<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-86541
PROSPECTUS
EXCHANGE OFFER FOR
$150,000,000
9 3/8% SENIOR SUBORDINATED NOTES DUE 2009 [CLASSIC CABLE, INC. LOGO]
Terms of Exchange Offer
- Expires 5:00 p.m., New York City time, October 13, 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- All outstanding notes that are validly tendered and not validly withdrawn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- Tenders of outstanding notes may be withdrawn any time prior to the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 June 30, 1999, on a pro forma basis we had approximately $294.3
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.
SEPTEMBER 9, 1999
<PAGE> 2
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. As a result, we are required to file annual, quarterly and special
reports 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 are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
We, together with the subsidiary guarantors, 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.
1
<PAGE> 3
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. and the other acquisitions
completed by either Classic or Buford prior to the date of this prospectus.
Reference should be made to the "Selected Historical Consolidated Financial
Data -- Classic Cable, 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
Series B 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 Guarantees" and "The
Exchange Offer."
The Exchange Offer......... We are offering to exchange up to $150,000,000 of
the exchange notes for up to $150,000,000 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 October 13,
1999. We will not extend this time period to a date
later than October 27, 1999. You may withdraw any
old notes you tender pursuant to the exchange offer
at any time prior to October 13, 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
2
<PAGE> 4
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 accrues from the
date of issuance at the rate of 9 3/8% per annum.
Payment of Interest........ Interest is payable semi-annually in arrears on
each February 1 and August 1, commencing on
February 1, 2000.
After February 1, 2000, interest on the old notes
accepted for exchange will stop accruing upon the
issuance of the exchange notes.
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 and the related guarantees to
the initial purchasers in a transaction exempt from
the registration requirements of the Securities Act
on July 28, 1999. At that time, Classic and the
initial purchasers 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;
3
<PAGE> 5
- you will not recognize gain or loss upon receipt
of the exchange notes;
- you must include interest 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 Chase Bank of Texas, National
Association as the exchange agent for the exchange
offer.
4
<PAGE> 6
TERMS OF THE NOTES AND GUARANTEES
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 Cable, Inc.
515 Congress Avenue, Suite 2626
Austin, Texas 78701
Guarantors.................... The notes are guaranteed by each of our current
and future domestic restricted subsidiaries.
Each guarantor is our wholly owned subsidiary.
If we cannot make payments on the notes when
they are due, the guarantors must make them
instead.
Maturity...................... August 1, 2009.
Interest...................... Annual rate -- 9 3/8%.
Payment frequency -- every six months on
February 1 and August 1.
First payment -- February 1, 2000.
Ranking....................... These notes and the subsidiary guarantees are
senior subordinated debts.
They rank behind all of our and our guarantors'
current and future indebtedness, except:
- trade payables, and
- indebtedness that expressly provides that it
is not senior to these notes and the
subsidiary guarantees.
Optional Redemption........... On or after August 1, 2004, we may redeem some
or all of the notes at any time at the
redemption prices listed in the "Description of
Notes and Guarantees" section under the heading
"Optional Redemption."
Before August 1, 2002, we may redeem up to 35%
of the notes ever issued under the indenture
with the proceeds of one or more Public Equity
Offerings by, or Strategic Equity Investments
in, Classic or Classic's direct parent at the
price listed in the "Description of Notes and
Guarantees" section under the heading "Optional
Redemption."
Mandatory Offer to
Repurchase.................... If we sell assets under some circumstances, or
experience specific kinds of changes of
control, we must offer to repurchase the notes
at the prices listed in the "Description of
Notes and Guarantees" section under the heading
"Repurchase at the Option of Holders."
Basic Covenants of
Indenture..................... We will issue the exchange notes under an
indenture with Chase Bank of Texas, National
Association. The indenture, among other things,
restricts our ability and the ability of our
subsidiaries to:
- borrow money;
- pay dividends on stock or repurchase stock;
5
<PAGE> 7
- make investments;
- use assets as security in other transactions;
- sell certain assets or merge with or into
other companies; and
- engage in certain transactions with
affiliates.
These covenants are subject to important
exceptions. For more details, see the
"Description of Notes and Guarantees" section
under the heading "Certain Covenants."
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 purchasers have
advised us that they currently intend to make a
market in the exchange notes. However, you
should be aware that the initial purchasers are
not obligated to do so. In the event such a
market may develop, the initial purchasers 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.
6
<PAGE> 8
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 acquisition of Buford Group, Inc., and
assuming completion of other recently publicly announced transactions by other
companies in the cable television industry, we believe we are the 14th largest
cable operator in the United States, with systems that pass approximately
609,000 homes and serve approximately 359,000 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.
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 Buford's state-of-the-art call center to
complement our existing 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.
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.
7
<PAGE> 9
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 has been further
enhanced by the addition of several key members of Buford's management team,
including Ron Martin, who became our Executive Vice President of Operations, and
Kay Monigold, who became 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 Communications, Inc.,
our parent, and up to an additional 10% of Classic Communications' common stock
has been set aside for issuance to management pursuant to options granted to
them.
THE BUFORD ACQUISITION
On July 28, 1999, we acquired Buford Group, Inc., which operates cable
television systems in Arkansas, Louisiana, Missouri and Texas, for approximately
$300 million in cash. 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. We
financed the Buford acquisition through certain financing arrangements,
consisting of a $250.0 million new credit facility and the issuance of $150.0
million of senior subordinated notes due 2009. See "Description of Other
Indebtedness." In addition, approximately $95.7 million in cash was contributed
to us by our parent, Classic Communications, pursuant to the Brera Classic
equity investment. See "-- The Brera Classic Equity Investment."
THE BRERA CLASSIC EQUITY INVESTMENT
In connection with the Buford acquisition, Classic Communications received
$100.0 million from Brera Classic, L.L.C., $95.7 million of which was
contributed in cash to us, $3.3 million of which was paid to Brera Classic
pursuant to management and advisory fee agreements, and $1.0 million was paid to
Brera Classic to reimburse Brera Classic for certain of its fees and expenses
incurred in connection with the Brera Classic equity investment. This equity
investment was financed through the sale of common stock of Classic
Communications 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.
Brera Classic now owns approximately 64% of the outstanding capital stock of
Classic Communications, 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."
8
<PAGE> 10
RECENT DEVELOPMENTS
On July 28, 1999, we had a change of control upon the sale of approximately
64% of Classic Communications' outstanding capital stock to Brera Classic as
part of the Brera Classic equity investment. Accordingly, as required by the
indenture governing our senior subordinated notes due 2008, we offered to
repurchase all of the outstanding 2008 subordinated notes at a price equal to
101% of the original aggregate principal amount, together with accrued and
unpaid interest, if any, to the date of repurchase. This offer to repurchase
expired at the close of business on September 1, 1999. Of the $125.0 million
outstanding, approximately $86.0 million was tendered to us for repurchase.
Accordingly, we borrowed $90.0 million under our incremental facility to
repurchase the tendered 2008 subordinated notes and to pay associated fees and
expenses incurred as a result of the change of control offer. See "Description
of Other Indebtedness." The tendered notes were repurchased by us on September
8, 1999.
RISK FACTORS
You should consider carefully the information set forth under the caption
"Risk Factors" beginning on page 16 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.
9
<PAGE> 11
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, our 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 and cash flow data and on June 30, 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 Cable, 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>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(IN THOUSANDS, EXCEPT
SUBSCRIBER DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... $149,897 $ 77,684
Costs and expenses.......................................... 97,289 44,686
Depreciation and amortization............................... 66,257 34,989
-------- --------
Operating loss.............................................. (13,649) (1,991)
Interest expense............................................ (43,292) (21,630)
Other income (expense)...................................... (896) (63)
-------- --------
Loss before income tax benefit.............................. (57,837) (23,684)
Income tax benefit.......................................... 2,565 210
-------- --------
Net loss.................................................... $(55,272) $(23,474)
======== ========
BALANCE SHEET DATA:
Total cash and cash equivalents............................. -- $ 7,368
Total assets................................................ -- 568,512
Total debt.................................................. -- 449,966
Total liabilities........................................... -- 478,752
Total stockholders' equity.................................. -- 89,760
OTHER FINANCIAL DATA:
Cash flows from operating activities........................ 21,169 7,688
Cash flows from investing activities........................ (408,179) (16,061)
Cash flows from financing activities........................ 379,865 (5,134)
Adjusted EBITDA(1).......................................... $ 61,604(2) $ 32,886
Adjusted EBITDA margin(3)................................... 41.1% 42.3%
Ratio of net debt to annualized Adjusted EBITDA(4).......... -- 6.7x
Ratio of Classic Communications net debt to annualized
Adjusted EBITDA........................................... -- 6.7x
Ratio of Adjusted EBITDA to interest expense................ -- 1.5x
Ratio of Adjusted EBITDA to cash interest expense........... -- 1.5x
Capital expenditures........................................ $ 34,228 $ 15,548
Deficiency of earnings to fixed charges(5).................. 57,837 (23,684)
OPERATING DATA:
Homes passed(6)............................................. 612,624 609,107
Basic subscribers(7)........................................ 361,428 358,969
Basic penetration(8)........................................ 59.0% 58.9%
Digital subscribers......................................... 1,454 3,060
Premium subscribers(9)...................................... 194,106 189,769
Premium penetration(10)..................................... 53.7% 52.9%
Average monthly basic revenue per basic subscriber(11)...... $ 28.02 $ 30.15
Average monthly total revenue per basic subscriber(12)...... $ 34.44 $ 36.35
</TABLE>
10
<PAGE> 12
- ---------------
(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 $(775,000) for the periods ended December 31, 1998
and June 30, 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.
11
<PAGE> 13
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA -- CLASSIC CABLE, 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 Cable, 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
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 $ 32,214 $ 39,286
Costs and expenses................................. 33,553 36,555 42,070 19,038 22,760
Depreciation and amortization...................... 27,510 27,832 30,531 14,169 18,096
-------- -------- -------- -------- --------
Operating loss..................................... (1,242) (3,392) (2,799) (993) (1,570)
Interest expense................................... (20,164) (20,759) (20,688) (10,223) (10,675)
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 64 15
-------- -------- -------- -------- --------
Loss before income tax benefit and extraordinary
loss............................................. (19,499) (20,936) (23,515) (11,152) (12,230)
Income tax benefit................................. 6,633 7,149 2,339 1,371 --
Extraordinary loss................................. -- -- (5,524) -- --
-------- -------- -------- -------- --------
Net loss........................................... $(12,866) $(13,787) $(26,700) $ (9,781) $(12,230)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total cash and cash equivalents.................... $ 653 $ 616 $ 2,779 $ -- $ 638
Total assets....................................... 245,987 220,218 252,445 -- 241,496
Total debt......................................... 193,998 187,967 220,804 -- 222,016
Total liabilities.................................. 215,826 202,887 239,303 -- 239,921
Total redeemable preferred stock................... 1,292 1,293 -- -- --
Total stockholders' equity......................... 28,868 16,038 13,142 -- 1,575
OTHER FINANCIAL DATA:
Cash flows from operating activities............... $ 7,848 $ 7,892 $ 13,996 $ 4,502 $ 5,514
Cash flows from investing activities............... 3,387 (1,341) (57,245) (4,219) (8,521)
Cash flows from financing activities............... (12,070) (6,588) 45,412 920 866
Adjusted EBITDA(1)................................. 27,326 25,498(2) 28,840(3) 13,652 17,189
Adjusted EBITDA margin(4).......................... 45.7% 41.8% 41.3% 42.4% 43.8%
Ratio of net debt to annualized Adjusted
EBITDA(5)........................................ -- -- -- -- 6.4x
Ratio of Adjusted EBITDA to interest expense....... -- -- -- -- 1.6x
Ratio of Adjusted EBITDA to cash interest
expense.......................................... -- -- -- -- 1.6x
Capital expenditures............................... $ 8,212 $ 10,135 $ 13,759 $ 4,201 $ 8,008
Deficiency of earnings to fixed charges(6)......... (19,499) (20,936) (23,515) (11,152) (12,230)
OPERATING DATA (END OF PERIOD, EXCEPT AVERAGE):
Homes passed(7).................................... 259,181 254,649 296,995 254,449 293,478
Basic subscribers(8)(9)............................ 171,657 165,737 188,871 163,243 185,170
Basic penetration(9)(10)........................... 66.2% 65.1% 63.6% 64.2% 63.1%
Digital subscribers................................ -- -- 200 -- 1,480
Premium subscribers(11)............................ 62,458 63,819 71,702 63,389 67,501
Premium penetration(12)............................ 36.4% 38.5% 38.0% 38.8% 36.5%
Average monthly basic revenue per basic
subscriber(13)................................... $ 22.77 $ 25.22 $ 27.87 $ 27.42 $ 29.35
Average monthly total revenue per basic
subscriber(14)................................... $ 27.68 $ 30.14 $ 33.24 $ 32.55 $ 34.85
</TABLE>
12
<PAGE> 14
- ---------------
(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 six month
periods ended June 30, 1998 and 1999 related to compensation on restricted
stock and were $1,058,000, $1,058,000, $1,108,000, $476,000 and $663,000,
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.
13
<PAGE> 15
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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
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 $ 32,943 $ 38,398
Costs and expenses................................ 32,932 40,858 51,168 24,547 22,433
Depreciation and amortization..................... 17,175 17,753 21,399 10,137 12,105
-------- -------- -------- -------- --------
Operating income (loss)........................... (546) (475) (2,092) (1,741) 3,860
Interest expense.................................. (5,345) (5,787) (7,919) (3,681) (4,095)
Gain on sale of cable systems..................... 5,418 -- -- -- --
Other income (expense)............................ 344 859 (221) 73 (78)
-------- -------- -------- -------- --------
Loss before income taxes and cumulative effect of
change in accounting principle.................. (129) (5,403) (10,232) (5,349) (313)
Income tax benefit (expense)...................... (94) 315 226 (25) 210
Cumulative effect of change in accounting
principle, net of taxes......................... -- -- -- -- (207)
-------- -------- -------- -------- --------
Net loss.......................................... $ (223) $ (5,088) $(10,006) $ (5,374) $ (310)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets...................................... $117,676 $143,932 $175,953 -- $166,602
Total debt........................................ 60,053 85,000 118,000 -- 112,000
Total liabilities................................. 69,182 97,008 131,147 -- 122,881
Total stockholders' equity........................ 48,493 46,924 44,806 -- 43,721
OTHER FINANCIAL DATA:
Cash flows from operating activities.............. $ 13,628 $ 16,872 $ 20,334 $ 8,470 $ 8,527
Cash flows from investing activities.............. (20,289) (39,683) (53,151) (40,969) (7,540)
Cash flows from financing activities.............. (10,927) 24,947 32,830 30,000 (6,000)
Adjusted EBITDA(1)................................ 18,087 20,797 27,195 11,946 15,190
Adjusted EBITDA margin(2)......................... 36.5% 35.8% 38.6% 36.3% 39.6%
Capital expenditures.............................. $ 15,593 $ 22,042 $ 20,469 $ 10,980 $ 7,540
Deficiency of earnings to cover fixed
charges(3)...................................... (129) (5,403) (10,232) (5,349) (313)
OPERATING DATA (END OF PERIOD, EXCEPT AVERAGE):
Homes passed(4)................................... 234,994 270,430 315,629 307,974 315,629
Basic subscribers(5).............................. 131,148 143,829 172,557 172,923 173,799
Basic penetration(6).............................. 55.8% 53.2% 54.7% 56.2% 55.1%
Digital subscribers............................... -- 65 1,254 604 1,580
Premium subscribers(7)............................ 92,247 99,644 122,404 122,668 122,268
Premium penetration(8)............................ 70.3% 69.3% 70.9% 70.9% 70.4%
Average monthly basic revenue per basic
subscriber(9)................................... $ 24.80 $ 26.31 $ 28.17 $ 28.27 $ 30.94
Average monthly total revenue per basic
subscriber(10).................................. $ 32.05 $ 33.68 $ 35.64 $ 33.52 $ 37.84
</TABLE>
14
<PAGE> 16
- ---------------
(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 six month
periods ended June 30, 1998 and 1999 related to employee stock compensation
were $1,458,000, $3,519,000, $7,888,000, $3,550,000 and a credit of
($775,000), 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 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.
