- --
Changes in working capital, net of acquisition amounts:
Change in accounts receivable.......................... (1,841) (321) (3,952)
Change in prepaids and other assets.................... 166 126 754
Change in other accruals and payables.................. 1,100 413 2,685
Change in accrued interest............................. 4,349 555 831
--------- -------- --------
Net cash provided by operating activities................... 14,262 7,892 7,933
INVESTING ACTIVITIES
Acquisition of cable television systems..................... (43,486) -- (367)
Purchases of property, plant and equipment.................. (13,759) (10,135) (8,212)
Payments for other intangibles.............................. -- (323) (467)
Net proceeds from sale of cable systems..................... -- 6,189 12,433
Net proceeds from litigation settlement..................... -- 2,928 --
--------- -------- --------
Net cash provided by (used in) investing activities......... (57,245) (1,341) 3,387
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 281,208 759 2,208
Repayments of long-term debt................................ (190,308) (7,246) (13,345)
Repayments of subordinated indebtedness..................... (4,458) -- --
Repayment of promissory notes............................... (650) -- --
Financing costs............................................. (9,455) -- (232)
Redemption of preferred stock............................... (31,023) -- --
Cash dividends paid on preferred stock...................... (93) (101) (101)
Sales of common stock....................................... 50 -- (85)
Repurchase of common stock.................................. (125) -- --
Purchase of subsidiary stock................................ -- -- (600)
--------- -------- --------
Net cash provided by (used in) financing activities......... 45,146 (6,588) (12,155)
--------- -------- --------
Increase (decrease) in cash and cash equivalents............ 2,163 (37) (835)
Cash and cash equivalents at beginning of year.............. 616 653 1,488
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 2,779 $ 616 $ 653
========= ======== ========
Cash taxes paid............................................. $ 166 $ 1 $ 5
Cash interest paid.......................................... $ 15,247 $ 18,397 $ 17,367
Non-cash investing and financing activities:
PIK dividends on preferred stock.......................... $ 2,475 $ 3,742 $ 3,229
Accretion of discount on preferred stock.................. $ 1,869 $ 237 $ 237
</TABLE>
See accompanying notes.
F-6
<PAGE> 128
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION
Classic Communications, Inc. and its subsidiaries (collectively, the
"Company") acquire, develop and operate cable television systems throughout the
United States.
2. ACQUISITIONS AND DISPOSITIONS OF CABLE TELEVISION SYSTEMS
Acquisitions
In December 1998, the Company acquired certain assets of TCA Cable Partners
in exchange for a cable television system in Texas (with a fair value of
approximately $0.6 million) and cash consideration of $2.4 million.
In July 1998, the Company acquired certain assets of Cable One, Inc. (the
"Cable One Acquisition") serving communities in four states for approximately
$41.7 million in cash and the assumption of $0.2 million in net operating
liabilities. The purchase was financed from proceeds of the Company's private
debt offering.
The above acquisitions were accounted for using the purchase method and,
accordingly, the operating results of the systems acquired have been included in
the Company's consolidated financial statements since the date of acquisition.
Dispositions
During 1998, the Company sold or disposed of some smaller systems that did
not fit into the Company's long-term strategic plans.
In April and May 1997, the Company sold certain cable television systems in
Kansas and Oklahoma for $5.7 million, net of selling expenses. The net pretax
gain from the sales was approximately $3.6 million.
In September 1996, the Company sold certain cable television systems in
Arkansas for cash consideration of $12.4 million, net of selling expenses. The
net pretax gain from the sale was approximately $5.2 million.
PRO FORMA INFORMATION
The following summarized unaudited pro forma financial information assumes
the Cable One acquisition had occurred on January 1, 1998 and 1997,
respectively. 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):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues.................................................... $ 76,418 $ 72,177
Net loss before extraordinary item.......................... $(23,916) $(10,072)
Net loss.................................................... $(29,440) $(10,072)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F-7
<PAGE> 129
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Service income includes subscriber service revenues and charges for
installations and connections and is recognized in the period in which the
services are provided to the customers. Subscriber services paid for in advance
are recorded as income when earned.
Initial installation revenue is recognized as revenue when the service is
performed, to the extent of direct selling costs, with any balance deferred and
taken into income over the estimated average period that subscribers are
expected to remain connected to the system.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<S> <C>
Buildings............................................... 30 years
Cable television distribution systems................... 7-12 years
Office furniture and equipment.......................... 3-7 years
Vehicles................................................ 5 years
</TABLE>
Leasehold improvements are amortized over the shorter of their estimated
life or the period of the related leases.
Initial subscriber connection costs are capitalized as part of cable
television distribution systems. Costs related to disconnects and reconnects of
customers are expensed as incurred.
Deferred Financing Costs
Deferred financing costs are being amortized to interest expense using the
interest method over the terms of the related debt.
Intangible Assets
The useful lives of the specific intangible assets are as follows:
<TABLE>
<S> <C>
Subscriber relationships................................ 5-15 years
Franchise rights........................................ 7-10 years
Noncompete agreements................................... 5 years
Goodwill................................................ 5-40 years
</TABLE>
Intangible assets are being amortized using the straight-line method over
their estimated useful lives.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amounts of property, plant
and equipment, identifiable intangible assets and goodwill both purchased in the
normal course of business and acquired through acquisition to determine whether
current events or circumstances, as defined in Financial Accounting Standards
Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, warrant adjustments to such carrying
amounts by considering, among other things, the future cash inflows expected to
result from the use of the asset and its eventual disposition less the future
cash outflows expected to be necessary to obtain those inflows. An impairment
loss would be measured by comparing the fair value of the asset with its
carrying amount. Any write-down is treated as a permanent reduction in the
carrying amount of the assets. Management reviews the
F-8
<PAGE> 130
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
valuation and amortization periods of goodwill on a periodic basis, taking into
consideration any events or circumstances which might result in diminished fair
value or revised useful life. No events or circumstances have occurred to
warrant a diminished fair value or reduction in the useful life of goodwill.
Income Taxes
The Company adopted the provisions of the Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes, upon inception.
Accordingly, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the tax rates that are expected to be in
effect when the differences are expected to reverse, based upon current laws and
regulations.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents and accounts
receivable. Excess cash is invested in high quality short-term liquid money
instruments issued by highly-rated financial institutions. Concentrations of
credit risk with respect to the Company's receivables are limited due to the
large number of customers, individually small balances, short payment terms and
required deposits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities, approximate fair value because of their short
maturities. All bank debt agreements carry variable interest rates and their
carrying value is considered to approximate fair value. The estimated fair value
of the Company's bonds is based on quoted market prices. The carrying amount of
the Company's bonds was $186.5 million and the fair value was $198.4 million at
December 31, 1998.
The Company utilizes interest rate cap and interest rate swap agreements to
manage interest rate exposures. The principal objective of such agreements is to
minimize the risks and/or costs associated with financial activities. The
Company does not utilize financial instruments for trading or other speculative
purposes. The counterparties to these contractual arrangements are major
financial institutions with which the Company also has other financial
relationships. The Company is exposed to credit loss in the event of
nonperformance by these counterparties. However, the Company does not anticipate
nonperformance by the other parties, and no material loss would be expected from
their nonperformance.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after
F-9
<PAGE> 131
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 15, 1999. Because of the Company's minimal use of derivatives, management
does not anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the Company.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
Accounts receivable, trade.................................. $5,211 $4,570
Accounts receivable, other.................................. 588 211
Less allowance for doubtful accounts........................ (325) (262)
------ ------
Accounts receivables, net of allowance...................... $5,474 $4,519
====== ======
</TABLE>
The activity in the Company's allowance for doubtful accounts for the
periods ending December 31, 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
FOR THE PERIOD ENDED OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- -------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998.......................... $262 $ 971 $ (908) $325
December 31, 1997.......................... $513 $1,248 $(1,499) $262
December 31, 1996.......................... $249 $1,491 $(1,227) $513
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Land........................................................ $ 1,152 $ 1,021
Buildings and improvements.................................. 3,262 2,107
Vehicles.................................................... 6,061 4,088
Cable television distribution systems....................... 106,373 83,499
Office furniture, tools and equipment....................... 3,858 2,499
Construction in progress.................................... 6,463 3,636
-------- --------
127,169 96,850
Less accumulated depreciation............................... (39,977) (28,211)
======== ========
$ 87,192 $ 68,639
======== ========
</TABLE>
F-10
<PAGE> 132
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Balances of amounts outstanding under the Company's various debt agreements
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
13.25% Senior Discount Notes................................ $114,000 $ --
Unamortized discount...................................... (51,963) --
9.875% Senior Subordinated Notes............................ 125,000 --
Unamortized discount...................................... (563) --
1998 Credit Agreement
Term loans................................................ 75,000 --
Revolving loans........................................... 20,800 --
1995 Senior Credit Agreement
Term A loan............................................... -- 18,324
Term B loan............................................... -- 58,184
Line of credit notes...................................... -- 112,717
Unamortized discount...................................... (1,892)
Other....................................................... 568 634
-------- --------
$282,842 $187,967
======== ========
</TABLE>
In July 1998, the Company issued $114.0 million of 13.25% Senior Discount
Notes due 2009 and its wholly owned subsidiary, Classic Cable, issued $125.0
million of 9.875% Senior Subordinated Notes due 2008. Net of the applicable
discounts and the fair value of the common stock sold along with the Senior
Discount Notes, proceeds from these issues were $60.0 million and $124.4
million, respectively. Interest payments on the Senior Discount Notes do not
commence until 2004. Interest payments on the Senior Subordinated Notes begin in
1999. Concurrent with the offering, Classic Cable entered into the 1998 Credit
Agreement. The 1998 Credit Agreement consists of a $50.0 million Reducing
Revolving Credit Facility which matures in 2006 and a $75.0 million Term Loan
Facility which matures in 2007. Mandatory payments commence in 2000. The Company
may be subject to mandatory prepayments based upon operating results, sales of
assets, equity or debt offerings or other events. Interest is based upon either
a LIBOR rate plus an applicable margin or, at the option of the Company, a base
rate plus an applicable margin. Proceeds from the 1998 Credit Agreement totaled
$95.8 million.