15
<PAGE> 17
RISK FACTORS
In addition to the other information set forth in this prospectus, you
should carefully review the following risk factors before deciding whether to
participate in the exchange offer.
WE HAVE SIGNIFICANT DEBT WHICH MAY LIMIT FUNDS AVAILABLE TO OPERATE AND COMPETE
EFFECTIVELY.
We have a significant amount of debt outstanding. As of June 30, 1999, pro
forma for the Buford acquisition, we would have owed approximately $450.0
million under our various debt agreements. The maximum amount of senior debt
that we would have been able to borrow on that date was $75.0 million, subject
to limitations contained in our new credit facility. Under our new credit
facility, we will be required to make minimum principal payments totaling
approximately $3.8 million beginning in 2001, increasing to $20.6 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 our cash flow from operations must be dedicated
to the repayment of indebtedness, which will reduce the amount of cash we
have available for other purposes;
- 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 $57.8 million for the year ended December 31, 1998 and by $23.7
million for the six months ended June 30, 1999. However, you should know that
these amounts reflect non-cash charges totaling approximately $75.3 million for
the year ended and $34.9 million for the six 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 and our existing
indenture do not fully prohibit us or our subsidiaries from doing so. Our new
credit facility permits additional borrowing of up to $75.0 million, and all of
those borrowings would be senior to the notes and the subsidiary guarantees. 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 and Guarantees."
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 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.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under our new credit facility 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
16
<PAGE> 18
cannot assure you that we will be able to refinance any of our indebtedness,
including our new credit facility and these notes, on commercially reasonable
terms or at all.
IF THE OPERATIONS OF THE COMPANIES WE ACQUIRE ARE NOT SUCCESSFULLY INTEGRATED
WITH OUR OPERATIONS, OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
The benefits we anticipate in the combination of Classic and Buford may not
be realized if combining Classic'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, our operations and financial results could be affected, both
materially and adversely.
IF WE CANNOT ADEQUATELY MANAGE OUR INCREASED SIZE RESULTING FROM OUR ACQUISITION
OF BUFORD, OUR FUTURE OPERATIONS MAY BE ADVERSELY AFFECTED.
Our operations approximately doubled with the purchase of Buford. Our
future operations depend largely upon our ability to manage this sizeable and
growing business successfully. In addition, our management team now manages a
larger number of cable operations than we have previously operated. If we fail
to manage the size and the growth of our business, a material adverse effect
could result.
WE MAY CONTINUE TO INCUR NET LOSSES.
We had a pro forma net loss of $55.3 million for the year ended December
31, 1998 and a pro forma net loss of $23.5 million for the six months ended June
30, 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 Cable."
OUR DEBT AGREEMENTS MAY SIGNIFICANTLY LIMIT OR PROHIBIT US FROM ENGAGING IN
CERTAIN TRANSACTIONS.
The indenture and our new credit facility impose significant operating and
financial restrictions on us and our subsidiaries.
The loan documents we signed to borrow money to acquire Buford impose
significant restrictive covenants on us and require us to maintain specified
financial ratios and satisfy certain financial tests. Our ability to meet these
financial ratios and tests may be affected by events beyond our control and, as
a result, we cannot assure you that we will be able to meet such tests. In
addition, the restrictions contained in our new credit facility could limit our
ability to obtain future financing, make needed capital expenditures, withstand
a future downturn in our business or in the economy or otherwise conduct
necessary corporate activities. Our failure to comply with the restrictions in
the indenture and our new credit facility could lead to a default under the
terms of those documents. In the event of such a default, our 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, our lenders could terminate their commitments to lend to
us in the future. If that occurs, we cannot assure you that we would be able to
make payments on the 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.
17
<PAGE> 19
You should also be aware that the existing indebtedness under the new
credit facility is secured by substantially all of our and our subsidiaries'
assets. Should a default or acceleration of such indebtedness occur, the holders
of such indebtedness could sell the assets to satisfy all or a part of what is
owed. Our new credit facility also contains provisions prohibiting the
modification of the notes and limiting our ability to refinance the notes. For
additional information, please refer to the sections in this prospectus entitled
"Description of the Notes and Guarantees -- Certain Covenants" and "Description
of Other Indebtedness -- New Credit Facility."
YOUR RIGHTS TO PAYMENT ON THE NOTES ARE SUBORDINATE TO OUR SENIOR DEBT.
The notes will be unsecured and subordinated in right of payment to all of
our existing and future senior indebtedness, including obligations under our new
credit facility. As a result, in the event of a default in payment of or
acceleration of our other indebtedness, or upon the liquidation, reorganization,
insolvency, bankruptcy, or dissolution of us, holders of senior indebtedness
will be entitled to receive payment in full prior to any payment being made on
the notes. As of June 30, 1999, on a pro forma basis, we had approximately
$294.3 million of senior indebtedness. In addition, if any default exists with
respect to certain senior indebtedness under our new credit facility and certain
other conditions are satisfied, we may not make any payments on the notes for a
designated period of time. As a result of the subordination provisions, upon the
occurrence of any such event, there may be insufficient assets remaining after
payment of senior indebtedness to pay amounts due on the notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Notes and
Guarantees -- Ranking."
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 we have or Classic Communications has a change of control in the future,
we will be required to make an offer to purchase all of the notes outstanding at
that time. We will be required to purchase the notes at 101% of their principal
amount, plus accrued and unpaid interest and additional interest, if any, 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 our new credit facility and may
lead to an acceleration of any other senior indebtedness we may have at that
time. In such event, the subordination provisions of the notes would require us
to pay our new credit facility and any other senior indebtedness in full before
repurchasing notes. In addition, a change of control could require us to
repurchase our existing notes. See "Description of the Notes and
Guarantees -- Repurchase at the Option of Holders -- Change of Control." The
inability to repay senior indebtedness, if accelerated, and to purchase all of
the tendered notes, would constitute an event of default under the indenture.
BRERA CLASSIC WILL INDIRECTLY BE OUR CONTROLLING STOCKHOLDER.
As a result of making the Brera Classic equity investment, Brera Classic
beneficially owns approximately 64% of the issued and outstanding shares of
common stock of Classic Communications, our parent. Brera Classic will therefor
indirectly control us and, through its control of Classic Communications, 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 stockholder, Classic Communications. 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 and Classic and
their respective affiliates may conflict with the interests of the holders of
the notes.
18
<PAGE> 20
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 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
19
<PAGE> 21
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 closed the Buford acquisition
and the Brera Classic equity investment using temporary licenses from the FCC in
certain limited instances. While we do not anticipate problems in obtaining
final approval, our ability to operate some of our systems could be
significantly impaired if we cannot obtain final approval. 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
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
20
<PAGE> 22
section in this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
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.
THE INCURRENCE OF THIS INDEBTEDNESS MAY BE VOIDED BY A COURT IF THE COURT
DETERMINES THAT THE INCURRENCE OF THIS INDEBTEDNESS RESULTED IN A FRAUDULENT
TRANSFER.
In the event of the bankruptcy or insolvency of any of the subsidiary
guarantors, the incurrence by each subsidiary guarantor of its guarantee of
these notes would be subject to review under relevant federal and state
fraudulent conveyance and similar statutes in a bankruptcy or reorganization
case or a lawsuit by or on behalf of creditors of such subsidiary guarantor.
Under those statutes, if a court were to find that the subsidiary guarantee was
incurred with the intent of hindering, delaying or defrauding creditors or that
such subsidiary guarantor received less than a reasonably equivalent value or
fair consideration therefor and, at the time of its incurrence, the subsidiary
guarantor either (A) was insolvent or rendered insolvent by reason thereof, (B)
was engaged in a business or transaction for which its remaining unencumbered
assets constituted unreasonably small capital, or (C) intended to or believed
that it would incur debts beyond its ability to pay as they matured or became
due, the court could void those obligations.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company is considered insolvent at a particular time if the sum of
its debts is greater than the then fair value of its assets, or if the fair
salable value of its assets is less than the amount that would be required to
pay its probable liability on its existing debts as they become absolute and
mature. As of June 30, 1999, pro forma for the Buford acquisition, we would have
had total indebtedness of approximately $450.0 million and we believe that the
total fair value of our assets is not less than that amount. We believe that
each of our subsidiary guarantors is (A) neither insolvent nor rendered
insolvent by the incurrence of its subsidiary guarantee, (B) in possession of
sufficient capital to run its business effectively, and (C) incurring debts
within its ability to pay as the same mature or become due. We cannot assure
you, however, that the assumptions and methodologies used by us in reaching our
conclusions about the solvency of the subsidiary guarantors would be adopted by
a court or that a court would concur with those conclusions.
In the event that the subsidiary guarantee of a subsidiary guarantor was
voided as a fraudulent conveyance, holders of the notes would effectively be
subordinated to all indebtedness and other liabilities and commitments of such
subsidiary guarantor.
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 purchasers have informed us that
they intend to make a market in the notes, they are not obligated to do so and
may discontinue any such market at any time without notice. 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.
21
<PAGE> 23
USE OF PROCEEDS OF THE EXCHANGE NOTES
This exchange offer is intended to satisfy our obligations under the
exchange and registration rights agreement dated as of July 28, 1999 by and
between Classic and Goldman, Sachs & Co., Merrill Lynch & Co., and Donaldson,
Lufkin & Jenrette, as initial purchasers. We will not receive any cash proceeds
from the issuance of the exchange notes. We will only receive old notes with a
total principal amount equal to the total principal amount of the exchange notes
issued in the exchange offer.
We financed the Buford acquisition through certain financing arrangements,
consisting of a $250.0 million new credit facility and the issuance of $150.0
million of senior subordinated notes due 2009. See "Description of Other
Indebtedness." In addition, approximately $95.7 million in cash was contributed
to us by Classic Communications pursuant to the Brera Classic equity investment.
See "Brera Classic Equity Investment." The sources and uses of funds for the
Buford acquisition were as follows:
<TABLE>
<S> <C>
SOURCES OF FUNDS:
The offering of new subordinated notes...................... $150,000
The Brera Classic equity investment (net of fees of and
expense reimbursements to Brera Classic).................. 95,748
New credit facility......................................... 175,000
--------
Total sources of funds............................ $420,748
========
USES OF FUNDS:
Retirement of existing credit facility...................... $ 97,050
Buford acquisition.......................................... 297,783
Fees and expenses:
Deferred financing costs.................................... 16,875
Other transaction costs..................................... 5,200
Working capital............................................. 3,840
--------
Total uses of funds............................... $420,748
========
</TABLE>
The amount set forth above under the caption "Other transaction costs"
represents compensation-related payments related to the Buford acquisition and
the Brera Classic equity investment.
22
<PAGE> 24
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 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 entered into in connection with the Buford
acquisition as if it had occurred on June 30, 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 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> 25
CLASSIC CABLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CLASSIC CABLE BUFORD ADJUSTMENTS PRO FORMA
------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..................... $ 638 $ 2,890 3,840(w) $ 7,368
Accounts receivable, net...................... 5,136 2,846 -- 7,982
Prepaid expenses.............................. 1,341 484 -- 1,825
Property, plant and equipment................. 135,177 208,268 $(85,059)(d)(l) 258,386
Accumulated depreciation...................... (47,486) (96,913) 96,913(e) (47,486)
-------- -------- -------- --------
87,691 111,355 11,854 210,900
Advances to parent............................ 519 -- -- 519
Deferred financing costs, net................. 6,429 142 14,370(f)(u)(x) 20,941
Other assets.................................. -- 2,444 -- 2,444
Intangible assets:
Subscriber relationships.................... 95,367 -- 82,042(m) 177,409
Franchise rights............................ 71,500 54,417 31,877(g)(n) 157,794
Noncompete agreements....................... 8,425 7,434 (441)(h)(o) 15,418
Goodwill.................................... 40,865 3,203 (1,741)(i)(p) 42,327
-------- -------- -------- --------
216,157 65,054 111,737 392,948
Less accumulated amortization................. (76,415) (18,613) 18,613(j) (76,415)
-------- -------- -------- --------
139,742 46,441 130,350 316,533
-------- -------- -------- --------
Total assets......................... $241,496 $166,602 $160,414 $568,512
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable............................ $ 489 $ 491 -- $ 980
Subscriber deposits and unearned income..... 5,203 2,341 -- 7,544
Accrued expenses............................ 5,465 7,073 -- 12,538
Accrued interest............................ 5,731 -- -- 5,731
Long-term debt.............................. 222,016 112,000 $115,950(k)(q)(s)(t) 449,966
Deferred taxes, net......................... 1,017 976 -- 1,993
-------- -------- -------- --------
Total liabilities.................... 239,921 122,881 115,950 478,752
Stockholders' equity:
Common stock................................ -- 1 (1)(a) --
Additional paid-in capital.................. 86,805 14,058 81,690(b)(r)() 182,553
Accumulated deficit......................... (85,230) 29,662 (37,225)(c)(v)(x) (92,793)
-------- -------- -------- --------
Total stockholders' equity........... 1,575 43,721 44,464 89,760
-------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $241,496 $166,602 $160,414 $568,512
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
24
<PAGE> 26
CLASSIC CABLE, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 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 June 30, 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, based upon valuations that are not yet complete. Accordingly, the
allocations of the purchase price may change upon completion of the acquisition.