In connection with the early extinguishment of the Senior Credit Agreement,
an extraordinary loss of $5.5 million was recorded related to the write-off of
unamortized deferred financing costs and discount.
The Senior Discount Notes were sold in units that consisted of a $1,000
note and three shares of common stock of the Company. Shares issued in
connection with the offering totaled 342,000. Proceeds of $3.77 per share were
allocated to the sale of the shares. A discount of $1.3 million was recorded in
connection with common stock issued. This per share amount represents the fair
value of the stock as of the date of the offering.
The 1998 Credit Agreement is collateralized by a security interest in
essentially all the assets of Classic Cable. The Company 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
the Company and may not be available for dividends and/or debt service of the
Company.
F-11
<PAGE> 133
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the 1998 Credit Agreement, the Company is required to
pay a quarterly commitment fee that can range from 0.375% to 0.500% per annum on
the unused portion of the revolving loan commitment.
The 1995 Senior Credit Agreement consisted of a $20,000,000 Term A Loan, a
$65,000,000 Term B Loan and Line of Credit Notes not to exceed $130,000,000.
Interest was based upon either a LIBOR rate plus an applicable margin or, at the
option of the Company, a base rate plus an applicable margin. The 1995 Senior
Credit Agreement was amended in 1997. A fee of approximately $1 million was paid
to the bank equal to 0.5% of the outstanding Term Loans and Line of Credit
Notes. This amount is included as a component of interest expense in 1997.
The Company utilizes interest rate cap and interest rate swap agreements to
limit the impact of increases in interest rates on its floating rate debt. The
agreements require premium payments to counterparties based upon a notional
principal amount. No such agreements were outstanding at December 31, 1998 or
1997. Interest rate cap agreements entitle the Company to receive from the
counterparties the amounts, if any, by which the selected market interest rates
exceed the strike rates stated in the agreements. Interest rate swap agreements
are used by the Company to change the interest rate of their debt from variable
rate to fixed rate. The swap is a contractual agreement between the Company and
another party to exchange payments periodically over the life of the agreement
based upon the interest rates of the underlying debt over the period of the
agreement. The differential to be paid or received is accrued and recognized as
an adjustment of interest expense related to the debt (the accrual accounting
method). The premium paid for both types of agreements is amortized to interest
expense over the life of the agreement.
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999..................................................... $ 118
2000..................................................... 1,200
2001..................................................... 750
2002..................................................... 750
2003..................................................... 750
Thereafter............................................... 331,800
--------
$335,368
========
</TABLE>
7. SUBORDINATED DEBT
Subordinated debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1998 1997
---- ------
<S> <C> <C>
7.5% Junior Subordinated Promissory Notes(A)................ $-- $ 295
15% Senior Subordinated Promissory Note(B).................. -- 3,728
--- ------
$-- $4,023
=== ======
</TABLE>
- ---------------
(A) The Junior Subordinated Promissory Notes (the "Interest Notes") bore
interest at 7.5% per annum. The Interest Notes had no required principal
payments other than upon maturity on July 7, 2002. The interest on the
Interest Notes was deferred until maturity. The Interest Notes and accrued
interest were paid in full in July 1998.
(B) The Senior Subordinated Promissory Note (the "Senior Note") bore interest
at 15% per annum, payable quarterly in arrears unless paid in kind ("PIK")
through the issuance of new Senior Notes (the "PIK Notes") incorporating
the same terms as the Senior Note. All principal and deferred
F-12
<PAGE> 134
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest under the Senior and PIK Notes was due on December 31, 2007. The
Senior Note, the PIK Notes and accrued interest were paid in full in July
1998.
8. CAPITAL STOCK
Shares Reserved
At December 31, 1998, 152,418 shares of Voting Common Stock and 183,435
shares of Nonvoting Common Stock were reserved for the exercise of the Common
Stock Purchase Warrants.
Common Stock
In 1996, the Company issued 258,813 shares of restricted Voting Common
Stock to complete an exchange for 10,075 shares of Class A Common Stock that was
initiated in October 1995. The restrictions include a three and one half year
vesting provision and the entitlement to $9.93 less per share in distributions
than the amount otherwise payable for distribution to the holders of the
Company's Common Stock. The amount by which the fair value of the restricted
Voting Common Stock exceeded the fair value of the Class A Common Stock is
recorded as compensation expense ratably over the vesting period. The fair value
of the restricted Voting Common Stock and the Class A Common Stock was
determined as of the issuance date by an independent valuation.
The Company has the 1996 and 1998 Restricted Stock Award Plans ("the
Plans") whereby employees may be granted shares of the Company's Voting Common
Stock. The stock awards will generally vest over a three to four year period. In
addition, upon any distribution event, the restricted stock stockholders will be
entitled to either $29.78 less per share, $19.06 less per share or $3.77 less
per share in distributions than the amount otherwise payable for distribution to
the holders of the Company's Common Stock. The Company has authorized 743,231
shares under the Plans, all of which have been awarded. The fair value of the
awards is recorded as compensation expense ratably over the vesting period. The
fair value was determined by an independent valuation.
The following table summarizes the activity of the Company's restricted
stock:
<TABLE>
<CAPTION>
DISTRIBUTION THRESHOLDS
--------------------------------------
$29.78 $19.06 $9.93 $3.77 TOTAL
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... -- -- -- -- --
Class A Common Stock Exchange.... -- -- 258,813 -- 258,813
1996 Restricted Stock Award
Plan.......................... 129,407 129,406 -- -- 258,813
------- ------- -------- ------- --------
Balance at December 31, 1996....... 129,407 129,406 258,813 -- 517,626
No activity in 1997.............. -- -- -- -- --
------- ------- -------- ------- --------
Balance at December 31, 1997....... 129,407 129,406 258,813 -- 517,626
Repurchase of stock.............. -- -- (76,350) -- (76,350)
1998 Restricted Stock Award Plan:
Shares exchanged.............. (93,171) (93,171) (109,991) -- (296,333)
Shares awarded................ -- -- -- 484,418 484,418
Other......................... (2) (1) -- -- (3)
------- ------- -------- ------- --------
Balance at December 31, 1998....... 36,234 36,234 72,472 484,418 629,358
======= ======= ======== ======= ========
Shares vested at December 31,
1998............................. 27,176 27,176 54,354 67,280 175,986
======= ======= ======== ======= ========
</TABLE>
Upon certain events, the Company has repurchase rights for unvested shares.
The Company also has the right of first refusal for any proposed disposition of
shares issued under the Plans. The restrictions on the shares are transferable.
F-13
<PAGE> 135
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
In July 1998, the Company redeemed the outstanding shares of TVE Preferred
Stock at a redemption price per share of $100 plus accrued and unpaid dividends.
In July 1998, the Company redeemed the outstanding shares of Senior and
Junior Preferred Stock at a redemption price per share of $1,000 plus accrued
and unpaid dividends.
Stock Purchase Warrants
At December 31, 1998 and 1997, there were warrants outstanding to acquire
335,853 common shares at $.001 per share which expire beginning 2004 through
2006. No warrants have been exercised as of December 31, 1998. Under the terms
of the warrant agreements, the exercise price and exercise rate shall be subject
to adjustment in the event of a change in the number of shares outstanding or
valuation of the Company's Common Stock.
Voting Rights
At December 31, 1998, all general voting power was vested in the holders of
Voting Common Stock. The holders of Preferred Stock have no voting rights with
regard to matters submitted to a vote of the stockholders. However, the
affirmative consent or vote of at least 80% of the outstanding shares of
Preferred Stock, voting as a class, shall be required with respect to any action
affecting the power, preferences and rights of the holders of shares of
Preferred Stock.
Holders of Nonvoting Common Stock are entitled at any time and from time to
time to convert any and all of the shares held into the same number of shares of
Voting Common Stock provided that such conversion would be in accordance with
all laws, regulations, rules or other requirements of any governmental authority
applicable to such conversion.
Dividends
The holders of Junior and Senior Preferred Stock are entitled to a
cumulative dividend equal to $150.00 per share per annum, due and payable at the
end of each calendar quarter. Dividends are payable solely in the form of
additional shares of such class of Preferred Stock.
The holders of TVE Preferred Stock are entitled to a cumulative cash
dividend equal to $8.00 per share per annum, due and payable on June 30 of each
year.
Dividends on Common Stock shall be paid at such times as may be declared by
the Board of Directors. Through December 31, 1998, no such dividends had been
declared.
F-14
<PAGE> 136
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Significant components of income tax benefit from continuing operations are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ (80) $ 246 $ --
State................................................. -- -- 2
------- ------- -------
Total Current................................. (80) 246 2
Deferred:
Federal............................................... (1,536) (6,304) (5,649)
State................................................. (314) (1,289) (1,155)
------- ------- -------
Total Deferred................................ (1,850) (7,593) (6,804)
------- ------- -------
Income tax benefit............................ $(1,930) $(7,347) $(6,802)
======= ======= =======
</TABLE>
The Company's provision for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 34% to income before income taxes and extraordinary items as a result of
the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate................................ (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit....................... (3.9) (3.8) (3.9)
Increase in valuation allowance........................... 27.8 -- --
Nondeductible items....................................... 3.0 3.6 3.8
----- ----- -----
(7.1)% (34.2)% (34.1)%
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis of depreciable assets................. $ 698 $ 2,091
Book over tax basis of assets that are amortizable for
tax.................................................... 3,144 5,414
-------- -------
Total deferred tax liabilities.................... 3,842 7,505
Deferred tax assets:
Net operating loss carryforwards:
Acquired............................................... 4,880 4,880
Other.................................................. 13,411 6,807
Other....................................................... 1,847 561
-------- -------
Total deferred tax assets......................... 20,138 12,248
Less valuation allowance.................................... (17,364) (7,661)
-------- -------
Net deferred tax assets........................... 2,774 4,587
-------- -------
Net deferred tax liabilities...................... $ 1,068 $ 2,918
======== =======
</TABLE>
F-15
<PAGE> 137
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company had net operating loss carryforwards of
$47,771,000 for federal income tax purposes, which begin to expire in 2002 if
not utilized. Utilization of some of the loss carryforwards are subject to
various limitations under the Internal Revenue Code, which could result in
expiration of the loss carryforward before utilization.