The estimated purchase price of Buford and the preliminary allocations are
as follows:
<TABLE>
<S> <C> <C>
Purchase price of Buford.................................... $ 297,783
=========
Eliminate Buford equity:
(a) Common stock................................................ $ 1
(b) Additional paid-in capital.................................. 14,058
(c) Accumulated deficit......................................... 29,662
---------
Total Buford equity......................................... 43,721
Eliminate historical property, plant and equipment:
(d) Costs....................................................... (208,268)
(e) Accumulated deprecation..................................... 96,913
Eliminate historical intangible assets:
(f) Deferred financing costs.................................... (142)
(g) Franchise rights............................................ (54,417)
(h) Noncompete agreements....................................... (7,434)
(i) Goodwill and other intangible assets........................ (3,203)
(j) Accumulated amortization.................................... 18,613
(k) Eliminate long-term debt not assumed........................ 112,000
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....................................................... $ 297,783
=========
</TABLE>
25
<PAGE> 27
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...................... $150,000
(r) The Brera Classic equity investment (net of fees of and
expense reimbursements to Brera Classic).................... 95,748
(s) New credit facility......................................... 175,000
--------
Total sources of funds...................................... $420,748
========
USES OF FUNDS:
(t) Retirement of existing credit facility...................... $ 97,050
Buford acquisition.......................................... 297,783
Fees and expenses:
(u) Deferred financing costs.................................... 16,875
(v) Other transaction costs..................................... 5,200
(w) Working capital............................................. 3,840
--------
Total uses of funds......................................... $420,748
========
</TABLE>
(x) Concurrent with the Buford acquisition, we will write off unamortized
deferred financing costs of $2,363 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> 28
CLASSIC CABLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BUFORD
CLASSIC CABLE 1998 TOTAL PRO
CABLE 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..................... (20,688) -- (7,919) (34) (14,651)(c) (43,292)
Other income (expense)............... (28) (648) (221) 1 -- (896)
-------- ------ -------- ------ -------- --------
Income (loss) before income taxes.... (23,515) 1,607 (10,232) 512 (26,209) (57,837)
Income tax benefit................... 2,339 -- 226 -- --(d) 2,565
-------- ------ -------- ------ -------- --------
Net Income (loss).................... $(21,176) $1,607 $(10,006) $ 512 $(26,209) $(55,272)
======== ====== ======== ====== ======== ========
</TABLE>
See the Notes to the Unaudited Pro Forma Consolidated Statement of
Operations.
27
<PAGE> 29
CLASSIC CABLE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASSIC TOTAL PRO FORMA
CABLE BUFORD ADJUSTMENTS AS ADJUSTED
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $ 39,286 $38,398 $ -- $ 77,684
Operating expenses:
Programming................................. 10,427 10,430 -- 20,857
Plant and operating......................... 4,401 3,377 -- 7,778
General and administrative.................. 5,755 8,461 -- 14,216
Marketing and advertising................... 452 237 -- 689
Corporate overhead.......................... 1,725 (72) (507)(a) 1,146
Depreciation and amortization............... 18,096 12,105 4,788(b) 34,989
-------- ------- -------- --------
Total operating expenses............... 40,856 34,538 4,281 79,675
-------- ------- -------- --------
Income (loss) from operations.................... (1,570) 3,860 (4,281) (1,991)
Interest expense................................. (10,675) (4,095) (6,860)(c) (21,630)
Other income (expense)........................... 15 (78) -- (63)
-------- ------- -------- --------
Loss before income taxes......................... (12,230) (313) (11,141) (23,684)
Income tax benefit............................... -- 210 --(d) 210
-------- ------- -------- --------
Net loss......................................... $(12,230) $ (103) $(11,141) $(23,474)
======== ======= ======== ========
</TABLE>
See the Notes to Unaudited Pro Forma Consolidated Statements of Operations.
28
<PAGE> 30
CLASSIC CABLE, 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 six months ended June 30, 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
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 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 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 $507 for the year ended December 31,
1998 and the six months ended June 30, 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 SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
------------ -------------
<S> <C> <C>
Depreciation and amortization expense on the purchased basis
of property, plant and equipment and intangible assets
acquired.................................................. $ 35,726 $ 16,893
Elimination of historical depreciation and amortization
expense................................................... (22,678) (12,105)
-------- --------
Total adjustment to depreciation and
amortization.................................... $ 13,048 $ 4,788
======== ========
</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> 31
<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 7.75% and 8.00% for 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 SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Interest expense on the new credit facility................. $ 13,813* $ 6,907*
Interest expense on the new subordinated notes.............. 14,063 7,032
Full year interest expense on the exchange notes............ 7,612 --
Amortization expense of deferred financing fees related to
the financing............................................. 1,869 934
Elimination of historical interest expense on the current
credit facility and subordinated debt and related
amortization of deferred financing costs.................. (22,706) (8,013)
-------- -------
Total increase to interest expense................ $ 14,651 $ 6,860
======== =======
</TABLE>
- ---------------
* The total effect of a 1/8% variance in the interest rate would be $219 and
$109, 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> 32
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 SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
------------ -------------
<S> <C> <C>
Total pro forma adjustments................................. (26,209) (11,141)
Tax rate.................................................... 34% 34%
------- --------
8,911 3,788
Total Cable One and the Buford 1998 acquisition pre tax
income.................................................... 2,119 --
Tax rate.................................................... 34% 34%
------- --------
(720) --
Effect of valuation allowance............................... (8,191) (3,788)
------- --------
Total adjustment to income tax benefit...................... -- --
======= ========
</TABLE>
31
<PAGE> 33
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA -- CLASSIC CABLE, 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 Cable, 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 six months ended June 30, 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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- -------------------
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 $ 32,214 $ 39,286
Costs and expenses............................... 8,372 18,911 33,553 36,555 42,070 19,038 22,760
Depreciation and amortization.................... 6,383 16,427 27,510 27,832 30,531 14,169 18,096
------- -------- -------- -------- -------- -------- --------
Operating income (loss).......................... 1,264 1,339 (1,242) (3,392) (2,799) (993) (1,570)
Interest expense................................. (4,975) (14,132) (20,164) (20,759) (20,688) (10,223) (10,675)
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 64 15
------- -------- -------- -------- -------- -------- --------
Loss before income tax benefit, minority interest
and extraordinary loss......................... (3,596) (12,793) (19,499) (20,936) (23,515) (11,152) (12,230)
Income tax benefit............................... 1,121 4,510 6,633 7,149 2,339 1,371 --
Extraordinary loss............................... -- (4,054) -- -- (5,524) -- --
Minority interest in net loss of subsidiary...... 46 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net loss......................................... $(2,429) $(12,337) $(12,866) $(13,787) $(26,700) $ (9,781) $(12,230)
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Total assets..................................... $96,136 $271,496 $245,987 $220,218 $252,445 -- $241,496
Total debt....................................... 58,161 204,646 193,998 187,967 220,804 -- 222,016
Total liabilities................................ 78,251 229,426 215,826 202,887 239,303 -- 239,921
Total redeemable preferred stock................. 12,332 1,292 1,292 1,293 -- -- --
Total stockholders' equity....................... 5,553 40,777 28,868 16,038 13,142 -- 1,575
</TABLE>
32
<PAGE> 34
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
six months ended June 30, 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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- ------------------
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 $32,943 $ 38,398
Costs and expenses............................... 26,755 32,965 32,932 40,858 51,168 24,547 22,433
Depreciation and amortization.................... 13,670 17,379 17,175 17,753 21,399 10,137 12,105
-------- -------- -------- -------- -------- ------- --------
Operating income (loss).......................... (3,393) (786) (546) (475) (2,092) (1,741) 3,860
Interest expense................................. (2,823) (6,332) (5,345) (5,787) (7,919) (3,681) (4,095)
Gain on sale of cable systems.................... -- 8,506 5,418 -- -- -- --
Other income (expense)........................... 191 1,443 344 859 (221) 73 (78)
-------- -------- -------- -------- -------- ------- --------
Loss before income tax benefit (expense) and
cumulative effect of change in accounting
principle...................................... (6,025) 2,831 (129) (5,403) (10,232) (5,349) (313)
Income tax benefit (expense)..................... 3,027 7,235 (94) 315 226 (25) 210
Cumulative effect of change in accounting
principle...................................... -- -- -- -- -- -- (207)
-------- -------- -------- -------- -------- ------- --------
Net income (loss)................................ $ (2,998) $ 10,066 $ (223) $ (5,088) $(10,006) $(5,374) $ (310)
======== ======== ======== ======== ======== ======= ========
BALANCE SHEET DATA (END OF PERIOD):
Total assets..................................... $127,702 $127,379 $117,676 $143,932 $175,953 -- $166,602
Total debt....................................... 72,110 70,643 60,053 85,000 118,000 -- 112,000
Total liabilities................................ 91,773 80,122 69,182 97,008 131,147 -- 122,881
Total stockholders' equity....................... 35,969 47,257 48,493 46,924 44,806 -- 43,721
</TABLE>
33
<PAGE> 35
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 and the six months ended June 30, 1998 and
1999. This discussion should be read in conjunction with "Selected Historical
Consolidated Financial Data -- Classic Cable, 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 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 assuming completion of other
recently publicly announced transactions by other companies in the cable
television industry, we believe 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 June 30, 1999, our collective systems
passed approximately 609,000 homes and served approximately 359,000 basic
subscribers.
We have developed a plan to integrate the operation of Buford's cable
systems with Classic'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 June 30, 1999, our collective systems served approximately 359,000 basic
subscribers and approximately 192,000 premium units, representing a basic
penetration rate of approximately 59% and a premium penetration rate of
approximately 53%. The table below sets forth for the periods indicated the
percentage of our total revenues attributable to the various sources:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------------
<S> <C> <C>
Basic............................................ 84.0% 84.7%
Premium.......................................... 11.2 11.0
Other............................................ 4.8 4.3
----- -----
Total revenues......................... 100.0% 100.0%
===== =====
</TABLE>
34
<PAGE> 36
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 CABLE
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1999
----------------------- -----------------------
AMOUNT % OF REVENUES AMOUNT % OF REVENUES
------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $32,214 100.0% $39,286 100.0%
Operating expenses:
Programming................................... 8,218 25.5 10,427 26.5
Plant and operating........................... 3,865 12.0 4,401 11.2
General and administrative.................... 5,357 16.6 5,755 14.6
Marketing and advertising..................... 339 1.1 452 1.2
Corporate overhead................................. 1,259 3.9 1,725 4.4
Depreciation and amortization...................... 14,169 44.0 18,096 46.1
------- ----- ------- -----
Loss from operations..................... $ (993) (3.1)% $(1,570) (4.0)%
======= ===== ======= =====
</TABLE>
Revenues. Revenues increased $7.1 million, or 22%, for the six months ended
June 30, 1999, as compared to the corresponding prior year period. Basic
revenues increased by $6.0 million due to increased subscribers of approximately
23,000 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 7% from $27.42 to $29.35 period to period. Classic 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 $8.1 million, or 24%, for
the six months ended June 30, 1999, as compared to the corresponding prior year
period. Programming expense increased $2.2 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 six months ended June 30, 1999 was $18.1 million, an increase of
$3.9 million over the same period in 1998. The increase represents the effect of
acquisitions and capital expenditures.
35
<PAGE> 37
Other Income and Expenses. Interest expense increased $0.4 million, or 4%,
for the six months ended June 30, 1999, as compared to the corresponding prior
year period. This increase is primarily the result of the debt issued in
conjunction with the July 1998 financing.
Income Tax Benefit. The income tax benefit decreased $1.4 million for the
six months ended June 30, 1999, as compared to the corresponding prior year
period. No tax benefit was recognized in 1999. The effective tax rates for the
six months ended June 30, 1999 and June 30, 1998 differ from the statutory rates
primarily due to an increase in the valuation allowance on deferred tax assets.
Net Loss. As a result of the above described fluctuations in Classic's
results of operations, the net loss of $12.2 million for the six months ended
June 30, 1999 increased by $2.4 million, as compared to the net loss of $9.8
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> 38
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 $7.1 million for
year ended December 31, 1997 to $2.3 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 34.1% for the year ended
December 31, 1997 to 9.9% 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 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> 39
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 Communications
agreed to repurchase certain stock of Classic Communications 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 $6.6
million in 1996 to $7.1 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 34.0% to 34.1% in 1996 and 1997, respectively.
Total deferred tax liabilities and total deferred tax assets decreased by
$12.9 million and $6.5 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 $5.0 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> 40
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 $7.4
million for the reduction in net deferred tax liabilities.
RESULTS OF OPERATIONS -- BUFORD
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues for the six months ended June 30, 1999 were $38.4
million, an improvement of $5.5 million, or 17%, over revenues of $32.9 million
for the corresponding prior year period. Revenues for the six months ended June
30, 1999 included the revenues for the systems acquired in late April 1998.
Average monthly basic revenue per basic subscriber increased 7% from $28.27 in
the first six months of 1998 to $30.94 in the first six months of 1999.
Operating Expenses. Operating expenses increased $2.3 million from $20.2
million for the six months ended June 30, 1998 to $22.5 million for the six
months ended June 30, 1999. Programming costs for the six months ended June 30,
1999 increased $1.7 million, or 19%, over the corresponding prior year period to
$10.4 million. 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 $3.4 million
for the six months ended June 30, 1999 and June 30, 1998. Plant and operating
expenses as a percent of revenues decreased from 10% for the six months ended
June 30, 1998 to 9% for the six months ended June 30, 1999 reflecting the
continued benefits derived from Buford's cluster strategy. General and
administrative expenses for the six months ended June 30, 1999 were $8.5
million, up $0.6 million, or 7%, 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%
for the six months ended June 30, 1998 to 22% for the six months ended June 30,
1999. Marketing and advertising expenses for the six months ended June 30, 1999
and 1998 were relatively flat at $0.2 million.
Corporate Overhead. Corporate overhead for the six months ended June 30,
1999 was a credit of $0.1 million, a decrease over the six months ended June 30,
1998 of approximately $4.4 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. Buford recorded a credit of approximately $0.7 million during the
six months ended June 30, 1999 to corporate overhead based on the actual
payments made upon consummation of the sale. Buford recorded compensation
expense of $3.6 million in the six months ended June 30, 1998 related to these
appreciation rights. Excluding the compensation expense relating to these
appreciation rights, corporate overhead decreased by approximately $0.2 million
for the six months ended June 30, 1999 as compared to the six months ended June
30, 1998.
Depreciation and Amortization. Depreciation and amortization expense for
the six months ended June 30, 1999 was $12.1 million, an increase of $2 million
or 19% 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.
39
<PAGE> 41
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
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
40
<PAGE> 42
the year ended December 31, 1996. The increase is due primarily to the inclusion
of fixed assets placed into service during the year.
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 contributed by its parent Classic Communications raised
through sales of equity to institutional equity investors. Capital stock of
Classic Communications 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 Communications.
At June 30, 1999, Classic Communications had aggregate consolidated indebtedness
of approximately $288.3 million. This debt and equity financing was utilized
primarily in the acquisition of cable television systems.
Our net cash provided by operations was $14.0 million in 1998 compared to
$7.9 million in 1997 and $7.8 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 $45.4 million, $(6.6) million and $(12.1) 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 June 30, 1999, Buford had
aggregate consolidated indebtedness of $112.0 million, all of which was repaid
on the date of acquisition. Borrowings bore 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 June 30, 1999 was 6.2%.
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.
41
<PAGE> 43
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 financed the Buford acquisition through certain financing arrangements,
consisting of a $250.0 million new credit facility and the issuance of $150.0
million of senior subordinated notes due 2009. See "Description of Other
Indebtedness." In addition, approximately $95.7 million in cash was contributed
to us by Classic Communications pursuant to the Brera Classic equity investment.