Approximately $7.6 million of the total valuation allowance as of December
31, 1998 was previously recorded for certain acquisition net operating loss
carryforwards and other acquisition deferred tax assets due to restrictions on
their utilization under the tax law and other uncertainties regarding their
realization. When, and if, realized, the tax benefit associated with these
deferred tax assets will be applied to reduce goodwill and other noncurrent
intangibles related to the acquisitions.
During 1997, a subsidiary of the Company filed an amended income tax return
for a period prior to its acquisition. This resulted in an additional net
operating loss carryforward of $1,525,000 available to the Company. The Company
has recorded a deferred tax asset of $584,000 for this item and a corresponding
reduction to goodwill related to the subsidiary's acquisition.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution pension plan, a 401(k) plan.
Participation in this plan is available to substantially all employees.
Employees may contribute up to 15% of their pay. The Company will match employee
contributions for an amount up to 3% of each employee's base salary. Costs of
the plan, including the Company's matching contributions, were $149,000,
$114,000 and $89,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
11. ABANDONMENT OF TELEPHONE OPERATIONS
At December 31, 1995 the Company was negotiating an agreement to purchase
four telephone exchanges in Kansas. For various reasons, the Company did not
complete the acquisitions and hence, did not enter the telephone business. Net
assets of the telephone business, when abandoned in 1996, consisted primarily of
property, plant and equipment. In connection therewith, the Company recorded a
$2,994,000 charge in 1996 related to the termination of the purchase agreement
and operations associated with the proposed acquisition. Items included in the
charge were the write-off of certain costs capitalized in connection with the
proposed acquisition, legal and consulting fees and estimated severance for
personnel reductions. The Company revised their estimate of costs associated
with the abandonment and took an additional charge of $500,000 in 1997.
In November 1998, the Company settled certain litigation related to these
transactions. Terms of the settlement included the sale of certain cable
television systems in Kansas, the granting of a five year right of first refusal
for the sale of certain other cable television systems in Kansas, and a five
year non-competition agreement. In addition, the Company received cash
consideration of $348,000 in 1999 in connection with the settlement. The
settlement resulted in a loss of approximately $220,000.
12. SETTLEMENT OF CLAIMS
In February 1998, the Company settled claims that arose in conjunction with
divorce proceedings of an officer of the Company. The Company purchased certain
stock of the Company in which the officer's wife held a community property
interest and provided monetary consideration for the release of the claims. The
Company acquired and canceled 101,538 shares of the Company's Common Stock
(76,350 of which were restricted stock). The related expenses, including legal,
consultant and other fees of approximately $1,411,000 are included in corporate
overhead expenses in 1997.
F-16
<PAGE> 138
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1997, the Company settled certain litigation in which the Company
was seeking damages related to a previous year's acquisition. The Company
received approximately $3.5 million in the settlement. The net proceeds of $3
million were recorded as a reduction of goodwill.
13. COMMITMENTS AND CONTINGENCIES
Lease Arrangements
The Company, as an integral part of its cable operations, has entered into
short-term lease contracts for microwave service, pole use and office space. At
December 31, 1998, approximate annual minimum aggregate rentals under such
leases were $1,206,000 in 1999, $1,004,000 in 2000, $954,000 in 2001, $891,000
in 2002, $873,000 in 2003 and $287,000 thereafter. Rent expense was $1,285,000,
$1,160,000 and $1,071,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Litigation
The Company is involved in various legal proceedings that have arisen in
the normal course of business. While the ultimate results of these matters
cannot be predicted with certainty, management does not expect them to have a
material adverse effect on the consolidated financial position and results of
operations of the Company.
F-17
<PAGE> 139
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 3,472
Accounts receivable, net.................................... 5,061
Prepaid expenses............................................ 872
Property, plant, and equipment.............................. 130,399
Less accumulated depreciation............................... (43,641)
--------
86,758
Deferred financing costs, net............................... 9,061
Intangible assets:
Subscriber relationships.................................. 95,367
Franchise rights.......................................... 71,486
Noncompete agreements..................................... 8,425
Goodwill.................................................. 40,506
--------
215,784
Less accumulated amortization............................... (71,120)
--------
144,664
--------
Total assets......................................... $249,888
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 593
Subscriber deposits and unearned income................... 5,011
Accrued expenses.......................................... 4,779
Accrued interest.......................................... 2,787
Long-term debt............................................ 290,428
Deferred taxes, net....................................... 1,068
--------
Total liabilities.................................... 304,666
Stockholders' equity:
Common Stock, voting...................................... 17
Common Stock, nonvoting................................... 15
Additional paid-in capital................................ 28,876
Accumulated deficit....................................... (83,686)
--------
Total stockholders' equity........................... (54,778)
--------
Total liabilities and stockholders' equity........... $249,888
========
</TABLE>
See accompanying notes.
F-18
<PAGE> 140
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
-------- -------
<S> <C> <C>
Revenues.................................................... $19,576 $16,072
Operating expenses:
Programming............................................... 5,231 4,118
Plant and operating....................................... 2,306 1,959
General and administrative................................ 2,948 2,699
Marketing and advertising................................. 173 208
Corporate overhead........................................ 856 629
Depreciation and amortization............................. 8,955 7,006
------- -------
Total operating expenses............................... 20,469 16,619
------- -------
Loss from operations........................................ (893) (547)
Interest expense............................................ (7,446) (5,014)
Other income (expense)...................................... 17 30
------- -------
Loss before taxes........................................... (8,322) (5,531)
Income tax benefit.......................................... -- 684
------- -------
Net loss.................................................... $(8,322) $(4,847)
======= =======
Loss applicable to common stockholders...................... $(8,322) $(6,165)
======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 141
CLASSIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1999 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(8,322) $(4,847)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for bad debt................................. 319 264
Depreciation........................................... 3,664 2,723
Amortization of intangibles............................ 5,292 4,284
Amortization of deferred financing costs............... 210 329
Discount accretion on long-term debt................... 2,111 110
Non-cash compensation.................................. 332 237
Change in operating assets and liabilities:
Accounts receivable.................................. 94 (77)
Prepaid expenses..................................... (448) 54
Accounts payable..................................... (54) (115)
Subscriber deposits and unearned income.............. 165 107
Accrued expenses..................................... (1,327) (1,728)
Accrued interest..................................... (3,096) 88
Deferred taxes....................................... -- (655)
------- -------
Net cash provided by (used in) operating activities....... (1,060) 887
INVESTING ACTIVITIES
Payments for other intangibles............................ (140) (18)
Purchase of property, plant and equipment................. (3,230) (2,122)
------- -------
Net cash used in investing activities..................... (3,370) (2,140)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. 5,500 1,000
Repayments of long-term debt.............................. (25) (21)
Financing costs........................................... (352) --
Cash dividends paid on preferred stock.................... -- (25)
Repurchase of common stock................................ -- (125)
------- -------
Net cash provided by financing activities................. 5,123 829
------- -------
Change in cash and cash equivalents....................... 693 (424)
Cash and cash equivalents at beginning of period.......... 2,779 616
------- -------
Cash and cash equivalents at end of period................ $ 3,472 $ 192
======= =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 142
CLASSIC COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 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-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
2. ACCOUNTS RECEIVABLE
The activity in CCI's allowance for doubtful accounts for the three months
ending March 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FOR THE THREE MONTHS ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
March 31, 1999......................... $325 $319 $287 $357
March 31, 1998......................... 262 264 266 260
</TABLE>
3. INCOME TAXES
CCI did not record an income tax benefit for the three months ended March
31, 1999. The effective tax rates for the three months ended March 31, 1999 and
March 31, 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. SUBSEQUENT EVENT
Classic Cable, Inc., a wholly-owned subsidiary of CCI, has reached an
agreement with Buford Group, Inc. to acquire the cable television business of
Buford. The agreement is subject to completing definitive documentation.
Buford's systems serve approximately 170,000 customers in Texas, Missouri,
Arkansas and Louisiana.
F-21
<PAGE> 143
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
BUFORD GROUP, INC.:
We have audited the accompanying consolidated balance sheets of Buford
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Buford
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Dallas, Texas
March 5, 1999
F-22
<PAGE> 144
BUFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 7,903 $ 7,890
Accounts receivable, net.................................... 2,878 2,514
Prepaid expenses............................................ 166 342
Property, plant and equipment............................... 200,727 166,886
Less accumulated depreciation and amortization.............. (87,483) (71,198)
-------- --------
113,244 95,688
Intangible assets:
Franchise rights.......................................... 54,417 35,767
Noncompetition agreements................................. 7,434 7,434
Excess cost over net assets of acquired companies......... 2,114 2,114
Other..................................................... 2,116 2,031
-------- --------
66,081 47,346
Less accumulated amortization............................... (16,705) (12,001)
-------- --------
49,376 35,345
Other assets................................................ 2,386 2,153
-------- --------
$175,953 $143,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 1,033 $ 1,209
Deposits and unearned revenues.............................. 2,234 1,984
Accrued expenses............................................ 8,642 7,052
Long-term obligations....................................... 118,000 85,000
Deferred federal income taxes............................... 1,238 1,763
-------- --------
Total liabilities...................................... 131,147 97,008
-------- --------
Stockholders' equity:
Common stock, $1 par value. Authorized 2,000 shares;
issued and outstanding 1,000 shares.................... 1 1
Additional capital........................................ 14,833 6,945
Retained earnings......................................... 29,972 39,978
-------- --------
Total stockholders' equity............................. 44,806 46,924
Commitments and contingencies...............................