See "Brera Classic Equity Investment." The sources and uses of funds for the
Buford acquisition were as follows:
<TABLE>
<S> <C>
SOURCES OF FUNDS:
The offering of new subordinated notes...................... $150,000
The Brera Classic equity investment (net of fees of and
expense reimbursements to Brera Classic).................. 95,748
New credit facility......................................... 175,000
--------
Total sources of funds............................ $420,748
========
USES OF FUNDS:
Retirement of existing credit facility...................... $ 97,050
Buford acquisition.......................................... 297,783
Fees and expenses:
Deferred financing costs.................................... 16,875
Other transaction costs..................................... 5,200
Working capital............................................. 3,840
--------
Total uses of funds............................... $420,748
========
</TABLE>
The amount set forth above under the caption "Other transaction costs"
represents compensation-related payments related to the Buford acquisition and
the Brera Classic equity investment.
Following the Buford acquisition, we have debt service requirements
increasing from approximately $41 million a year to $55 million over the next
eight years. During this time, we anticipate capital expenditures averaging
approximately $40 million a year. Debt covenants dictate that we 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
our operations and pay the anticipated debt service and capital expenditure
requirements are anticipated to be primarily generated from our operating
activities and from additional financing activities. On June 30, 1999, we had
$75.0 million available under our line of credit subject to some limitations.
Although we have not generated earnings sufficient to cover our fixed charges,
we have generated cash and obtained financing sufficient to meet our debt
service, working capital and capital expenditure requirements.
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."
42
<PAGE> 44
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 our current level of operations and anticipated cost savings and
operative improvements, we believe our cash flow from operations, available cash
and available borrowings under our credit facility, will be adequate to meet our
future liquidity needs for at least the next few years.
We cannot assure you, however, that our 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 our new 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 our new credit facility
and these notes, on commercially reasonable terms or at all. See "Risk Factors."
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 shutdown 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.
43
<PAGE> 45
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 acquisition of Buford Group, Inc. and
assuming completion of other recently publicly announced transactions by other
companies in the cable television industry, we believe we are the 14th largest
cable operator in the United States, with systems that pass approximately
609,000 homes and serve approximately 359,000 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
44
<PAGE> 46
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 has been further
enhanced by the addition of several key members of Buford's management team,
including Ron Martin, who became our Executive Vice President of Operations, and
Kay Monigold, who became 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 Communications, Inc.,
our parent, and up to an additional 10% of Classic Communications' common stock
will be set aside for issuance to management pursuant to options granted to
them.
Since Classic's inception, Classic has been supported through debt
financings and equity contributed by its parent, Classic Communications, that
was raised through sales to institutional equity investors. Capital stock of
Classic Communications is owned by institutional investors, including Austin
Ventures, L.P., Brera Classic, NationsBanc Capital Corp., The Texas Growth Fund,
BT Capital Partners, Inc., and certain members of its existing bank group led by
The Chase Manhattan Bank and Union Bank Ventures. These institutional investors
have contributed approximately $134.1 million of total equity financing to
Classic Communications. At June 30, 1999, on a pro forma basis, we had long term
debt of approximately $450.0 million and Classic Communications had additional
long-term debt of approximately $66.3 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.
45
<PAGE> 47
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.
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.
46
<PAGE> 48
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.
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.
47
<PAGE> 49
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
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 June 30, 1999, we had approximately 3,100 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.
48
<PAGE> 50
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......................................... 274,325 141,310 52% 5
Arkansas...................................... 96,728 61,907 64 4
Oklahoma...................................... 81,270 49,880 61 6
Missouri...................................... 67,288 38,841 58 6
Kansas........................................ 50,965 34,977 69 3
Louisiana..................................... 27,381 18,586 68 8
Colorado...................................... 5,157 5,312 103 7
Nebraska...................................... 3,389 2,166 64 12
New Mexico.................................... 2,604 1,655 64 11
------- ------- ---
Subtotals................................ 609,107 354,634 58%
===
CCT...................................... 4,335
------- -------
Totals.............................. 609,107 358,969
======= =======
</TABLE>
As part of the Buford acquisition, we acquired 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.
49
<PAGE> 51
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 six months ended June 30, 1999, programming costs as a
percentage of revenues were 26% and 27%, 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 June
30, 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 June 30, 1999,
the weighted average price for our monthly full basic service was approximately
$30.28.
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
50
<PAGE> 52
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.
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 June 30, 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.............. 3,383 79,694 95,221 54,802 121,534 354,634(1)
% of total basic subscribers... 1.0% 22.5% 26.9% 15.5% 34.3% 100.0%
Basic subscribers per plant
mile......................... 20.0 17.4 20.7 17.7 29.3 21.4
Premium subscribers............ 1,000 35,331 42,514 38,480 72,444 189,769
Premium penetration............ 29.6% 44.3% 44.6% 70.2% 59.6% 53.5%
</TABLE>
-------------------------
(1) Does not include approximately 4,300 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)........... -- 206 113 38 182 539
Miles of plant................. -- 3,013 1,873 1,043 10,655 16,584
Homes passed................... 90,458 65,225 31,764 421,660 609,107
Basic subscribers.............. -- 45,438 29,892 12,226 267,038 354,634(2)
% of total basic subscribers... -- 12.9% 8.4% 3.4% 75.3% 100.0%
Basic subscribers per plant
mile......................... -- 15.1 16.0 11.8 25.1 21.4
Premium subscribers............ -- 20,265 14,144 11,270 144,090 189,769
Premium penetration............ -- 44.6% 47.3% 91.9% 54.0% 53.5%
</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 4,300 equivalent basic units
related to CCT.
51
<PAGE> 53
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 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 June 30, 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.
52
<PAGE> 54
The following table sets forth the number of franchises by year of
franchise expiration and the approximate number and percentage of basic
subscribers at June 30, 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 7.4%
2000 to 2003................................ 177 25.5 84,695 23.9
After 2003.................................. 489 70.3 243,544 68.7
--- ----- ------- -----
Total............................. 695 100.0% 354,634 100.0%
=== ===== ======= =====
</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 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
53
<PAGE> 55
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.
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
54
<PAGE> 56
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.
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.
55
<PAGE> 57
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.
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 June 30, 1999, Classic and Buford employed approximately 670 full-time
employees and 51 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
56
<PAGE> 58
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
Communications is a party or to which any of our or their respective properties
are subject.
57
<PAGE> 59
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
58
<PAGE> 60
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
59
<PAGE> 61
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.
60
<PAGE> 62
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
61
<PAGE> 63
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
62
<PAGE> 64
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 satellite
distributed video programmers affiliated with cable companies from favoring
cable operators over
63
<PAGE> 65
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;
64
<PAGE> 66
- 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
65
<PAGE> 67
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.
In July 1999 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.
66
<PAGE> 68
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 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.
67
<PAGE> 69
MANAGEMENT
All of our outstanding capital stock is owned by our parent, Classic
Communications. The executive officers of Classic Communications are also our
executive officers and hold the same positions. Our directors and the directors
for all of our subsidiaries are J. Merritt Belisle and Steven E. Seach.
Executive officers, key operations managers and outside directors of Classic
Communications are listed 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.............................. 42 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
was 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. Mr. Cribiore serves as one of Brera Classic's
designees to our Board. See "Certain Relationships and Related Transactions --
1999 Stockholders' Agreement."
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. Mr. Belisle serves as one
of our directors pursuant to his position as Chief Executive Officer of Classic
Communications. See "Certain Relationships and Related Transactions -- 1999
Stockholders' Agreement."
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 Communications 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. Mr. Seach serves as one of our directors
pursuant to the 1999 Stockholders' Agreement. See "Certain Relationships and
Related Transactions -- 1999 Stockholders' Agreement."
68
<PAGE> 70
Ronald W. Martin, who became our Executive Vice President of Operations
upon the closing of the Buford acquisition, is 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
Wesleyan, 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 for Buford. 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. Since October 1995, Mr. McCabe has been 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 became our Executive Vice President of
Administration upon the closing of the Buford acquisition, is responsible for
all of our human resources, legal, information systems and risk management
functions, as well as operating responsibility for CCT. Since 1993, she 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, was 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. Ms. Hook
serves as one of Brera Classic's designees to our Board. See "Certain
Relationships and Related Transactions -- 1999 Stockholders' Agreement."
David Webb, a Principal of Brera Capital Partners, was 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. Mr. Webb serves as one of Brera Classic's designees to our
Board. See "Certain Relationships and Related Transactions -- 1999 Stockholders'
Agreement."
Martin D. Payson, the Chairman of Latin Communications Group, Inc., a
privately-held Spanish language media company, was 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
69
<PAGE> 71
York University School of Law. Mr. Payson serves as one of Brera Classic's
designees to our Board. See "Certain Relationships and Related
Transactions -- 1999 Stockholders' Agreement."
1999 STOCKHOLDERS' AGREEMENT
Effective July 28, 1999, Classic Communications, 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 Communications entered into a
stockholders' agreement. This agreement provides, among other things, that,
until such time as the parties to the stockholders' agreement together own less
than 30% of the outstanding common stock of Classic Communications, 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 Communications, 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. Such stockholders have not yet designated an individual to serve
as the seventh member of the board of directors.
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.
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 LLP, 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.
70
<PAGE> 72
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.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers are the executive officers of Classic Communications
and hold the same offices. Other than the executive officers of Classic and
Classic Communications who are also directors, no other directors of Classic or
Classic Communications receive any compensation for serving as a director. The
following table summarizes the compensation for services rendered which Classic
Communications 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 Communications 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
71
<PAGE> 73
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 Communications' 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
Communications' 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 Communications' common stock. These shares
vested upon the consummation of the Brera Classic equity investment. 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.
1996 RESTRICTED STOCK PLAN
Certain members of management own restricted stock subject to the terms of
Classic Communications' 1996 Restricted Stock Plan. Pursuant to the 1996 Plan,
Classic Communications may, from time to time, grant restricted stock to
officers and other key employees of Classic Communications or its subsidiaries
upon the terms, conditions and provisions of the 1996 Plan. Concurrently with
the adoption of the 1996 Plan, Classic Communications granted a total of 517,626
shares of Classic Communications common stock as of such date, of which only
144,940 shares are currently outstanding. These shares vested upon the
consummation of the Brera Classic equity investment. One-half of such shares of
restricted stock is subject to a distribution threshold equal to $9.93 per
share, i.e., the first $9.93 of distributions with respect to such shares is to
be withheld and distributed instead to the other holders of Classic
Communications common stock, and one-fourth of the shares is 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
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 Classic
Communications common stock pursuant to the 1998 Plan, each representing
approximately 6.8% of Classic Communications common stock on a fully diluted
basis. These shares vested upon the consummation of the Brera Classic equity
investment. All of such shares of restricted Classic Communications common stock
are subject to a distribution threshold equal to $3.77 per share.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
At the closing of the Brera Classic equity investment, J. Merritt Belisle
and Steven E. Seach each entered into an employment agreement with Classic
Communications, on substantially similar terms with their former employment
agreements. In connection with the consummation of the Brera Classic equity
investment, Mr. Belisle was paid $780,000 and Mr. Seach was paid $700,000 under
their former employment agreements. Each of the new employment agreements
provides for their continued employment with Classic Communications 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 new employment agreement
72
<PAGE> 74
provides that upon termination by Classic Communications 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 Classic Communications during his term of employment and for a period of
two years thereafter.
Under their new employment agreements, Messrs. Belisle and Seach were each
granted a stock option to purchase 279,874 shares of common stock in Classic
Communications 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 of Classic Communications for cash or securities by merger, tender
offer, stock purchase or an initial public offering of Classic Communications'
common stock.
In addition, Messrs. Belisle and Seach will each also receive a second
stock option to purchase 279,874 shares of common stock in Classic
Communications, to vest over a three-year period commencing on the date of a
sale of all of the stock of Classic Communications 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 of Classic Communications for cash or a sale of
substantially all the assets of Classic Communications. The price of the second
option is gross sale price per share of common stock of Classic Communications
in its 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 provided for a
transaction fee of 1% to be paid on the value of all mergers, acquisitions, or
dispositions of assets or subsidiaries by Classic Communications that were
consummated during their term of employment. Messrs. Belisle and Seach each
received a transaction fee of $1.5 million related to the consummation of the
Buford acquisition. The new employment agreements do not contain a provision for
transaction fees to be paid to Messrs. Belisle and Seach.
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 continuing one
year period at all times.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of Classic Communications as a whole determines the
compensation of Classic Communications' executive officers. J. Merritt Belisle,
Classic Communications' Chief Executive Officer, and Steven E. Seach, Classic
Communications' 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 Communications and 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 of Classic
Communications. 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. Classic Communications 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, Classic advanced approximately $200,000 to Mr. Belisle, which has
been forgiven.
73
<PAGE> 75
STOCKHOLDER VOTING AGREEMENTS
Brera Classic 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 held
approximately 80.4% of the fully diluted common stock of Classic Communications,
before giving effect to the Brera Classic equity investment. The stockholder
voting agreements required the stockholders to vote in favor of the Brera
Classic equity investment, which was consummated on July 28, 1999.
1995 STOCKHOLDERS AGREEMENT
Each member of management of Classic Communications holding shares of
Classic Communications common stock in October 1995 executed a stockholders
agreement with Classic Communications and its other shareholders dated as of
October 15, 1995. The stockholders agreement generally provides Classic
Communications with a right of first refusal in the event of proposed sales of
Classic Communications common stock owned by the members of management, and upon
any termination of a management stockholder's employment, to repurchase any
Classic Communications common stock owned by such management stockholder. The
stockholders agreement contains certain rights of the management stockholders to
participate in sales of Classic Communications common stock and certain
obligations of the management stockholders to sell their Classic Communications
common stock in the case of a sale for cash of all outstanding Classic
Communications common stock. Finally, the management stockholders are required
to vote their Classic Communications common stock to elect to the Classic
Communications Board of Directors the directors nominated by the other Classic
Communications stockholders under the stockholders agreement. This stockholders
agreement terminated for the existing stockholders of Classic Communications
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
Classic Communications common stock meeting certain criteria.
1999 STOCKHOLDERS' AGREEMENT
Effective July 28, 1999, Classic Communications, 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 Communications entered into
the 1999 stockholders' agreement which subjects the equity securities these
stockholders hold in Classic Communications to a right of first offer to Classic
Communications 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 Classic
Communications issues or sells additional equity securities in Classic
Communications, 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 Communications, 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 Communications, 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 Classic Communications.
MANAGEMENT AND ADVISORY FEE AGREEMENT
As part of the Brera Classic equity investment, Classic Communications and
Brera Classic entered into an agreement pursuant to which Brera Classic was 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 Classic Communications will pay Brera Classic an annual
fee of $250,000 in consideration for transactional assistance and advice
provided to Classic Communications until Classic
74
<PAGE> 76
Communications is sold or completes an initial public offering, the first
payment of which was made at the closing of the Buford acquisition.
BRERA CLASSIC INVESTMENT AGREEMENT
Classic Communications and Brera Classic entered into an Investment
Agreement whereby Classic Communications agreed to issue and sell 6,490,734
shares of Classic Communications voting common stock for an aggregate purchase
price of $100 million. Pursuant to the Investment Agreement, Classic
Communications agreed to pay all fees and expenses of Brera Classic's legal
counsel, financial advisors, accountants and third party consultants in an
amount up to $750,000. In addition to the $750,000 paid to Brera Classic at the
closing of the Buford acquisition for its fees and expenses of counsel,
accountants, advisors and consultants, Classic Communications approved and paid
an additional $252,000 of Brera Classic's closing costs.
TRANSACTION FEE
In connection with the Buford acquisition, Classic Communications paid a
transaction fee of $300,000 to The Austin Advisory, a financial consulting firm
in which Kevin P. McCabe, our Executive Vice President and Chief Accounting
Officer, is a principal.
75
<PAGE> 77
PRINCIPAL STOCKHOLDERS
All of our outstanding capital stock is owned by Classic Communications.
The following table sets forth certain information regarding the beneficial
ownership of Classic Communications' common stock by (A) each executive officer
and director of Classic Communications, (B) each stockholder known by Classic
Communications to beneficially own 5.0% or more of such Classic Communications
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 has sold non-voting equity interests in Brera Classic equal
to 19.85% of its investment in Classic Communications to certain
institutions and individuals including affiliates of Goldman, Sachs & Co.
(an initial purchaser) and The Chase Manhattan Bank.
(3) All shares of Classic Communications 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, Classic Communications
believes that such shares should be taken into account in considering
voting interests in Classic Communications.
(4) Warrants are for shares of Classic Communications 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 Communications 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 Communications 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 Communications 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.
76
<PAGE> 78
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
To finance a portion of the Buford acquisition purchase price, we entered
into a new credit facility, agented by Goldman Sachs Credit Partners L.P., Union
Bank of California, N.A. and The Chase Manhattan Bank, pursuant to which we may
borrow up to $250.0 million. 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 eight year revolving credit facility will be made
available to us for working capital, capital expenditures, refinancing debt and
general corporate purposes, including acquisitions. Up to $25.0 million was made
available to redeem the 2008 subordinated notes put by the noteholders as a
result of the change of control. The $175.0 million in term loan facilities,
comprised of the $75.0 million eight year term loan A facility and the $100.0
million eight and one-half year term loan B facility, were drawn at the closing
of the Buford acquisition to fund our purchase of Buford and to refinance debt
and pay certain other costs associated with the Buford acquisition.
On each date set forth below, our ability to borrow under our revolving
credit facility will automatically be reduced to the corresponding amount set
forth below:
<TABLE>
<CAPTION>
REDUCED REVOLVING CREDIT
DATE OF REDUCTION FACILITY AMOUNT
- ----------------- ------------------------
<S> <C>
December 31, 2001 $73,125,000
March 31, 2002 71,718,750
June 30, 2002 70,312,500
September 30, 2002 69,906,250
December 31, 2002 67,500,000
March 31, 2003 65,625,000
June 30, 2003 63,750,000
September 30, 2003 61,875,000
December 31, 2003 60,000,000
March 31, 2004 57,187,500
June 30, 2004 54,375,000
September 30, 2004 51,562,500
December 31, 2004 48,750,000
March 31, 2005 45,000,000
June 30, 2005 41,250,000
September 30, 2005 37,500,000
December 31, 2005 33,750,000
March 31, 2006 29,062,500
June 30, 2006 24,375,000
September 30, 2006 19,687,500
December 31, 2006 15,000,000
March 31, 2007 7,500,000
July 31, 2007 0
</TABLE>
77
<PAGE> 79
The term loan A facility is payable in quarterly installments on the last
day of each March, June, September and December, commencing on December 31, 2001
and continuing through and including March 31, 2007, with a final installment of
all outstanding principal and interest payable on July 30, 2007 as follows:
<TABLE>
<CAPTION>
PRINCIPAL PAYMENT
-----------------
<S> <C>
December 31, 2001 $ 1,875,000
March 31, June 30, September 30 and December 31, 2002 1,406,250
March 31, June 30, September 30 and December 31, 2003 1,875,000
March 31, June 30, September 30 and December 31, 2004 2,812,500
March 31, June 30, September 30 and December 31, 2005 3,750,000
March 31, June 30, September 30 and December 31, 2006 4,687,500
March 31 and July 31, 2007 7,500,000
</TABLE>
The term loan B facility is payable in quarterly installments on the last
day of each March, June, September and December, commencing on December 31, 2001
and continuing through and including December 31, 2007, with a final installment
of all outstanding principal and interest payable on January 31, 2008 as
follows:
<TABLE>
<CAPTION>
PRINCIPAL PAYMENT
-----------------
<S> <C>
December 31, 2001 $ 250,000
March 31, June 30, September 30 and December 31, 2002 250,000
March 31, June 30, September 30 and December 31, 2003 250,000
March 31, June 30, September 30 and December 31, 2004 250,000
March 31, June 30, September 30 and December 31, 2005 250,000
March 31, June 30, September 30 and December 31, 2006 250,000
March 31, June 30, September 30 and December 31, 2007 250,000
January 31, 2008 93,750,000
</TABLE>
The new credit facility provides for prepayment of the loans under the
following circumstances:
- Beginning in 2002, a prepayment must be made each year in an amount equal
to 75% of excess cash flow for the previous fiscal year;
- Upon receipt of net proceeds from asset sales exceeding $2,000,000, in
the aggregate, a prepayment must be made in the amount of such excess,
unless we intend to reinvest the proceeds through a permitted acquisition
within six months. If so, the proceeds will be held in a cash collateral
account for such six month period or until reinvested. If these proceeds
are not reinvested within six months, they will be used to prepay the
loans. If the amount being held in the cash collateral account ever
exceeds $10,000,000, this excess will be used to prepay the loans;
- Upon receipt of net proceeds from any sale-leaseback of tower assets made
during any period in which the maximum total debt ratio is greater than
6.75:1.00, the proceeds must be used to prepay the loans;
- Upon receipt of net proceeds from any sale-leaseback of tower assets made
during any period in which the maximum total debt ratio is less than or
equal to 6.75:1.00, a prepayment must be made in an amount equal to 50%
of the proceeds;
- Upon receipt of net proceeds from any equity offering, the proceeds must
be used to prepay the loans to the extent they are not used to prepay
subordinated notes or to finance permitted acquisitions;
- Upon receipt of net proceeds from any debt offering, the proceeds must be
used to prepay the loans;
- Upon receipt of net proceeds in excess of $500,000 from purchase price
adjustments in connection with an acquisition, a prepayment must be made
in the amount of the excess; and
78
<PAGE> 80
- Upon receipt of proceeds exceeding $250,000, in the aggregate, from
insurance, condemnation award or other compensation in respect of any
casualty affecting any of Classic Cable's property, a prepayment must be
made in the amount of the excess to the extent the proceeds are not used
for the repair or replacement of the property.
Each prepayment described above will be applied to the outstanding amounts
of the term loans and the revolving loans on a pro rata basis.
The new credit facility is secured by a perfected first priority security
interest in substantially all of our personal property, including, without
limitation, the capital stock of our direct and indirect subsidiaries. The new
credit facility is unconditionally guaranteed by each of our 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.
The revolving credit facility provides for the payment of an unused
commitment fee based on the average daily amount of the unused revolving credit
commitment. This fee is payable quarterly in arrears on the last day of each
March, June, September and December, commencing on September 30, 1999. The
amount of the unused commitment fee is based on the maximum total debt ratio. If
this ratio is less than 5.50:1, the fee is equal to 0.375% per annum. If the
ratio is more than 5.50:1, the fee is equal to 0.500% per annum.
The new credit facility also provides an additional $100.0 million term
loan C 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 shares ratably and equally in all collateral and guarantees
which secure the new credit facility. We borrowed $90.0 million under the term
loan C credit facility to redeem the 2008 subordinated notes tendered to us by
noteholders pursuant to the change of control offer made as a result of the
Brera Classic equity investment. The terms of the term loan C facility,
including the reduction schedule and prepayment provisions, are the same as
those of the term loan B facility.
OUR 2008 SUBORDINATED NOTES
In 1998, we issued $125.0 million in principal amount of 9 7/8% senior
subordinated notes due 2008. In connection with the change of control offer,
approximately $86.0 million of the 2008 subordinated notes were tendered to us
for repurchase. As a result, approximately $39.0 million in aggregate principal
amount of the 2008 subordinated notes remain outstanding. The 2008 subordinated
notes have the following basic terms:
Maturity...................... August 1, 2008.
Interest...................... Annual rate -- 9 7/8%.
Payment frequency -- every six months on
February 1 and August 1.
First payment -- February 1, 1999.
Guarantors.................... All of our wholly-owned subsidiaries.
Optional Redemption........... 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
79
<PAGE> 81
and unpaid interest, if any, to the date of
redemption. In addition, at any time prior to
August 1, 2001, we may redeem up to 35% 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
109.875% of the principal amount of the notes
to be redeemed, together with accrued and
unpaid interest, if any, to the date of
redemption. We would still be required to keep
at least 65% of the original aggregate
principal amount of the notes outstanding after
such a 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 original aggregate
principal amount, together with accrued and
unpaid interest, if any, to the date of
repurchase. In addition, upon the occurrence of
a change of control, we will have the option to
redeem the notes prior to August 1, 2003, at
the respective redemption price.
Ranking....................... The notes are unsecured and are subordinated to
all our existing and future senior
indebtedness. The notes rank without preference
with all our existing and future senior
subordinated indebtedness.
Guarantees.................... The guarantees are general unsecured
obligations of the subsidiary guarantors and
are subordinated in right of payment to all
existing and future guarantor senior
indebtedness. The guarantees are joint and
several.
Restrictive Covenants......... The indenture under which the notes were issued
limits:
- the incurrence of additional indebtedness by
us and our subsidiaries;
- the making of restricted payments;
- 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;
- sales of assets;
- transactions with affiliates; and
- liens.
In addition, the indenture limits our ability
to engage in consolidations, mergers and
transfers of substantially all of its assets
and also contains certain restrictions on
distributions from its subsidiaries. All of
these limitations and prohibitions are subject
to a number of important qualifications and
exceptions.
80
<PAGE> 82
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
prior to September 11, 1999 and to use our reasonable best efforts to cause the
exchange offer registration statement to become effective under the Securities
Act on or before February 23, 2000. 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 declared effective by February 23,
2000, Classic will be obligated to pay certain interest rate increases to
holders of the old notes until the exchange offer registration statement is
declared effective.
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 October 13, 1999. Classic will issue $1,000 principal amount
81
<PAGE> 83
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 and Guarantees."
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, $150.0 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 exchange and 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 exchange and 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
exchange and 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 October 13, 1999,
unless Classic, in its reasonable 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 reasonable 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
82
<PAGE> 84
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.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest at a rate of 9 3/8% per annum,
payable semi-annually, on February 1 and August 1 of each year. Holders of
exchange notes will receive interest on February 1, 2000 from the date of
initial issuance of the exchange notes, plus an amount equal to the accrued
interest on the old notes through such date. Interest on the old notes accepted
for exchange will cease to accrue upon issuance of the exchange notes.
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 expiration date, 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 reasonable 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.
83
<PAGE> 85
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 any time and from
time to time in its reasonable 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
84
<PAGE> 86
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 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 so to 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 reasonable 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
85
<PAGE> 87
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-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.
86
<PAGE> 88
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.
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 prior
to the expiration date.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. Chase Bank of Texas, National Association 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:
Chase Bank of Texas, National Association, Exchange Agent
<TABLE>
<S> <C> <C>
By Registered or Certified By Overnight Courier: By Hand Delivery:
Mail:
600 Travis, Suite 1150 600 Travis, Suite 1150 600 Travis, Suite 1150
Houston, Texas 77002 Houston, Texas 77002 Houston, Texas 77002
Attention: Mauri J. Cowen Attention: Mauri J. Cowen Attention: Mauri J. Cowen
</TABLE>
Facsimile Transmission Number:
713/216-5476
---------------------
Confirm Receipt of Facsimile by Telephone:
713/216-6686
---------------------
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
87
<PAGE> 89
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 $250,000,
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.
88
<PAGE> 90
DESCRIPTION OF THE NOTES AND GUARANTEES
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 Cable, Inc. and not to any of its subsidiaries.
Classic will issue the notes under an indenture among itself, the
Guarantors and Chase Bank of Texas, National Association, 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 a copy
of the indenture as an exhibit to the registration statement which includes this
prospectus.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
The notes:
- are general obligations of Classic;
- are subordinated in right of payment to all existing and future Senior
Debt of Classic;
- are pari passu in right of payment with any future senior subordinated
Indebtedness of Classic; and
- are unconditionally guaranteed by the Guarantors.
THE GUARANTEES
The notes are guaranteed by all of our current and future Domestic
Subsidiaries.
Each guarantee of the notes:
- is a general unsecured obligation of the Guarantor;
- is subordinated in right of payment to all existing and future Senior
Debt of the Guarantor; and
- is pari passu in right of payment with any future senior subordinated
Indebtedness of the Guarantor.
As of the date of the indenture, all of our subsidiaries will be
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "-- Certain Covenants -- Designation of Restricted and
Unrestricted Subsidiaries," we will be permitted to designate certain of our
subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will
not be subject to many of the restrictive covenants in the indenture. Our
Unrestricted Subsidiaries will not guarantee the notes.
PRINCIPAL, MATURITY AND INTEREST
The indenture provides for the issuance by Classic of notes with a maximum
aggregate principal amount of $250.0 million, of which $150.0 million were
issued in the offering. Classic may issue additional notes (the "Additional
Notes") from time to time after the offering. Any offering of Additional Notes
is subject to the covenant described below under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." The
notes and any Additional Notes subsequently issued under the indenture would be
treated as a single class for all purposes under the indenture, including,
89
<PAGE> 91
without limitation, waivers, amendments, redemptions and offers to purchase.
Classic will issue notes in denominations of $1,000 and integral multiples of
$1,000. The notes will mature on August 1, 2009.
Interest on the notes will accrue at the rate of 9 3/8% per annum and will
be payable semi-annually in arrears on February 1 and August 1, commencing on
February 1, 2000. Classic will make each interest payment to the Holders of
record on the immediately preceding January 15 and July 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder of more than $5.0 million in principal amount of the notes has
given wire transfer instructions to Classic, Classic will pay all principal,
interest and premium and Special Interest, if any, on that Holder's notes in
accordance with those instructions. All other payments on notes will be made at
the office or agency of the paying agent and registrar for the notes within the
City and State of New York unless Classic elects to make interest payments by
check mailed to the Holders at their addresses set forth in the register of
Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. Classic may
change the paying agent or registrar without prior notice to the Holders, and
Classic or any of its Subsidiaries may act as paying agent or registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and Classic may require
a Holder to pay any taxes and fees required by law or permitted by the
indenture. Classic is not required to transfer or exchange any note selected for
redemption. Also, Classic is not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
SUBSIDIARY GUARANTEES
The Guarantors will jointly and severally guarantee Classic's obligations
under the notes. Each Subsidiary Guarantee will be subordinated to the prior
payment in full of all Senior Debt of that Guarantor. The obligations of each
Guarantor under its Subsidiary Guarantee will be limited as necessary to prevent
that Subsidiary Guarantee from constituting a fraudulent conveyance under
applicable law. See "Risk Factors -- The incurrence of this indebtedness may be
voided by a court if the court determines that the incurrence of this
indebtedness resulted in a fraudulent transfer."