-------- --------
$175,953 $143,932
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 145
BUFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cable television revenues................................... $ 70,475 $58,136 $49,561
Operating expenses:
Programming............................................... 18,339 14,349 11,596
Plant and operating....................................... 6,937 6,567 5,705
General and administrative................................ 16,183 14,910 12,557
Marketing and advertising................................. 345 174 176
Corporate overhead........................................ 9,364 4,858 2,898
Depreciation and amortization............................. 21,399 17,753 17,175
-------- ------- -------
72,567 58,611 50,107
-------- ------- -------
Operating loss......................................... (2,092) (475) (546)
-------- ------- -------
Other income (expense):
Interest expense.......................................... (7,919) (5,787) (5,345)
Interest income........................................... 307 324 521
Gain (loss) on sales of assets............................ (165) 829 5,655
Other, net................................................ (363) (294) (414)
-------- ------- -------
(8,140) (4,928) 417
-------- ------- -------
Loss before income taxes............................... (10,232) (5,403) (129)
Income tax benefit (expense)................................ 226 315 (94)
-------- ------- -------
Net loss............................................... $(10,006) $(5,088) $ (223)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 146
BUFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.................... $1 $ 1,968 $ 45,289 $ 47,258
Employee stock appreciation..................... -- 1,458 -- 1,458
Net loss........................................ -- -- (223) (223)
-- ------- -------- --------
Balance at December 31, 1996.................... 1 3,426 45,066 48,493
Employee stock appreciation..................... -- 3,519 -- 3,519
Net loss........................................ -- -- (5,088) (5,088)
-- ------- -------- --------
Balance at December 31, 1997.................... 1 6,945 39,978 46,924
Employee stock appreciation..................... -- 7,888 -- 7,888
Net loss........................................ -- -- (10,006) (10,006)
-- ------- -------- --------
Balance at December 31, 1998.................... $1 $14,833 $ 29,972 $ 44,806
== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 147
BUFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,006) $ (5,088) $ (223)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................ 21,399 17,753 17,175
Non-cash interest expense............................ 171 168 --
(Gain) loss on sales of assets....................... 165 (829) (5,655)
Employee stock appreciation expense.................. 7,888 3,519 1,458
Deferred federal income tax expense (benefit)........ (525) (449) 94
Changes in assets and liabilities, excluding
acquisitions and dispositions:
Accounts receivable............................. (364) (1,031) 484
Prepaid expenses................................ 176 (30) (47)
Federal income taxes receivable................. -- -- 1,040
Accounts payable and accrued expenses........... 1,414 1,908 (522)
Deposits and unearned revenue................... 250 1,418 79
Other........................................... (234) (467) (255)
-------- -------- --------
Net cash provided by operating activities....... 20,334 16,872 13,628
-------- -------- --------
Cash flows from investing activities:
Acquisitions of cable systems............................. (29,900) (17,771) (18,350)
Additions to property, plant and equipment................ (20,469) (22,042) (15,593)
Additions to intangible assets............................ (3,139) (1,098) --
Net proceeds from sale of assets.......................... 357 -- --
Net proceeds from disposition of cable systems............ -- 1,228 13,654
-------- -------- --------
Net cash used in investing activities........... (53,151) (39,683) (20,289)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term obligations....................... 33,000 25,000 4,260
Payments of long-term obligations......................... -- (53) (14,850)
Payment of debt issuance costs............................ (170) -- (337)
-------- -------- --------
Net cash provided by (used in) financing
activities................................... 32,830 24,947 (10,927)
Net increase (decrease) in cash and cash equivalents........ 13 2,136 (17,588)
Cash and cash equivalents at beginning of year.............. 7,890 5,754 23,342
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 7,903 $ 7,890 $ 5,754
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 148
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Buford Group, Inc. and subsidiaries (the "Company") are engaged in cable
television operations within the United States. The Company owns and operates
cable television systems primarily in Texas, Louisiana, Arkansas, and Missouri.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Buford Group,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
During 1998, the Company purchased the remaining 76.8% of Friendship Cable,
Ltd. ("FCL"), a Texas limited partnership in which the Company had held a 1%
general partner interest and limited partner interests aggregating 22.2%. The
accounts of FCL for 1998 and 1997 are consolidated because the Company, as
general partner, is required to fund deficits incurred during the period from
inception to January 1, 2000, and certain shareholders of the Company controlled
the limited partner interests of FCL through the date of the Company's
acquisition of the remaining interests. In prior years, allocated net losses to
the limited partners had reduced their capital accounts to zero.
(c) REVENUE RECOGNITION
Revenues from basic and premium services are recognized when the related
services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system.
(d) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
The Company uses the indirect method to present cash flows from operating
activities. Supplemental disclosures of cash flow information follow:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest paid............................................... $7,593,000 $4,588,000
========== ==========
Income taxes paid........................................... $ 250,000 $ 59,000
========== ==========
</TABLE>
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, including all direct
cost and certain indirect costs of construction of cable television transmission
and distribution systems, and the cost of new customer installations.
Maintenance and repairs are charged to expense as incurred and equipment
replacements and betterments are capitalized. The Company charges depreciation
to operations on a straight-line basis over the estimated useful lives of the
related property and equipment as follows:
<TABLE>
<S> <C>
Cable distribution equipment........................... 3 - 12 years
Furniture, fixtures, automobiles and other............. 3 - 12 years
Buildings and improvements............................. 5 - 20 years
</TABLE>
F-27
<PAGE> 149
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(f) INTANGIBLE ASSETS
The excess cost over net identifiable tangible and intangible assets of
acquired companies is being amortized on a straight-line basis over the
estimated economic lives of 40 years. Franchise rights purchased in connection
with cable television operations are being amortized on a straight-line basis
over 5 to 15 years. The costs of noncompetition agreements are being amortized
on a straight-line basis over the terms of the respective agreements.
The Company assesses the recoverability of intangible assets as well as the
related amortization lives by determining whether the carrying value of the
intangible assets can be recovered over the remaining lives through projected
undiscounted future cash flows. To the extent that such projections indicate
that undiscounted future cash flows are not expected to be adequate to recover
the carrying amounts of the related intangible assets, such carrying amounts are
adjusted for impairment to a level commensurate with the estimated fair value of
the underlying assets.
(g) FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount more likely than not to be realized.
Income tax expense is the total of tax payable for the period and the change
during the period in deferred tax assets and liabilities.
(h) DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Any derivative financial
instruments are used to manage well-defined interest rate risks related to the
Company's outstanding debt.
Any costs of interest rate agreements are initially recognized as assets
and amortized to interest expense over the lives of the agreements using the
interest method. Under all interest rate agreements, the differential to be paid
or received is recognized as an adjustment to interest expense. During the years
ended December 31, 1998, 1997 and 1996, the Company recognized net expenses of
$39,000, $38,000 and $59,000, respectively, under its interest rate agreements
(see note 6).
The carrying amounts of cash equivalents, accounts receivable and accounts
payable reported in the accompanying consolidated financial statements
approximate fair value due to their short maturities. The outstanding borrowings
under the Company's credit agreement (note 6) bear interest at current market
rates, and thus, the carrying amount of debt approximates estimated fair value.
The fair value of the interest rate agreements (note 6) was approximately
$(449,000) at December 31, 1998, which represents the estimated amount, based on
dealer quotations, that the Company would pay, excluding accrued interest, to
terminate the contracts at December 31, 1998, taking into account the current
unrealized loss on open contracts.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-28
<PAGE> 150
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(j) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," in the first
quarter of 1998, which required companies to disclose comprehensive income
separately from net income. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-ownership sources. It includes all changes in equity during a period, except
those resulting from investments by owners and distributions to owners. The
adoption of this statement had no effect on the Company at December 31, 1998,
because the Company has no elements of other comprehensive income. Accordingly,
comprehensive income and net income are the same amount for each period
presented.
(2) ACQUISITIONS AND DISPOSITIONS
In April 1998, the Company acquired cable systems from three unaffiliated
parties for $29.9 million. In April and May 1997, the Company acquired cable
systems from unaffiliated parties for $17.8 million. During 1996, the Company
acquired cable systems from unaffiliated parties for $18.4 million.
The acquisitions were accounted for as purchases and, accordingly, the
purchase prices were allocated to tangible and intangible assets based on
estimated fair values at the dates of the acquisitions. Operating results of the
acquired systems are included in the accompanying financial statements from the
dates of acquisition. Net assets acquired as a result of these acquisitions
included $15.6 million, $7.4 million and $7.0 million in franchise rights and
$14.3 million, $10.4 million and $11.4 million in property, plant and equipment
during 1998, 1997 and 1996, respectively.
On October 1, 1996, the Company sold all of its cable television systems
operating in North Carolina for a cash purchase price of $11.8 million,
resulting in a gain of $4.7 million. Additionally, on October 1, 1996, the
Company sold cable television system assets of a consolidated partnership
(70%-owned) for a total cash price of $2.1 million, resulting in a gain of
$717,000.
In September 1998, the Company acquired the remaining 76.8% of FCL for $2.8
million. The Company accounted for this transaction as a purchase business
combination, and accordingly, allocated the purchase price to FCL's assets
(primarily intangible assets) based on their estimated fair values.
Unaudited pro forma operating results as though the 1998 and 1997
acquisitions discussed above had occurred on January 1, 1997, with adjustments
to give effect to amortization of franchises, depreciation of property, plant
and equipment, interest expense and certain other adjustments is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 73,531 $67,354
Operating income (loss)..................................... (1,630) 1,801
Net loss.................................................... (10,177) (4,831)
</TABLE>
F-29
<PAGE> 151
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(3) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Accounts receivable, trade.................................. $2,665 $2,417
Accounts receivable, other.................................. 627 554
------ ------
3,292 2,971
Less allowance for doubtful accounts........................ (414) (457)
------ ------
$2,878 $2,514
====== ======
</TABLE>
(4) OTHER ASSETS
The Company is the named beneficiary on life insurance policies for key
management members. The cash surrender value of the policies is recorded net of
policy loans of $5,977,000 and $5,553,000 at December 31, 1998 and 1997,
respectively. The net amounts of $2,153,000 and $1,837,000 at December 31, 1998
and 1997, respectively, are included in other assets in the accompanying
consolidated balance sheets.
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment and accumulated depreciation and
amortization follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cable distribution equipment................................ $188,264 $155,119
Furniture, fixtures, automobiles and other.................. 8,572 7,520
Buildings, land and improvements............................ 3,891 4,247
-------- --------
200,727 166,886
Less accumulated depreciation and amortization.............. (87,483) (71,198)
-------- --------
Property, plant and equipment, net..................... $113,244 $ 95,688
======== ========
</TABLE>
(6) LONG-TERM OBLIGATIONS
The Company had outstanding borrowings of $118,000,000 and $85,000,000 at
December 31, 1998 and 1997, respectively, under a credit agreement with banks
providing for up to $140,000,000 of borrowings. Borrowings bear interest at the
bank's floating rate, the London Interbank Offered Rate ("LIBOR"), or a
combination thereof as selected by the Company, plus a margin dependent on the
Company's leverage ratio (as defined in the credit agreement). The weighted
average effective interest rate at December 31, 1998 and 1997 was 6.75%. The
Company must pay an annual commitment fee ranging from .25% to .375% of the
unfunded portion of the commitment. Borrowings under the credit agreement are
secured by the common stock of the Company and its subsidiaries. The credit
agreement contains certain provisions which limit the Company as to additional
indebtedness, sales of assets, liens, guarantees, investments and acquisitions.
Additionally, the Company must maintain certain specified financial ratios.
On April 30, 1998, the bank amended the credit agreement to extend the
final maturity date to June 30, 2005. Beginning September 30, 1999, and
quarterly thereafter through June 30, 2005, the
F-30
<PAGE> 152
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
commitment amount is to be reduced by quarterly amounts ranging from $2,655,000
to $12,685,000. Additionally, on or before April 30 of each year, commencing
April 30, 2000, the Company is required to make mandatory payments equal to 50%
of the excess cash flow for the previous fiscal year, if any, as defined in the
credit agreement.
In accordance with the credit agreement, the Company has interest rate
agreements with various banks to reduce the impact of changes in interest rates.
At December 31, 1998, the Company had three interest rate collar agreements
expiring in May 1999, October 1999 and June 2000 with a bank covering notional
principal amounts of $10,000,000, $10,000,000 and $15,000,000, respectively.
These agreements have maximum cap rates of 8.20%, 7.50% and 6.55%, respectively,
and each has a minimum floor rate of 5.65%. The Company also had an interest
rate swap agreement with a bank covering a notional amount of $25,000,000, with
a fixed rate of 5.73%, which expires in January 2000.
The Company is exposed to credit loss in the event of nonperformance of the
other parties to the above agreements; however, the Company does not anticipate
nonperformance by such counterparties.
As of December 31, 1998, principal payments due on indebtedness in future
years was as follows (in thousands):
<TABLE>
<S> <C>
1999...................................................... $ 5,310
2000...................................................... 10,620
2001...................................................... 15,340
2002...................................................... 18,880
Thereafter................................................ 67,850
</TABLE>
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Accrued programming......................................... $2,970 $1,312
Accrued property taxes...................................... 1,704 1,389
Accrued payroll and benefits................................ 1,279 1,764
Accrued interest............................................ 514 938
Accrued other............................................... 2,175 1,649
------ ------
$8,642 $7,052
====== ======
</TABLE>
(8) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 includes the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current -- State............................................ $ 250 $ 134 $--
Current -- Federal.......................................... 49 -- --
Deferred -- Federal......................................... (525) (449) 94
----- ----- ---
$(226) $(315) $94
===== ===== ===
</TABLE>
F-31
<PAGE> 153
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Actual income tax expense (benefit) differs from the "expected" income tax
expense (benefit) (computed by applying the U.S. federal corporate tax rate of
35% to the loss before income taxes) as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Computed expected tax benefit........................... $(3,581) $(1,891) $ (45)
Change in the valuation allowance....................... 394 328 1
Revision of prior year estimate......................... 299 -- (252)
Employee stock appreciation............................. 2,760 1,231 509
Other................................................... (98) 17 (119)
------- ------- -----
$ (226) $ (315) $ 94
======= ======= =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 8,616 $ 5,992
Alternative minimum tax credit carryforwards.............. 5,692 5,692
Investment in partnerships................................ -- 1,593
Deferred compensation..................................... -- 116
Other..................................................... 968 670
------- -------
Total gross deferred tax assets...................... 15,276 14,063
Less valuation allowance.................................. (4,764) (4,370)
------- -------
Net deferred tax assets.............................. 10,512 9,693
------- -------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... $11,118 $10,898
Other..................................................... 632 558
------- -------
Total gross deferred tax liabilities................. 11,750 11,456
------- -------
Net deferred tax liability........................... $(1,238) $(1,763)
======= =======
</TABLE>
The net changes in the valuation allowance for 1998, 1997 and 1996 were
increases of $394,000, $328,000, and $1,000, respectively. The Company has
recognized deferred tax assets to the extent such assets can be realized through
future reversals of existing temporary differences.
At December 31, 1998, the Company had approximately $24,596,000 of tax net
operating loss carryforwards which expire in years 2007 through 2012. In
addition, the Company had approximately $5,700,000 of alternative minimum tax
credit carryforwards available to reduce future regular federal income taxes
over an indefinite period.
(9) LEASE OBLIGATIONS
Total rental expense for operating leases was $1,427,000, $1,433,000 and
$1,264,000 in 1998, 1997 and 1996, respectively. Included in these amounts are
payments for pole rental agreements amounting to $1,313,000, $1,306,000 and
$1,102,000 in 1998, 1997 and 1996, respectively. Pole rental agreements may be
terminated by either party by written notice ranging up to ninety days.
F-32
<PAGE> 154
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(10) EMPLOYEE BENEFIT PLANS
In January 1992, the Company established a savings plan to provide elective
employee and employer contributions under Section 401(k) of the Internal Revenue
Code. Under the terms of the plan, the Company may make voluntary contributions
to the plan matching employee contributions in percentages and discretionary
amounts as determined by the Board of Directors. The Company made matching and
discretionary contributions to the plan of $423,000, $459,000 and $397,000 in
1998, 1997 and 1996, respectively.
Under the terms of the Buford Television Partnership Agreement (the
"Agreement") effective January 1, 1994, a new partnership, Buford Television
Partnership ("BTP"), was formed to hold the outstanding shares of the Company.
Under the terms of this Agreement, the stockholders on January 1, 1994
contributed 100% of their shares to the Partnership. Key employees were granted
12% ownership of future appreciation in the market value of the Company's common
stock, as defined in the Agreement, through appreciation percentages. These
appreciation percentages have none of the rights associated with ownership of
the common stock of the Company, such as voting or dividend rights, and will
have no value outside the context of the Agreement. However, the partners of
BTP, which include the key employees, have voting rights in the management of
BTP, the purpose of which is to acquire, manage, vote, pledge, hold and dispose
of the Company's stock and to perform all duties necessary to accomplish the
purposes of BTP. On December 1, 1997, the Agreement was amended whereby 620
shares of the Company's common stock were withdrawn from BTP by the principal
stockholders, leaving BTP with 380 shares of the Company's common stock, or 38%
ownership. However, the aforementioned key employees still retain 12% ownership
of the future appreciation in the market value of 100% of the Company's common
stock. Participants have vested 20% each year in the accumulated value of their
appreciation percentages, and became fully vested as of December 31, 1998. The
Company records expense for the accumulated value of the common stock
appreciation based on vesting criteria over the five year vesting period, and
subsequently, will continue to record expense based on the fully vested status
of the key employees and changes in fair value of the Company's common stock.
For the years ended December 31, 1998, 1997 and 1996, the Company recognized
$7,888,000, $3,519,000 and $1,458,000, respectively, in expense related to the
Agreement. The cumulative amount recorded pursuant to this agreement was
$14,833,000 as of December 31, 1998.
The Company has agreements with several employees that provide for amounts
to be paid to such employees in the event of a sale of certain cable systems'
assets. The amounts to be paid are based on several factors, including
historical cash flow. No amounts have been recorded related to these agreements
as the Company has not consummated a sale of any of the cable systems' assets
covered by these agreements.
(11) CONTINGENCIES
In October 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act"). During May 1993, pursuant to
authority granted to it under the 1992 Cable Act, the Federal Communications
Commission ("FCC") issued its rate regulation rules which became effective
September 1, 1993. These rate regulation rules required cable systems in
franchised areas serving at least 1,000 customers, which receive certification
and are not subject to effective competition, as defined, to set rates for basic
and cable programming services, as well as related equipment and installations,
pursuant to general cost-of-service standards or FCC prescribed benchmarks. The
Act also entailed quality service criteria and must carry/retransmission
requirements.
F-33
<PAGE> 155
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
On February 1, 1996, Congress passed The Telecommunications Act of 1996
(the "1996 Act") which was signed into law on February 6, 1996. This new law
altered federal, state and local laws and regulations for telecommunications
providers and services, including the Company. Several aspects of the 1996 Act
impact cable television, including the elimination of regulation of the cable
programming service tier for certain smaller cable providers, including the
Company.
The Company believes that it has complied with all provisions of the 1992
Cable Act and the 1996 Act including the rate setting provisions promulgated by
the FCC.