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than Classic or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger
assumes all the obligations of that Guarantor under the indenture,
its Subsidiary Guarantee and the registration rights agreement
pursuant to a supplemental indenture satisfactory to the trustee; or
90
<PAGE> 92
(b) the Net Proceeds of such sale or other disposition are applied in
accordance with the "Asset Sale" provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or
after giving effect to such transaction) a Subsidiary of Classic, if
the Guarantor applies the Net Proceeds of that sale or other
disposition in accordance with the "Asset Sale" provisions of the
indenture;
(2) in connection with any sale of all of the Capital Stock of a Guarantor
to a Person that is not (either before or after giving effect to such
transaction) a Subsidiary of Classic, if Classic applies the Net
Proceeds of that sale in accordance with the "Asset Sale" provisions of
the indenture; or
(3) if Classic properly designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary in accordance with the
applicable provisions of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales."
SUBORDINATION
The payment of principal, interest and premium and Special Interest, if
any, on the notes will be subordinated to the prior payment in full of all
Senior Debt of Classic, including Senior Debt incurred after the date of the
indenture.
The holders of Senior Debt will be entitled to receive payment in full of
all Obligations due in respect of Senior Debt (including interest after the
commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt) before the Holders of notes will be entitled to receive
any payment with respect to the notes (except that Holders of notes may receive
and retain Permitted Junior Securities and payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance"), in the event of
any distribution to creditors of Classic:
(1) in a liquidation or dissolution of Classic;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Classic or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of Classic's assets and liabilities.
Classic also may not make any payment in respect of the notes (except in
Permitted Junior Securities or from the trust described under "-- Legal
Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2) any other default occurs and is continuing on any series of Designated
Senior Debt that permits holders of that series of Designated Senior
Debt to accelerate its maturity and the trustee receives a notice of
such default (a "Payment Blockage Notice") from Classic or the holders
of any Designated Senior Debt.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
91
<PAGE> 93
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, interest and premium and Special
Interest, if any, on the notes that have come due have been paid in
full in cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been cured or waived for a period of not less than 90 days.
If the trustee or any Holder of the notes receives a payment in respect of
the notes (except in Permitted Junior Securities or from the trust described
under "-- Legal Defeasance and Covenant Defeasance") when:
(1) the payment is prohibited by these subordination provisions; and
(2) the trustee or the Holder has actual knowledge that the payment is
prohibited;
the trustee or the Holder, as the case may be, shall hold the payment in trust
for the benefit of the holders of Senior Debt. Upon the proper written request
of the holders of Senior Debt, the trustee or the Holder, as the case may be,
shall deliver the amounts in trust to the holders of Senior Debt or their proper
representative.
Classic must promptly notify holders of Senior Debt if payment of the notes
is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of Classic, Holders of notes may
recover less, ratably, than creditors of Classic who are holders of Senior Debt.
See "Risk Factors -- Your rights to payment on the notes are subordinate to our
senior debt."
OPTIONAL REDEMPTION
At any time prior to August 1, 2002, Classic may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes ever
issued under the indenture at a redemption price of 109.375% of the principal
amount of the notes redeemed, plus accrued and unpaid interest and Special
Interest, if any, to the redemption date, with the net cash proceeds of one or
more Public Equity Offerings by Classic or the net cash proceeds of a Strategic
Equity Investment in Classic or a capital contribution to Classic's common
equity made with the net cash proceeds of a concurrent Public Equity Offering
by, or Strategic Equity Investment in, Classic's direct parent; provided that:
(1) at least 65% of the notes ever issued under the indenture remain
outstanding immediately after each such redemption (excluding notes
held by Classic and its Subsidiaries); and
(2) the redemption occurs within 60 days of the date of the closing of such
Public Equity Offering or Strategic Equity Investment.
At any time, Classic may also redeem all or a part of the notes upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60 days'
prior notice (but in no event may any such redemption occur more than 90 days
after the occurrence of such Change of Control) mailed by first-class mail to
each Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued and
unpaid interest and Special Interest, if any, to the date of redemption.
Except as described above, the notes will not be redeemable at Classic's
option prior to August 1, 2004. After August 1, 2004, Classic may redeem all or
a part of the notes upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
92
<PAGE> 94
below plus accrued and unpaid interest and Special Interest, if any, thereon, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004...................................................... 104.688%
2005...................................................... 103.125%
2006...................................................... 101.562%
2007 and thereafter....................................... 100.000%
</TABLE>
MANDATORY REDEMPTION
Classic is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require Classic to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to an offer to purchase the
notes (a "Change of Control Offer") on the terms set forth in the indenture. In
the Change of Control Offer, Classic will offer a Change of Control Payment in
cash equal to 101% of the aggregate principal amount of notes repurchased plus
accrued and unpaid interest and Special Interest, if any, on the notes
repurchased, to the date of purchase. Within 30 days following any Change of
Control, Classic will mail a notice to the trustee and each Holder offering to
repurchase notes on the date specified in the notice (the "Change of Control
Payment Date"), which date shall be no earlier than 30 days and no later than 60
days from the date such notice is mailed, pursuant to the procedures required by
the indenture and described in such notice. Classic will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent those laws and regulations are
applicable in connection with the repurchase of the notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the Change of Control provisions of the indenture,
Classic will comply with the applicable securities laws and regulations and will
not be deemed to have breached its obligations under the Change of Control
provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, Classic will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions of notes properly tendered;
and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions of notes being purchased by Classic.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and Classic will execute
and issue and the trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new note equal in principal amount
to any unpurchased portion of the notes surrendered, if any; provided that each
such new note will be in a principal amount of $1,000 or an integral multiple of
$1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, Classic
will either repay all outstanding Senior Debt or obtain the requisite consents,
if any, under all agreements governing outstanding Senior Debt to permit the
93
<PAGE> 95
repurchase of notes required by this covenant. Classic will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The provisions described above that require Classic to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the Holders of the notes to require that Classic
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
Classic will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by Classic and
purchases all notes or portions of notes properly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of Classic and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require Classic to repurchase such notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Classic and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
Asset Sales
Classic will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) Classic (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Classic's board of directors
and evidenced by a resolution of the board of directors set forth in an
Officers' Certificate delivered to the trustee; and
(3) at least 75% of the consideration received in such Asset Sale by
Classic or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following
shall be deemed to be cash:
(a) any Indebtedness or other 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
Indebtedness that is by its terms subordinated to the notes or any
Subsidiary Guarantee) that are assumed by the transferee of any such
assets pursuant to an agreement that releases Classic or such
Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Classic or
any such Restricted Subsidiary from such transferee that are
converted within 60 days of the applicable Asset Sale by Classic or
such Restricted Subsidiary into cash or Cash Equivalents, to the
extent of the cash received in that conversion.
Notwithstanding the foregoing, Classic and its Restricted Subsidiaries may
consummate Asset Swaps; provided that, immediately after giving effect to such
Asset Swap, Classic would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant described below under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock."
94
<PAGE> 96
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
including any cash received in an Asset Swap, Classic or any of its Restricted
Subsidiaries may apply those Net Proceeds at its option:
(1) to prepay, repay, redeem or purchase Senior Debt and, if the Senior
Debt repaid is revolving credit Indebtedness, to correspondingly reduce
commitments with respect thereto;
(2) to acquire all or substantially all of the assets of a Permitted
Business;
(3) to acquire Voting Stock of a Permitted Business from a Person that is
not a Subsidiary of Classic; provided, that (a) after giving effect
thereto, Classic and its Restricted Subsidiaries collectively own a
majority of such Voting Stock and (b) such acquisition is otherwise
made in accordance with the indenture, including, without limitation,
the "Restricted Payments" covenant;
(4) to make a capital expenditure; or
(5) to acquire other long-term assets that are used or useful in a
Permitted Business;
provided that in the event Classic would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth
in the first paragraph of the covenant described below under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock" at the time it consummates a Permitted Tower Sale and Leaseback, then the
365-day period referred to above shall be extended for an additional 365 days as
to the Net Proceeds from the Permitted Tower Sale and Leaseback only.
Pending the final application of any Net Proceeds, Classic may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $15.0 million, Classic will make an
offer (an "Asset Sale Offer") to all Holders of notes and all holders of other
Indebtedness that is pari passu with the notes containing provisions similar to
those set forth in the indenture relating to the notes with respect to offers to
purchase or redeem with the proceeds of sales of assets to purchase the maximum
principal amount of notes and such other pari passu Indebtedness that may be
purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer
will be equal to 100% of principal amount plus accrued and unpaid interest and
Special Interest, if any, to the date of purchase, and will be payable in cash.
If any Excess Proceeds remain after consummation of an Asset Sale Offer, Classic
may use such Excess Proceeds for any purpose not otherwise prohibited by the
indenture. If the aggregate principal amount of notes and such other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the trustee will select the notes and such other pari passu
Indebtedness to be purchased on a pro rata basis based on the principal amount
of notes and such other pari passu Indebtedness tendered. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero.
Classic will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sales provisions of the
indenture, Classic will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the indenture by virtue of such conflict.
The agreements governing Classic's outstanding Senior Debt currently
prohibit Classic from purchasing any notes, and also provides that certain
change of control or asset sale events with respect to Classic would constitute
a default under these agreements. Any future credit agreements or other
agreements relating to Senior Debt to which Classic becomes a party may contain
similar restrictions and provisions. In the event a Change of Control or Asset
Sale occurs at a time when Classic is prohibited
95
<PAGE> 97
from purchasing notes, Classic could seek the consent of its senior lenders to
the purchase of notes or could attempt to refinance the borrowings that contain
such prohibition. If Classic does not obtain such a consent or repay such
borrowings, Classic will remain prohibited from purchasing notes. In such case,
Classic's failure to purchase tendered notes would constitute an Event of
Default under the indenture which would, in turn, constitute a default under
such Senior Debt. In such circumstances, the subordination provisions in the
indenture would likely restrict payments to the Holders of notes.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by such method as the trustee shall deem fair
and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder thereof
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
CERTAIN COVENANTS
Restricted Payments
Classic will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of Classic's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection
with any merger or consolidation involving Classic or any of its
Restricted Subsidiaries) or to the direct or indirect holders of
Classic's or any of its Restricted Subsidiaries' Equity Interests in
their capacity as such (other than dividends or distributions payable
in Equity Interests (other than Disqualified Stock) of Classic or to
Classic or a Restricted Subsidiary of Classic);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving Classic) any Equity Interests of Classic or any direct or
indirect parent of Classic;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Subsidiary Guarantees, except a
payment of interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof; and
96
<PAGE> 98
(2) Classic would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable three-month period, have been permitted
to incur at least $1.00 of additional Indebtedness (other than
Permitted Debt) pursuant to the Debt to Cash Flow Ratio test set forth
in the first paragraph of the covenant described below under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made after the date of the
indenture (excluding Restricted Payments permitted by clauses (2), (3)
and (4) of the next succeeding paragraph) shall not exceed, at the date
of determination, the sum, without duplication, of:
(a) an amount equal to Classic's Consolidated Cash Flow from the date of
the indenture to the end of Classic's most recently ended
three-month period for which internal financial statements are
available, taken as a single accounting period, less the product of
1.4 times Classic's Consolidated Interest Expense from the date of
the indenture to the end of Classic's most recently ended
three-month period for which internal financial statements are
available, taken as a single accounting period; plus
(b) an amount equal to the net cash proceeds received by Classic from
the sale of Equity Interests after the date of the indenture (other
than (i) sales of Disqualified Stock, (ii) Equity Interests sold to
any of Classic's Subsidiaries, (iii) Equity Interests sold in the
Private Equity Sale and (iv) Equity Interests that are applied to
make a Permitted Investment pursuant to clause (10) of the
definition of Permitted Investments) or from the issue or sale of
convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of Classic that have been converted
into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or debt securities) sold to a
Subsidiary of Classic); plus
(c) to the extent that any Restricted Investment that was made after the
date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of: (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition,
if any); and (ii) the initial amount of such Restricted Investment.
The preceding provisions will not prohibit:
(1) so long as no Default has occurred and is continuing or would be caused
thereby, the payment of any dividend or distribution within 60 days
after the date of declaration thereof, if at the date of declaration
such payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition
of any subordinated Indebtedness of Classic or any Guarantor or of any
Equity Interests of Classic in exchange for, or out of the net cash
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 Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition will be excluded from clause (3)(b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Classic or any Guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Classic to
the holders of its Equity Interests on a pro rata basis; and
97
<PAGE> 99
(5) so long as no Default has occurred and is continuing or would be caused
thereby, the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of Classic or any Restricted
Subsidiary of Classic held by any member of Classic's (or any of its
Restricted Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the
date of the indenture; provided that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $250,000 in any twelve-month period.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by Classic or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by Classic's board of directors whose resolution
with respect thereto shall be delivered to the trustee. The board of directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $5.0 million. Not later than the date of making any
Restricted Payment, Classic will deliver to the trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this "Restricted Payments" covenant were
computed, together with a copy of any fairness opinion or appraisal required by
the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
Classic will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and Classic
will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that
Classic may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, and the Guarantors may incur Indebtedness or issue preferred stock, if
Classic's Debt to Cash Flow Ratio at the time of incurrence of such Indebtedness
or the issuance of such Disqualified Stock or preferred stock, after giving pro
forma effect to such incurrence or issuance as of such date and to the use of
proceeds therefrom as if the same had occurred at the beginning of the most
recently ended three-month period of Classic for which internal financial
statements are available, would have been no greater than 7.0 to 1.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Classic and any Guarantor of additional Indebtedness
and letters of credit under Credit Facilities in an aggregate principal
amount at any one time outstanding under this clause (1) (with letters
of credit being deemed to have a principal amount equal to the maximum
potential liability of Classic and its Restricted Subsidiaries
thereunder) not to exceed $350.0 million;
(2) the incurrence by Classic and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by Classic and the Guarantors of Indebtedness
represented by the notes and the related Subsidiary Guarantees to be
issued on the date of the indenture and the exchange notes and the
related Subsidiary Guarantees to be issued pursuant to the registration
rights agreement;
(4) the incurrence by Classic or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or 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, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to exceed $15.0
million at any time outstanding;
98
<PAGE> 100
(5) the incurrence by Classic or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other
than intercompany Indebtedness) that was permitted by the indenture to
be incurred under the first paragraph of this covenant or clauses (2),
(3), (4) or (5) of this paragraph;
(6) the incurrence by Classic or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Classic and any of its
Restricted Subsidiaries; provided, however, that:
(a) if Classic or any Guarantor is the obligor on such Indebtedness,
such Indebtedness must be expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the
notes, in the case of Classic, or the Subsidiary Guarantee, in the
case of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
Classic or a Restricted Subsidiary thereof and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not
either Classic or a Restricted Subsidiary of Classic, will be
deemed, in each case, to constitute an incurrence of such
Indebtedness by Classic or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (6);
(7) the incurrence by Classic or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the indenture to be
outstanding;
(8) the guarantee by Classic or any of the Guarantors of Indebtedness of
Classic or a Subsidiary of Classic that was permitted to be incurred by
another provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form
of additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of the
same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness or an issuance of Disqualified Stock for purposes of
this covenant;
(10) the incurrence of Indebtedness of a Restricted Subsidiary that was
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
to that acquisition, the Debt to Cash Flow Ratio would have been less
than or equal to the Debt to Cash Flow Ratio immediately prior to that
acquisition;
(11) the incurrence by Classic or any of the Guarantors of Indebtedness in
addition to any Indebtedness described in clauses (1) through (10) and
(12) of this covenant in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (11), not to exceed
$25.0 million; and
(12) the incurrence by Classic's Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, that event will be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of Classic that was not permitted by this clause (12).