(12) SUBSEQUENT EVENT (UNAUDITED)
In May 1999, the Company and its stockholders entered into an agreement to
sell all of the common stock of the Company to Classic Cable, Inc. for
approximately $302.3 million.
F-34
<PAGE> 156
BUFORD GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 9,049
Accounts receivable, net of allowance for doubtful accounts
of $416................................................... 2,516
Prepaid expenses............................................ 241
Property, plant and equipment............................... 203,848
Less accumulated depreciation and amortization.............. (91,905)
--------
111,943
Intangible assets:
Franchise rights....................................... 54,417
Noncompetition agreements.............................. 7,434
Excess cost over net assets of acquired companies...... 2,114
Other.................................................. 1,089
--------
65,054
Less accumulated amortization............................... (17,242)
--------
47,812
Other assets................................................ 2,519
--------
$174,080
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 416
Deposits and unearned revenues.............................. 2,351
Accrued expenses............................................ 8,003
Long-term obligations....................................... 118,000
Deferred federal income taxes............................... 1,099
--------
Total liabilities................................. 129,869
--------
Stockholders' equity:
Common stock, $1 par value. Authorized 2,000 shares;
issued and outstanding 1,000 shares................... 1
Additional capital..................................... 14,833
Retained earnings...................................... 29,377
--------
Total stockholders' equity........................ 44,211
Commitments and contingencies...............................
--------
$174,080
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-35
<PAGE> 157
BUFORD GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cable television revenues................................... $18,861 $15,263
------- -------
Operating expenses:
Programming............................................... 5,217 4,105
Plant and operating....................................... 1,694 1,657
General and administrative................................ 4,160 3,697
Marketing and advertising................................. 109 93
Corporate overhead........................................ 358 2,104
Depreciation and amortization............................. 5,727 4,870
------- -------
17,265 16,526
------- -------
Operating income (loss)................................ 1,596 (1,263)
------- -------
Other income (expense):
Interest expense.......................................... (2,094) (1,592)
Interest income........................................... 92 82
Other, net................................................ (69) (22)
------- -------
(2,071) (1,532)
------- -------
Loss before income taxes and cumulative effect of
change in accounting principle........................ (475) (2,795)
Income tax benefit (expense)................................ 87 (156)
------- -------
Loss before cumulative effect of change in accounting
principle............................................. (388) (2,951)
Cumulative effect of change in accounting principle, net of
income tax benefit of $52................................. (207) --
------- -------
Net loss............................................... $ (595) $(2,951)
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-36
<PAGE> 158
BUFORD GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (595) $(2,951)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................ 5,727 4,870
Non-cash interest expense............................ -- 42
Employee stock appreciation expense.................. -- 1,676
Deferred federal income tax benefit.................. (87) (143)
Cumulative effect of change in accounting
principle........................................... 207 --
Changes in assets and liabilities:
Accounts receivable............................... 362 73
Prepaid expenses.................................. (75) (264)
Accounts payable and accrued expenses............. (1,256) 68
Deposits and unearned revenues.................... 117 107
Other............................................. (133) 44
------- -------
Net cash provided by operating activities......... 4,267 3,522
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment................ (3,121) (4,496)
Other..................................................... -- 163
------- -------
Net cash used in investing activities............. (3,121) (4,333)
------- -------
Net increase (decrease) in cash and cash equivalents........ 1,146 (811)
Cash and cash equivalents at beginning of period............ 7,903 7,890
------- -------
Cash and cash equivalents at end of period.................. $ 9,049 $ 7,079
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-37
<PAGE> 159
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(1) GENERAL AND BASIS OF PRESENTATION
(a) ORGANIZATION
Buford Group, Inc. and subsidiaries are engaged in cable television
operations within the United States. The Company owns and operates cable
television systems primarily in Texas, Louisiana, Arkansas, and Missouri.
(b) PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
accounts of Buford Group, Inc. and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of March 31, 1999, and the results of
operations and cash flows for the three months ended March 31, 1999 and 1998.
These results are not necessarily indicative of the results to be expected for
the full fiscal year.
(d) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(e) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," in the first
quarter of 1998, which required companies to disclose comprehensive income
separately from net income. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-ownership sources. It includes all changes in equity during a period, except
those resulting from investments by owners and distributions to owners. The
adoption of this statement had no effect on the Company at December 31, 1998,
because the Company has no elements of other comprehensive income. Accordingly,
comprehensive income and net income are the same amount for each period
presented.
(2) RECENT ACCOUNTING PRONOUNCEMENT
The Company adopted the provisions of Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Costs of Start-up Activities," effective as of January
1, 1999. This pronouncement requires that costs of start-up activities,
including organizational costs, should be expensed as incurred. As a result of
adopting SOP 98-5, the Company recorded a charge of $259,000, less tax benefit
of $52,000, as the cumulative effect of recording the change in accounting
principle as of January 1, 1999.
F-38
<PAGE> 160
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(3) CONTINGENCIES
In October 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act"). During May 1993, pursuant to
authority granted to it under the 1992 Cable Act, the Federal Communications
Commission ("FCC") issued its rate regulation rules which became effective
September 1, 1993. These rate regulation rules required cable systems in
franchised areas serving at least 1,000 customers, which receive certification
and are not subject to effective competition, as defined, to set rates for basic
and cable programming services, as well as related equipment and installations,
pursuant to general cost-of-service standards or FCC prescribed benchmarks. The
Act also entailed quality service criteria and must carry/retransmission
requirements.
On February 1, 1996, Congress passed The Telecommunications Act of 1996
(the "1996 Act") which was signed into law on February 6, 1996. This new law
altered federal, state and local laws and regulations for telecommunications
providers and services, including the Company. Several aspects of the 1996 Act
impact cable television, including the elimination of regulation of the cable
programming service tier for certain smaller cable providers, including the
Company.
The Company believes that it has complied with all provisions of the 1992
Cable Act and the 1996 Act including the rate setting provisions promulgated by
the FCC.
(4) SUBSEQUENT EVENTS
In May 1999, the Company and its shareholders entered into an agreement to
sell the common stock of the Company to Classic Cable, Inc. for approximately
$302.3 million. In connection with the Buford Television Partnership Agreement
(the "Agreement"), which granted 12% ownership of future appreciation in the
market value of the Company's common stock, and in which the key employees were
100% vested, management of the Company estimates that the key employees covered
by the Agreement will receive approximately $14.8 million upon consummation of
the sale to Classic Cable, Inc. under the current terms of the sale agreement.
The Company has recognized compensation expense of approximately $14.8 million
through December 31, 1998.
Additionally, in the event that the sale is consummated under the current
terms, management estimates that the Company will pay out approximately $2.4
million to certain employees under separate agreements that provide for payments
in the event of the sale of certain cable systems' assets. The Company has not
recognized expense related to these agreements as such amounts are payable only
upon consummation of a sale of cable system assets.
On June 28, 1999, the Company reduced the amount of the commitment in its
bank credit agreement to $112.0 million.
F-39
<PAGE> 161
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CLASSIC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CLASSIC SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THE UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 1
Risk Factors.......................... 15
Use of Proceeds....................... 22
Unaudited Pro Forma Consolidated
Financial Information............... 23
Selected Historical Consolidated
Financial Data -- Classic
Communications, Inc. ............... 32
Selected Historical Consolidated
Financial Data -- Buford Group,
Inc................................. 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business.............................. 44
Legislation and Regulation............ 57
Management............................ 67
Certain Relationships and Related
Transactions........................ 72
Principal Stockholders................ 74
Description of Other Indebtedness..... 75
The Exchange Offer.................... 76
Description of the Notes.............. 84
United States Federal Income Tax
Considerations...................... 116
Plan of Distribution.................. 117
Legal Matters......................... 118
Experts............................... 118
Index to Historical Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
OFFER TO EXCHANGE
ALL OUTSTANDING
13 1/4% SENIOR DISCOUNT NOTES
DUE 2009
FOR
13 1/4% SENIOR DISCOUNT NOTES
DUE 2009
[CLASSIC CABLE LOGO]
CLASSIC COMMUNICATIONS, INC.
------------------------
PROSPECTUS
------------------------
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") grants each corporation organized thereunder, such as the Registrant,
the power to indemnify its directors and officers against liabilities for
certain of their acts. Section 102(b)(7) of the DGCL permits a provision in the
certificate of incorporation of each corporation organized thereunder, such as
the Registrant, eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for certain breaches of
fiduciary duty as a director except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit. Article Eighth of the Registrant's Certificate of
Incorporation has eliminated the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL.
Article 10 of the Registrant's Certificate of Incorporation provides as
follows: The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(whether or not by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee, or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), liability, loss,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding to the fullest extent
permitted by either (i) any applicable law in effect on the date of
incorporation of the Corporation, or (ii) any law which becomes effective during
the existence of the Corporation and which is applicable to it.
Article 8 of the Registrant's By-Laws provides as follows: To the extent
permitted by law, the Corporation shall indemnify any person against any and all
judgments, fines, amounts paid in settling or otherwise disposing of actions or
threatened actions, and expenses in connection therewith, incurred by reason of
the fact that he, his testator or intestate is or was a director or officer of
the Corporation or of any other corporation of any type or kind, domestic or
foreign, which he served in any capacity at the request of the Corporation. To
the extent permitted by law, expenses so incurred by any such person in
defending a civil or criminal action or proceeding shall at his request be paid
by the Corporation in advance of the final disposition of such action or
proceeding.
The foregoing statements are subject to the detailed provisions of Section
102(b)(7) of the DGCL, Article 10 of the Certificate of Incorporation of the
Registrant and Article 8 of the By-Laws of the Registrant, as applicable.
The foregoing discussion is qualified in its entirety by reference to the
DGCL and the Registrant's Certificate of Incorporation and By-Laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
2.1 -- Securities Purchase Agreement among Classic Cable, Inc.
and Buford Group, Inc. dated as of May 11, 1999.