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (12) above, or is
entitled to
99
<PAGE> 101
be incurred pursuant to the first paragraph of this covenant, Classic will be
permitted to classify such item of Indebtedness on the date of its incurrence or
later reclassify all or a portion of such item of Indebtedness in any manner
that complies with this covenant and the items will be treated as having been
incurred pursuant only to the first paragraph or clause (1) through (12) of this
covenant. Indebtedness under Credit Facilities outstanding on the date on which
notes are first issued and authenticated under the indenture shall be deemed to
have been incurred on such date in reliance on the exception provided by clause
(1) of the definition of Permitted Debt.
No Senior Subordinated Debt
Classic will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of Classic and senior in any respect in right of
payment to the notes. No Guarantor will incur, create, issue, assume, guarantee
or otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to the Senior Debt of such Guarantor and senior in any respect
in right of payment to such Guarantor's Subsidiary Guarantee.
Liens
Classic will not, and will not permit any Restricted Subsidiary to, incur
any Indebtedness secured by a Lien against or on any of its property or assets
now owned or hereafter acquired by the Company or any Restricted Subsidiary
unless contemporaneously therewith effective provision is made to secure the
notes equally and ratably with such secured Indebtedness. This restriction does
not, however, apply to Indebtedness secured by (1) Liens securing Senior Debt or
Indebtedness of a Restricted Subsidiary of Classic, (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)
other Liens, in addition to those described in clauses (1) through (5), (7) or
(8) of this paragraph, securing Indebtedness of Classic in an amount not to
exceed $10.0 million at any time outstanding; (7) Other Permitted Liens; and (8)
any extension, renewal or replacement of any Lien referred to in the foregoing
clauses (1) through (7), inclusive.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Classic will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Equity Interests
to Classic or any of its Restricted Subsidiaries, or pay any
indebtedness owed to Classic or any of its Restricted Subsidiaries;
(2) make loans or advances or guarantee any such loans or advances to
Classic or any of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to Classic or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) encumbrances and restrictions as in effect on the date of the
indenture pursuant to Existing Indebtedness or Credit Facilities, and
any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are
no more restrictive, taken as a whole, with respect to such dividend
100
<PAGE> 102
and other payment restrictions than those contained in such Existing
Indebtedness or Credit Facilities, as in effect on the date of the
indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Classic or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such
Indebtedness or Capital Stock was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the indenture to be
incurred;
(5) customary non-assignment provisions in contracts of Classic or any of
its Restricted Subsidiaries;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so
acquired of the nature described in clause (3) of the preceding
paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Subsidiary pending its
sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements, stock
sale agreements and other similar agreements entered into in the
ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) restrictions that are not materially more restrictive than customary
provisions in comparable financings if the management of Classic
determines that such restrictions will not materially impair Classic's
ability to make payments as required under the notes; and
(13) restrictions contained in Indebtedness under Credit Facilities
permitted to be incurred under the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock," provided that the restrictions are not more restrictive than
the terms contained in the existing Credit Facilities as of the date
of the indenture.
Merger, Consolidation or Sale of Assets
Classic may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not Classic is the surviving corporation); or
(2) sell, assign, transfer, convey or otherwise dispose of all or substantially
all of the properties or assets of Classic and its Restricted Subsidiaries taken
as a whole, in one or more related transactions, to another Person; unless:
(1) either: (a) Classic is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than
Classic) or to which such sale, assignment, transfer, conveyance or
other disposition shall have been made is a corporation, limited
liability company or limited partnership organized or existing under
the laws of the United States, any state thereof or the District of
Columbia;
101
<PAGE> 103
(2) the Person formed by or surviving any such consolidation or merger (if
other than Classic) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes
all the obligations of Classic under the notes, the indenture and the
registration rights agreement pursuant to agreements reasonably
satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) Classic or the Person formed by or surviving any such consolidation or
merger (if other than Classic), or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made will, on
the date of such transaction after giving pro forma effect thereto and
any related financing transactions as if the same had occurred at the
beginning of the applicable three-month period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Debt to Cash
Flow Ratio test set forth in the first paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock."
In addition, Classic may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Classic and any of the Guarantors.
Transactions with Affiliates
Classic will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any payment to, or sell, lease, transfer,
exchange or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into or make or amend any transaction or
series of transactions, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate, officer or director or
Classic (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Classic or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Classic or such
Restricted Subsidiary with an unrelated Person; and
(2) Classic delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess
of $1.0 million, a resolution of the board of directors set forth in
an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) of this covenant and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the board of directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess
of $10.0 million, an opinion as to the fairness to the Holders of
such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) employment agreements entered into by Classic or any of its
Subsidiaries on or prior to the date of the indenture and any
employment agreement entered into by Classic or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the
past practice of Classic or such Restricted Subsidiary;
(2) transactions between or among Classic and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of Classic solely
because Classic owns an Equity Interest in such Person;
102
<PAGE> 104
(4) payment of reasonable fees to directors who are not employees of
Classic or any of its Restricted Subsidiaries, and customary
indemnification and insurance arrangements in favor of any director;
(5) sales or issuances of Equity Interests (other than Disqualified Stock)
to Affiliates of Classic;
(6) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "-- Restricted Payments;"
(7) loans or advances, not to exceed $2.0 million in the aggregate at any
time outstanding, to employees in the ordinary course of business in
accordance with past practice; and
(8) management fees, deal fees or transaction fees paid to employees,
directors and their respective affiliates, in accordance with the
provisions of the Management and Advisory Fee Agreement or the
Stockholders' Agreement, as applicable, as the same are in effect on
the date of the indenture.
Additional Subsidiary Guarantees
If Classic or any of its Subsidiaries acquires or creates another Domestic
Subsidiary after the date of the indenture, then that newly acquired or created
Domestic Subsidiary must become a Guarantor and execute a supplemental indenture
and deliver an Opinion of Counsel to the trustee within 10 Business Days of the
date on which it was acquired or created, unless such Domestic Subsidiary has
properly been designated as an Unrestricted Subsidiary in accordance with the
indenture, for so long as such Domestic Subsidiary continues to constitute an
Unrestricted Subsidiary.
Designation of Restricted and Unrestricted Subsidiaries
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by Classic and its
Restricted Subsidiaries in the Subsidiary so designated will be deemed to be an
Investment made as of the time of such designation and will either reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "-- Restricted Payments" or reduce
the amount available for future Investments under one or more clauses of the
definition of Permitted Investments, as Classic shall determine. That
designation will only be permitted if such Investment would be permitted at that
time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The board of directors may redesignate any Unrestricted
Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a
Default.
Sale and Leaseback Transactions
Classic will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction, unless:
(1) Classic or that Restricted Subsidiary, as applicable, could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction under the Debt to Cash
Flow Ratio test in the first paragraph of the covenant described above
under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock" and (b) created a Lien on such property securing
Attributable Debt without equally and ratably securing the notes
pursuant to the covenant described above under the caption "-- Liens;"
(2) the net cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by
the board of directors and set forth in an Officers' Certificate
delivered to the trustee, of the property that is the subject of that
sale and leaseback transaction; and
103
<PAGE> 105
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Classic or that Restricted Subsidiary applies the
proceeds of such transaction in compliance with, the covenant described
above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
Classic will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, transfer, convey, sell, lease or otherwise dispose
of any Equity Interests in any Wholly Owned Restricted Subsidiary of Classic to
any Person (other than Classic or a Wholly Owned Restricted Subsidiary of
Classic), unless:
(1) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Wholly Owned Restricted Subsidiary; and
(2) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales."
In addition, Classic will not permit any Wholly Owned Restricted Subsidiary
of Classic to issue any of its Equity Interests (other than, if necessary,
shares of its Capital Stock constituting directors' qualifying shares) to any
Person other than to Classic or a Wholly Owned Restricted Subsidiary of Classic.
Reports
Whether or not required by the Commission, so long as any notes are
outstanding, Classic will furnish to the Holders of notes, within 15 days of the
time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K
if Classic were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report
on the annual financial statements by Classic's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Classic were required to file such reports.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the Commission,
Classic will file a copy of all of the information and reports referred to in
clauses (1) and (2) above with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing, in which case Classic will make such
information available to securities analysts and prospective investors upon
request). In addition, Classic and the Guarantors have agreed that, for so long
as any notes remain outstanding, unless Classic is filing periodic reports
pursuant to the Exchange Act, they will furnish to the 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.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Special
Interest with respect to, the notes whether or not prohibited by the
subordination provisions of the indenture;
(2) default in payment when due of the principal of, or premium, if any, on
the notes, whether or not prohibited by the subordination provisions of
the indenture;
104
<PAGE> 106
(3) failure by Classic or any of its Subsidiaries to comply with the
provisions applicable to them described under the caption "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets;"
(4) failure by Classic or any of its Subsidiaries for 30 days after notice
to comply with the provisions applicable to them described under the
captions "-- Repurchase at the Option of Holders -- Change of Control"
or "-- Certain Covenants" (in each case, other than a failure to
purchase notes);
(5) failure by Classic or any of its Subsidiaries for 60 days after notice
to comply with any of the other agreements applicable to them in the
indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Classic or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Classic or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the indenture, if that
default:
(a) is caused by a failure to pay principal of such Indebtedness at
final maturity; or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
if the total principal amount of such Indebtedness unpaid or accelerated
exceeds $5.0 million;
(7) any judgment or decree for the payment of money in excess of $5.0
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
notice;
(8) except as permitted by the indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor,
or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee; and
(9) certain events of bankruptcy or insolvency described in the indenture
with respect to Classic or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Classic, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the Holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, except a Default or Event of Default
relating to the payment of principal or interest.
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 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 (including Special
105
<PAGE> 107
Interest) 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; (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 a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except (1) a continuing Default or Event of Default in the payment
of interest or Special Interest on, or the principal of, the notes (2) 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.
Classic is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Classic is required to deliver to the trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator, manager, member, partner or
stockholder of Classic or any Subsidiary, as such, shall have any liability for
any obligations of Classic or the Guarantors under the notes, the exchange
notes, the indenture, the Subsidiary Guarantees 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. The waiver may
not be effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Classic may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Special
Interest, if any, on such notes when such payments are due from the
trust referred to below;
(2) Classic's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
Classic's and the Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Classic may, at its option and at any time, elect to have the
obligations of Classic and the Guarantors released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Classic must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, or interest
and premium and Special Interest, if any, on the
106
<PAGE> 108
outstanding notes on the Stated Maturity or on the applicable
redemption date, as the case may be, and Classic must specify whether
the notes are being defeased to maturity or to a particular redemption
date;
(2) in the case of Legal Defeasance, Classic shall have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that (a) Classic has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the
date of the indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders of the
outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Classic shall have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than a Default or Event
of Default resulting from the borrowing of funds to be applied to such
deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on
the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which Classic or
any of its Subsidiaries is a party or by which Classic or any of its
Subsidiaries is bound;
(6) Classic must have delivered to the trustee an Opinion of Counsel to the
effect that, assuming no intervening bankruptcy of Classic or any
Guarantor between the date of deposit and the 91st day following the
deposit and assuming that no Holder is an "insider" of Classic under
applicable bankruptcy law, after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(7) Classic must deliver to the trustee an Officers' Certificate stating
that the deposit was not made by Classic with the intent of preferring
the Holders of notes over the other creditors of Classic with the
intent of defeating, hindering, delaying or defrauding creditors of
Classic or others; and
(8) Classic must deliver to the trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been complied
with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the indenture
or the notes may be amended or supplemented with the consent of the Holders of
at least a majority in aggregate principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in aggregate principal amount of the
then outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
107
<PAGE> 109
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the
caption "-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Special Interest, if any, on the notes (except
a rescission of acceleration of the notes by the Holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of Holders of notes to receive payments
of principal of, or interest or premium or Special Interest, if any, on
the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders");
(8) release any Guarantor from any of its obligations under its Subsidiary
Guarantee or the indenture, except in accordance with the terms of the
indenture; or
(9) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the
indenture relating to subordination that adversely affects the rights of the
Holders of the notes will require the consent of the Holders of at least 75% in
aggregate principal amount of the notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of notes,
Classic, the Guarantors and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Classic's obligations to Holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of Classic's assets;
(4) to make any change that would provide any additional rights or benefits
to the Holders of notes or that does not adversely affect the legal
rights under the indenture of any such Holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has theretofore been deposited in trust and thereafter
repaid to Classic) have been delivered to the trustee for
cancellation; or
108
<PAGE> 110
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the making of
a notice of redemption or otherwise or will become due and payable
within one year and Classic or any Guarantor has irrevocably
deposited or caused to be deposited with the trustee, as trust funds
in trust solely for the benefit of the Holders, cash in U.S.
dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient without consideration
of any reinvestment of interest, to pay and discharge the entire
indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Special Interest, if any,
and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or shall occur as a result of such deposit and
such deposit will not result in a breach or violation of, or constitute
a default under, any other instrument to which Classic or any Guarantor
is a party or by which Classic or any Guarantor is bound;
(3) Classic or any Guarantor has paid or caused to be paid all sums payable
by it under the indenture; and
(4) Classic has delivered irrevocable instructions to the trustee under the
indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, Classic must deliver an Officers' Certificate and an Opinion of
Counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Classic or any Guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
BOOK-ENTRY; DELIVERY AND FORM
The notes will be represented by one or more permanent global 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 Depository 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
109
<PAGE> 111
hold their interests in a Restricted 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 notes represented by such Global Note for all
purposes under the Indenture and the 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
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 participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
110
<PAGE> 112
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.