3.1 -- Amended and Restated Certificate of Incorporation of
Classic Communications, Inc., dated as of October 30,
1995.
</TABLE>
II-1
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
3.1(b) -- Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Classic Communications,
Inc. dated July 21, 1998.
3.2 -- Bylaws of Classic Communications, Inc., as amended.
4.1 -- Indenture dated as of July 29, 1998, for Units consisting
of $114,000,000 in Aggregate Principal Amount at
Maturity, 13 1/4% Senior Discount Notes due 2009, by and
among Classic Communications, Inc., as Issuer, and Bank
One, N.A., as Trustee.
4.2 -- Form of Global Securities.
4.3A -- Registration Rights Agreement dated as of July 29, 1998,
by and between Classic Communications, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
4.3B -- Shareholder and Registration Rights Agreement, dated as
of July 29, 1998, by and among Classic Communications,
Inc. and Certain Stockholders and Merrill, Lynch, Pierce,
Fenner & Smith Incorporated.
4.3C -- Amended and Restated Registration Rights Agreement dated
as of October 31, 1995, modified by Amendment No. 1
(dated as of October 31, 1995) and Amendment No. 2 (dated
as of December 27, 1995).
4.3D -- Amended and Restated Shareholders Agreement dated as of
October 31, 1995, modified by Amendment No. 1 (dated as
of October 31, 1995), Amendment No. 2 (dated as of
December 27, 1995) and Amendment No. 3 (dated as of
December 19, 1997).
5.1(a) -- Opinion of Winstead Sechrest & Minick P.C. dated
September 17, 1998 regarding the enforceability and
issuance of the securities, including consent.
5.1(b) -- Opinion of Winstead Sechrest & Minick P.C. dated November
10, 1998 regarding the enforceability and issuance of the
securities, including consent.
8.1(a) -- Opinion of Winstead Sechrest & Minick P.C. dated
September 17, 1998 regarding federal income tax matters,
including consent.
8.1(b) -- Opinion of Winstead Sechrest & Minick P.C. dated November
10, 1998 regarding federal income tax matters, including
consent.
10.1 -- Employment Agreement dated as of January 31, 1998 by and
between Classic Communications, Inc., Classic Cable, Inc.
and J. Merritt Belisle.
10.2 -- Employment Agreement dated as of January 31, 1998 by and
between Classic Communications, Inc., Classic Cable, Inc.
and Steven E. Seach.
10.3 -- Credit Agreement among Classic Cable, Inc., As Borrower,
the Lenders Parties thereto, Union Bank of California,
N.A. and Goldman Sachs Credit Partners L.P. as
Co-Arrangers, Goldman Sachs Credit Partners L.P., as
Syndication Agent and Union Bank of California, N.A., as
Administrative and Documentation Agent, dated as of July
29, 1998.
10.4 -- Asset Purchase Agreement dated May 14, 1998 by and
between Cable One, Inc. and Black Creek Communications,
Inc.
10.4(b) -- Assignment of Asset Purchase Agreement dated June 19,
1998.
10.4(c) -- Amendment No. 1 to Asset Purchase Agreement dated July
15, 1998.
10.5 -- 1996 Restricted Stock Award Plan of Classic
Communications, Inc.
10.6 -- 1998 Restricted Stock Award Plan of Classic
Communications, Inc.
10.6(a) -- Restricted Stock Award Agreement dated July 29, 1998 by
and between J. Merritt Belisle and Classic
Communications, Inc.
10.6(b) -- Restricted Stock Award Agreement dated July 29, 1998 by
and between Steven E. Seach and Classic Communications,
Inc.
10.7 -- Investment Agreement dated as of May 24, 1999 between
Brera Classic, LLC and Classic Communications, Inc.
</TABLE>
II-2
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.8 -- Management and Advisory Fee Agreement dated May 24, 1999.
10.9 -- Stockholder Voting Agreements dated effective May 24,
1999, among Brera Classic, L.L.C. and Austin Ventures,
L.P., BT Capital Partners, Inc., The Texas Growth Fund,
BA SBIC Management, L.L.C., as the successor in interest
to NationsBanc Capital Corp., J. Merritt Belisle, Steven
E. Seach, and Bryan Noteboom.
*12.1 -- Statement of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Classic Communications, Inc.
*23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1 of this Registration Statement).
*23.3 -- Consent of KPMG LLP.
24.1 -- Powers of Attorney (included as part of signature page of
this Registration Statement).
25.1 -- Statement of Eligibility on Form T-1 of Bank One, N.A.,
as Trustee, including consent.
27.1 -- Financial Data Schedule.
99.1 -- Form of Transmittal Letter with respect to the Exchange
Offer.
99.2 -- Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.
</TABLE>
- ---------------
* Filed herewith
b. Financial Statement Schedules.
The following appear after the signature page of this Registration
Statement:
Report of Independent Public Accountants on Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
SCHEDULE DESCRIPTION NO.
- -------- ----------- ----
<C> <S> <C>
S-1 Condensed Financial Information of Classic Communications,
Inc. stand alone. S-1
</TABLE>
All other schedules are omitted because the required information is
included in the Consolidated Financial Statements or the Notes thereto or is
otherwise inapplicable.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
II-3
<PAGE> 165
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to this request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement.
(d) The undersigned Registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(e) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Act is used in
connection with an offering of securities subject to Rule 415 (sec. 230.415 of
this chapter), will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 166
(f) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time was it declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 7 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Austin,
State of Texas, on the 23rd day of July 1999.
CLASSIC COMMUNICATIONS, INC.
By: /s/ STEVEN E. SEACH
----------------------------------
Steven E. Seach
President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 7 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and Chief July 23, 1999
- ----------------------------------------------------- Executive Officer and a
J. Merritt Belisle Director (Principal Executive
Officer)
/s/ STEVEN E. SEACH President and Chief Financial July 23, 1999
- ----------------------------------------------------- Officer and a Director
Steven E. Seach (Principal Financial Officer
and Principal Accounting
Officer)
* Director July 23, 1999
- -----------------------------------------------------
Jeffery C. Garvey
* Director July 23, 1999
- -----------------------------------------------------
James J. Kozlowski
* Director July 23, 1999
- -----------------------------------------------------
Robert H. Sheridan, III
* Director July 23, 1999
- -----------------------------------------------------
Robert Marakovits
*By: /s/ STEVEN E. SEACH
------------------------------------------------
Steven E. Seach
</TABLE>
Steven E. Seach, by signing his name
hereto, does sign this document on
behalf of the persons named above,
pursuant to a power of attorney duly
executed by such persons and
previously filed.
II-6
<PAGE> 168
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CLASSIC COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ -- $ --
Investment in and advances to affiliates.................... 13,142,000 16,339,000
Deferred financing costs, net............................... 2,465,000 --
------------ ------------
Total assets...................................... $ 15,607,000 $ 16,339,000
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Liabilities:
Accrued interest.......................................... $ -- $ 90,000
Subordinated debt......................................... -- 4,023,000
Long-term debt............................................ 62,038,000 --
Deferred taxes, net....................................... 51,000 --
Amounts due to parent..................................... 306,000 --
------------ ------------
Total liabilities................................. 62,395,000 4,113,000
15% PIK Redeemable Senior Preferred Stock................. -- 5,978,000
15% PIK Redeemable Junior Preferred Stock................. -- 19,434,000
Common stock, Voting...................................... 17,000 6,000
Common stock, Nonvoting................................... 15,000 22,000
Paid in capital........................................... 28,544,000 31,287,000
Accumulated deficit....................................... (75,364,000) (44,501,000)
------------ ------------
Total stockholders' deficit....................... (46,788,000) (13,186,000)
------------ ------------
Total liabilities, redeemable preferred stock and
stockholders' deficit........................... $ 15,607,000 $ 16,339,000
============ ============
</TABLE>
S-1
<PAGE> 169
CLASSIC COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense................................. $ (3,754,000) $ (539,000) $ (469,000)
Interest in loss of subsidiary................... (26,700,000) (13,787,000) (12,866,000)
------------ ------------ ------------
Loss before taxes................................ (30,454,000) (14,326,000) (13,335,000)
Income tax benefit (expense)..................... (409,000) 198,000 169,000
------------ ------------ ------------
Net loss......................................... $(30,863,000) $(14,128,000) $(13,166,000)
============ ============ ============
</TABLE>
S-2
<PAGE> 170
CLASSIC COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
----------- -------- ------------
<S> <C> <C> <C>
Cash from operations................................. $ 265,000 $ -- $ 85,000
Investing activities
Capital contribution to subsidiary................. (22,764,000) -- --
----------- -------- ------------
Net cash used in investing activities................ (22,764,000) -- --
Financing activities
Expenses related to equity financings.............. -- -- (85,000)
Proceeds from long-term debt....................... 59,981,000 -- --
Repayments of long-term debt....................... (16,000) -- --
Repayment of subordinated indebtedness............. (4,458,000) -- --
Repayment of promissory notes...................... (650,000) -- --
Redemption of preferred stock...................... (29,756,000) -- --
Financing costs.................................... (2,527,000) -- --
Sale of common stock............................... 50,000 -- --
Repurchase of common stock......................... (125,000) -- --
----------- -------- ------------
Net cash provided by (used in) financing
activities......................................... 22,499,000 -- (85,000)
Net change in cash................................... -- -- --
----------- -------- ------------
Cash and cash equivalents at beginning of year....... -- -- --
----------- -------- ------------
Cash and cash equivalents at end of year............. $ -- $ -- $ --
=========== ======== ============
All 1997 activity related to non cash items.
</TABLE>
S-3
<PAGE> 171
CLASSIC COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION
In the parent company-only financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings (losses)
of subsidiaries since the date of acquisition, plus advances to, and less
payments from, subsidiaries. The parent company-only financial statements should
be read in conjunction with the Company's consolidated financial statements.
2. LONG-TERM DEBT
Balance of amounts outstanding under the Company's debt agreement is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
13.25% Senior Discount Notes................................ $114,000 $ --
Unamortized discount...................................... (51,962) --
-------- --------
$ 62,038 $ --
======== ========
</TABLE>
In July 1998, the Company issued $114.0 million of 13.25% Senior Discount
Notes due 2009. Net of the applicable discounts and the fair value of the common
stock sold along with the Senior Discount Notes, proceeds from this issue were
$60.0 million. Interest payments on the Senior Discount Notes do not commence
until 2004.
The Senior Discount Notes were sold in units that consisted of a $1,000
note and three shares of common stock of the Company. Shares issued in
connection with the offering totaled 342,000. Proceeds of $3.77 per share were
allocated to the sale of the shares. A discount of $1.3 million was recorded in
connection with common stock issued. This per share amount represents the fair
value of the stock as of the date of the offering.
3. SUBORDINATED DEBT
Subordinated debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1998 1997
------ ------
<S> <C> <C>
7.5% Junior Subordinated Promissory Notes(A)................ $ -- $ 295
15% Senior Subordinated Promissory Note (B)................. -- 3,727
------ ------
$ -- $4,023
====== ======
</TABLE>
- ---------------
(A) The Junior Subordinated Promissory Notes (the "Interest Notes") bore
interest at 7.5% per annum. The Interest Notes had no required principal
payments other than upon maturity on July 7, 2002. The interest on the
Interest Notes was deferred until maturity. The Interest Notes and
accrued interest were paid in full in July 1998.
(B) The Senior Subordinated Promissory Note (the "Senior Note") bore interest
at 15% per annum, payable quarterly in arrears unless paid in kind
("PIK") through the issuance of new Senior Notes (the "PIK Notes")
incorporating the same terms as the Senior Note. All principal and
deferred interest under the Senior and PIK Notes was due on December 31,
2007. The Senior Note, the PIK Notes and accrued interest was paid in
full in July 1998.
S-4
<PAGE> 172
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NO. NAME
------- ----
<C> <S>
2.1 -- Securities Purchase Agreement among Classic Cable, Inc.
and Buford Group, Inc. dated as of May 11, 1999.
3.1 -- Amended and Restated Certificate of Incorporation of
Classic Communications, Inc., dated as of October 30,
1995, as amended on July 21, 1998.
3.1(b) -- Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Classic Communications,
Inc. dated July 21, 1998.
3.2 -- Bylaws of Classic Communications, Inc., as amended.
4.1 -- Indenture dated as of July 29, 1998, for Units consisting
of $114,000,000 in Aggregate Principal Amount at
Maturity, 13 1/4% Senior Discount Notes due 2009, by and
among Classic Communications, Inc., as Issuer, and Bank
One, N.A., as Trustee.
4.2 -- Form of Global Securities.
4.3A -- Registration Rights Agreement dated as of July 29, 1998,
by and between Classic Communications, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
4.3B -- Shareholder and Registration Rights Agreement, dated as
of July 29, 1998, by and among Classic Communications,
Inc. and Certain Stockholders and Merrill, Lynch, Pierce,
Fenner & Smith Incorporated.
4.3C -- Amended and Restated Registration Rights Agreement dated
as of October 31, 1995, modified by Amendment No. 1
(dated as of October 31, 1995) and Amendment No. 2 (dated
as of December 27, 1995).
4.3D -- Amended and Restated Shareholders Agreement dated as of
October 31, 1995, modified by Amendment No. 1 (dated as
of October 31, 1995), Amendment No. 2 (dated as of
December 27, 1995) and Amendment No. 3 (dated as of
December 19, 1997).
5.1(a) -- Opinion of Winstead Sechrest & Minick P.C. dated
September 17, 1998 regarding the enforceability and
issuance of the securities, including consent.
5.1(b) -- Opinion of Winstead Sechrest & Minick P.C. dated November
10, 1998 regarding the enforceability and issuance of the
securities, including consent.
8.1(a) -- Opinion of Winstead Sechrest & Minick P.C. dated
September 17, 1998 regarding federal income tax matters,
including consent.
8.1(b) -- Opinion of Winstead Sechrest & Minick P.C. dated November
10, 1998 regarding federal income tax matters including
consent.
10.1 -- Employment Agreement dated as of January 31, 1998 by and
between Classic Communications, Inc., Classic Cable, Inc.
and J. Merritt Belisle.
10.2 -- Employment Agreement dated as of January 31, 1998 by and
between Classic Communications, Inc., Classic Cable, Inc.
and Steven E. Seach.
10.3 -- Credit Agreement among Classic Cable, Inc., As Borrower,
the Lenders Parties thereto, Union Bank of California,
N.A. and Goldman Sachs Credit Partners L.P. as
Co-Arrangers, Goldman Sachs Credit Partners L.P., as
Syndication Agent and Union Bank of California, N.A., as
Administrative and Documentation Agent, dated as of July
29, 1998.
10.4 -- Asset Purchase Agreement dated May 14, 1998 by and
between Cable One, Inc. and Black Creek Communications,
Inc.
10.4(b) -- Assignment of Asset Purchase Agreement dated June 19,
1998.
10.4(c) -- Amendment No. 1 to Asset Purchase Agreement dated July
15, 1998.
10.5 -- 1996 Restricted Stock Award Plan of Classic
Communications, Inc.
10.6 -- 1998 Restricted Stock Award Plan of Classic
Communications, Inc.
10.6(a) -- Restricted Stock Award Agreement dated July 29, 1998 by
and between J. Merritt Belisle and Classic
Communications, Inc.
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NO. NAME
------- ----
<C> <S>
10.6(b) -- Restricted Stock Award Agreement dated July 29, 1998 by
and between Steven E. Seach and Classic Communications,
Inc.
10.7 -- Investment Agreement dated as of May 24, 1999 between
Brera Classic, LLC and Classic Communications, Inc.
10.8 -- Management and Advisory Fee Agreement dated May 24, 1999.
10.9 -- Stockholder Voting Agreements dated effective May 24,
1999, among Brera Classic, L.L.C. and Austin Ventures,
L.P., BT Capital Partners, Inc., The Texas Growth Fund,
BA SBIC Management, L.L.C., as the successor in interest
to NationsBanc Capital Corp., J. Merritt Belisle, Steven
E. Seach, and Bryan Noteboom.
*12.1 -- Statement of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Classic Communications, Inc.
*23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Winstead Sechrest & Minick P.C. (included in
Exhibits 5.1 and 8.1 of this Registration Statement).
*23.3 -- Consent of KPMG LLP.
24.1 -- Powers of Attorney (included as part of signature page of
this Registration Statement).
25.1 -- Statement of Eligibility on Form T-1 of Bank One, N.A.,
as Trustee, including consent.
27.1 -- Financial Data Schedule.
99.1 -- Form of Transmittal Letter with respect to the Exchange
Offer.
99.2 -- Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------------
For the Quarter Ended
For the Year Ended December 31, March 31,
---------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income tax benefit, minority
interest and extraordinary loss (3,596) (12,860) (19,968) (21,476) (27,269) (5,389) (6,186)
Fixed Charges:
Interest expense 4,975 14,199 20,633 21,299 24,442 4,872 5,310
Interest portion of rental expense 113 264 428 464 514 114 157
Dividends on unconsolidated subsidiary -- -- 101 101 67 26 --
------ ------- ------- ------- ------- ------ ------
Earnings 1,492 1,603 1,194 388 (2,246) (377) (719)
====== ======= ======= ======= ======= ====== ======
Fixed charges:
Interest expense 4,975 14,199 20,633 21,299 24,442 4,872 5,310
Interest portion of rental expense 113 264 428 464 514 114 157
Dividends on unconsolidated subsidiary -- -- 101 101 67 26 --
------ ------- ------- ------- ------- ------ ------
Total fixed charges 5,088 14,463 21,162 21,864 25,023 5,012 5,467
------ ------- ------- ------- ------- ------ ------
Ratio of earnings to fixed charges n/a n/a n/a n/a n/a n/a n/a
Earnings inadequate to cover fixed charges:
Total fixed charges 5,088 14,463 21,162 21,864 25,023 5,012 5,467
Earnings 1,492 1,603 1,194 388 (2,246) (377) (719)
------ ------- ------- ------- ------- ------ ------
Deficiency of earnings to fixed charges (3,596) (12,860) (19,968) (21,476) (27,269) (5,389) (6,186)
====== ======= ======= ======= ======= ====== ======
<CAPTION>
ProForma
-------------------------
For the For the
Year Ended Quarter Ended
December 31, March 31,
1998 1999
------- -------
<S> <C> <C>
Loss before income tax benefit, minority
interest and extraordinary loss (66,295) (14,627)
Fixed Charges:
Interest expense 51,750 12,903
Interest portion of rental expense 1,085 271
Dividends on unconsolidated subsidiary -- --
------- -------
Earnings (13,460) (1,453)
======= =======
Fixed charges:
Interest expense 51,750 12,903
Interest portion of rental expense 1,085 271
Dividends on unconsolidated subsidiary -- --
------- -------
Total fixed charges 52,835 13,174
------- -------
Ratio of earnings to fixed charges n/a n/a
Earnings inadequate to cover fixed charges:
Total fixed charges 52,835 13,174
Earnings (13,460) (1,453)
------- -------
Deficiency of earnings to fixed charges (66,295) (14,627)
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 30, 1999, in Amendment No. 7 to the Registration
Statement (Form S-4 No. 333-63641) and the related Prospectus of Classic
Communications, Inc.
/s/ ERNST & YOUNG LLP
Austin, Texas
July 19, 1999
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Buford Group, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Historical Consolidated
Financial Data - Buford Group, Inc." in the prospectus.
/s/ KPMG LLP
Dallas, Texas
July 22, 1999