SAME DAY SETTLEMENT AND PAYMENT
Classic will make payments in respect of the notes represented by the
Global notes (including principal, premium, if any, interest and Special
Interest, if any) by wire transfer of immediately available funds to the
accounts specified by the Global note Holder. Classic will make all payments of
principal, interest and premium and Special Interest, if any, with respect to
Certificated notes by wire transfer of immediately available funds to the
accounts specified by the Holders thereof or, if no such account is specified,
by mailing a check to each such Holder's registered address. The notes
represented by the Global notes are expected to be eligible to trade in the
PORTAL market and to trade in DTC's Same-day Funds Settlement System, and any
permitted secondary market trading activity in such notes will, therefore, be
required by DTC to be settled in immediately available funds. Classic expects
that secondary trading in any Certificated notes will also be settled in
immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. DTC has advised Classic that cash received in Euroclear
or Cedel as a result of sales of interests in a Global note by or through a
Euroclear or Cedel participant to a Participant in DTC will be received with
value on the settlement date of DTC but will be available in the relevant
Euroclear or Cedel cash account only as of the business day for Euroclear or
Cedel following DTC's settlement date.
REGISTRATION RIGHTS; SPECIAL INTEREST
The following description is a summary of the material provisions of the
exchange and registration rights agreement. It does not restate that agreement
in its entirety. We urge you to read the exchange and registration rights
agreement in its entirety because it, and not this description, defines your
registration rights as Holders of these notes. We have filed a copy of the
exchange and registration rights agreement as an exhibit to the registration
statement which includes this prospectus. See "-- Additional Information."
Classic, the Guarantors and the initial purchasers entered into the
exchange and registration rights agreement on July 28, 1999. Pursuant to the
registration rights agreement, Classic and the Guarantors agreed to file with
the Commission the exchange offer registration statement on the appropriate form
under the Securities Act with respect to the exchange notes. Upon the
effectiveness of the exchange offer registration statement, Classic and the
Guarantors will offer to the Holders of Transfer Restricted Securities pursuant
to the exchange offer who are able to make certain representations the
opportunity to exchange their Transfer Restricted Securities for exchange notes.
If:
(1) Classic and the Guarantors are not
(a) required to file the exchange offer registration statement; or
(b) permitted to consummate the exchange offer because the exchange
offer is not permitted by applicable law or Commission policy; or
111
<PAGE> 113
(2) any Holder of Transfer Restricted Securities notifies Classic prior to
the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Commission policy from participating in
the exchange offer; or
(b) that it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is
not appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly from
Classic or an affiliate of Classic,
Classic and the Guarantors will file with the Commission a shelf registration
statement to cover resales of the notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the shelf registration statement.
Classic and the Guarantors will use their best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission.
For purposes of the preceding, "Transfer Restricted Securities" means each
note until:
(1) the date on which such note has been exchanged by a Person other than a
broker-dealer for an exchange note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of a
note for an exchange note, the date on which such exchange note is sold
to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the exchange
offer registration statement;
(3) the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf
registration statement; or
(4) the date on which such note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The exchange and registration rights agreement provides:
(1) Classic and the Guarantors will file the exchange offer registration
statement with the Commission on or prior to September 11, 1999;
(2) Classic and the Guarantors will use their best efforts to have the
exchange offer registration statement declared effective by the
Commission on or prior to February 23, 2000;
(3) unless the exchange offer would not be permitted by applicable law or
Commission policy, Classic and the Guarantors will
(a) commence the exchange offer; and
(b) use their best efforts to issue on or prior to 30 business days, or
longer, if required by the federal securities laws, after the date
on which the exchange offer registration statement was declared
effective by the Commission, exchange notes in exchange for all
notes tendered prior thereto in the exchange offer; and
(4) if obligated to file the shelf registration statement, Classic and the
Guarantors will use their best efforts to file the shelf registration
statement with the Commission on or prior to 45 days after such filing
obligation arises and to cause the shelf registration to be declared
effective by the Commission on or prior to 120 days after such
obligation arises.
112
<PAGE> 114
If:
(1) Classic and the Guarantors fail to file any of the registration
statements required by the exchange and registration rights agreement
on or before the date specified for such filing; or
(2) any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness
(the "Effectiveness Target Date"); or
(3) Classic and the Guarantors fail to consummate the exchange offer within
30 business days of the Effectiveness Target Date with respect to the
exchange offer registration statement; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective
or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the registration rights agreement (each
such event referred to in clauses (1) through (4) above, a
"Registration Default"),
then Classic and the Guarantors will pay special interest ("Special Interest")
to each Holder of notes with respect to the first 90-day period immediately
following the occurrence of the first Registration Default in an amount equal to
$0.05 per week per $1,000 principal amount of notes held by such Holder.
The amount of the Special Interest will increase by an additional $0.05 per
week per $1,000 principal amount of notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Special Interest for all Registration Defaults of $0.50 per week per $1,000
principal amount of notes.
All accrued Special Interest will be paid by Classic and the Guarantors on
each Special Interest Payment Date to the Global note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated notes by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified.
Following the cure of all Registration Defaults, the accrual of Special
Interest will cease.
Holders of notes will be required to make certain representations to
Classic (as described in the registration rights agreement) in order to
participate in the exchange offer and will be required to deliver certain
information to be used in connection with the shelf registration statement and
to provide comments on the shelf registration statement within the time periods
set forth in the exchange and registration rights agreement in order to have
their notes included in the shelf registration statement and benefit from the
provisions regarding Special Interest set forth above. By acquiring Transfer
Restricted Securities, a Holder will be deemed to have agreed to indemnify
Classic and the Guarantors against certain losses arising out of information
furnished by such Holder in writing for inclusion in any shelf registration
statement. Holders of notes will also be required to suspend their use of the
prospectus included in the shelf registration statement under certain
circumstances upon receipt of written notice to that effect from Classic.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
whether or not such Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
113
<PAGE> 115
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of more than 5% of
the Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Applicable Premium" means, with respect to any note on any redemption
date, the greater of:
(1) 1.0% of the principal amount of the note; or
(2) the excess of:
(a) the present value at such redemption date of (i) the redemption
price of the note at August 1, 2004 (such redemption price being set
forth in the table appearing above under the caption "-- Optional
Redemption") plus (ii) all required interest payments due on the
note through August 1, 2004 (excluding accrued but unpaid interest),
computed using a discount rate equal to the Treasury Rate as of such
redemption date plus 50 basis points; over
(b) the principal amount of the note, if greater.
"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 that constitute substantially all of an
operating unit, a division or line of business of such Person or that is
otherwise outside of the ordinary course of business.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than in the ordinary course of business consistent with
past practices; provided that the sale, conveyance or other disposition
of all or substantially all of the assets of Classic and its
Subsidiaries taken as a whole will be governed by the provisions of the
indenture described above under the caption "-- Repurchase at the
Option of Holders -- Change of Control" and/or the provisions described
above under the caption "-- Certain Covenants -- Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale
covenant; and
(2) the issuance or sale of Equity Interests in any of Classic's Restricted
Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million or results
in net proceeds to Classic and its Restricted Subsidiaries of less than
$1.0 million;
(2) transfers of assets between or among Classic and its Wholly Owned
Restricted Subsidiaries,
(3) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary
to Classic or to another Wholly Owned Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
114
<PAGE> 116
(6) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "-- Certain
Covenants -- Restricted Payments;" and
(7) the sale of property or equipment that has become worn out, damaged or
otherwise unsuitable for use in the business of Classic or any of its
Restricted Subsidiaries.
"Asset Swap" means an exchange of assets by Classic or a Restricted
Subsidiary of Classic for:
(1) one or more Permitted Businesses;
(2) a controlling equity interest in any Person whose assets consist
primarily of one or more Permitted Businesses;
(3) cash; and/or
(4) long-term assets that are used in a Permitted Business.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" shall have a corresponding meaning.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest, other than any straight debt obligation, or
participation that confers on a Person the right to receive a share of
the profits and losses of, or distributions of assets of, the issuing
Person.
"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
(provided that the full faith and credit of the United States is
pledged in support thereof) having maturities of not more than six
months from the date of acquisition;
115
<PAGE> 117
(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 either (x) a
party to the Credit Agreement or (y) a member of the Federal Reserve
Bank having capital and surplus in excess of $500.0 million and a
Thompson Bank Watch Rating of "B" or better;
(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 P-1 rating from Moody's Investors Service,
Inc. or an A-1 rating from Standard & Poor's Rating Services and in
each case maturing within six months after the date of acquisition; and
(6) money market funds having assets in excess of $100.0 million, at least
95% of the assets of which constitute Cash Equivalents of the kinds
described in clauses (1) through (5) of this definition.
"CCI" means Classic Communications, Inc., a Delaware corporation, and the
direct parent of Classic.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the properties or
assets of CCI, Classic and its Restricted Subsidiaries, taken as a
whole, to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act), other than Classic or any of its Restricted
Subsidiaries;
(2) the adoption of a plan relating to the liquidation or dissolution of
Classic;
(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals and their Related Parties or
a Permitted Group, becomes the Beneficial Owner, directly or
indirectly, of more than 35% of the Voting Stock of CCI, measured by
voting power rather than number of shares;
(4) the first day on which a majority of the members of the board of
directors of CCI or Classic are not Continuing Directors;
(5) CCI or Classic consolidates with, or merges with or into, any Person,
or any Person consolidates with, or merges with or into, CCI or
Classic, in any such event pursuant to a transaction in which any of
the outstanding Voting Stock of CCI or Classic or such other Person is
converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of CCI or
Classic outstanding immediately prior to such transaction is converted
into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance); or
(6) the first day on which the CCI ceases to own 100% of the outstanding
Equity Interests of Classic.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized by
such Person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
116
<PAGE> 118
(2) provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for
taxes was deducted in computing such Consolidated Net Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect
of letter of credit or bankers' acceptance financings, and net of the
effect of all payments made or received pursuant to Hedging
Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles) and other non-cash expenses (excluding any such
non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; plus
(5) all transaction fees paid or accrued on or prior to the date of the
indenture, to officers of Classic, in connection with transactions
consummated prior to or on the date of the indenture; plus
(6) all fees paid to officers of Classic after the date of the indenture in
connection with acquisitions or dispositions, provided that not more
than an aggregate of $1.0 million of such fees may be included pursuant
to this clause (6) in any twelve-month period; minus
(7) non-cash items increasing such Consolidated Net Income (including the
partial or entire reversal of reserves taken in prior periods) for such
period, other than the accrual of revenue in the ordinary course of
business,
in each case, on a consolidated basis and determined in accordance with
GAAP.
"Consolidated Indebtedness" means, with respect to any Person as of any
date of determination, the sum, without duplication, of (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the
aggregate liquidation value of all Disqualified Stock of such Person and all
preferred stock of Restricted Subsidiaries of such Person, less (iii) Hedging
Obligations that would be a liability on the balance sheet, in each case,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (i) the consolidated interest expense of
such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, all calculated after taking into
account the effect of all Hedging Obligations, and (ii) the consolidated
interest expense of such Person and its Subsidiaries that was capitalized during
such period, and (iii) any interest expense on Indebtedness of another Person
that is guaranteed by such Person or one of its Subsidiaries or secured by a
Lien on assets of such Person or one of its Subsidiaries (whether or not such
Guarantee or Lien is called upon) and (iv) the product of (a) all dividend
payments on any series of preferred stock of such Person or any of its
Subsidiaries, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
117
<PAGE> 119
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the specified Person or a Wholly Owned
Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental
approval (that 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 or governmental regulation
applicable to that Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall
be excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded; and
(5) the Net Income (but not loss) of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the specified Person or one of
its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the board of directors of Classic or CCI, as the case may be, who:
(1) was a member of such board of directors on the date of the indenture;
or
(2) was nominated for election or elected to such board of directors with
the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election; or
(3) is a representative of or was approved by Brera Classic, L.L.C., or one
of its Affiliates.
"Credit Agreement" means that certain Credit Agreement, dated as of July
28, 1999, by and among Classic and Goldman Sachs Credit Partners L.P., The Chase
Manhattan Bank and Union Bank of California providing for $175.0 million in term
loan facilities, up to $75.0 million of revolving credit borrowings, and an
additional $100.0 million uncommitted incremental facility on a term loan basis
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Debt to Cash Flow Ratio" means, as of any date of determination (the
"Determination Date"), the ratio of (a) the Consolidated Indebtedness of Classic
as of such Determination Date to (b) four times the Consolidated Cash Flow of
Classic for the latest three months for which financial information is available
preceding such Determination Date (the "Measurement Period"), determined on a
pro forma basis after giving effect to all acquisitions or dispositions of
assets made by Classic and its Subsidiaries from the beginning of such
three-month period through and including such Determination Date (including any
related financing transactions) as if such acquisitions and dispositions had
occurred at the beginning of such three-month period. For purposes of
calculating Consolidated Cash Flow for the Measurement Period
118
<PAGE> 120
immediately prior to the relevant Determination Date, (i) 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 Consolidated Cash Flow) will be deemed to
have been a Restricted Subsidiary at all times during the Measurement Period;
(ii) 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
Consolidated Cash Flow) will be deemed not to have been a Restricted Subsidiary
at any time during such Measurement Period; and (iii) if Classic or any
Restricted Subsidiary shall have in any manner (x) acquired (including through
an Asset Acquisition or the commencement of activities constituting such
operating business) or (y) 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.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Credit Agreement; and
(2) any other Senior Debt permitted under the indenture the principal
amount of which is $50.0 million or more and that has been designated
by Classic as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case 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 redeemable at the option of the holder
thereof, in whole or in part, on or prior to the earlier of the date on which
the notes mature and the date on which no notes remain outstanding.
Notwithstanding the preceding sentence, any Capital Stock that would constitute
Disqualified Stock solely because the holders thereof have the right to require
Classic to repurchase such Capital Stock upon the occurrence of a change of
control or an asset sale shall not constitute Disqualified Stock if the terms of
such Capital Stock provide that Classic may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Domestic Subsidiary" means any Restricted Subsidiary that was formed under
the laws of the United States or any state thereof or the District of Columbia
or that guarantees or otherwise provides direct credit support for any
Indebtedness of Classic.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of Classic and its Subsidiaries,
including refinancings thereof, (other than Indebtedness under the Credit
Agreement) in existence on the date of the indenture, until such amounts are
repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
119
<PAGE> 121
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness, measured as the lesser of the
aggregate outstanding amount of the Indebtedness so guaranteed and the face
amount of the guarantee.
"Guarantors" means each of:
(1) Classic's Domestic Subsidiaries on the date of the indenture; and
(2) any other subsidiary that executes a Subsidiary Guarantee in accordance
with the provisions of the indenture;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Holder" means a Person in whose name a note is registered.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations of such Person and all
Attributable Debt in respect of sale and leaseback transactions entered
into by such Person;
(5) in respect of the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the outstanding principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other extensions of
120
<PAGE> 122
credit), advances or capital contributions (excluding commission, travel, moving
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with GAAP
and include the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary. If Classic or any Restricted Subsidiary of Classic sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Classic such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of Classic, 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 Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, hypothecation, assignment for security or encumbrance
of any kind in respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law, including any conditional sale or
capital lease or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
"Management and Advisory Fee Agreement" means the agreement by and between
CCI and Brera Classic, L.L.C., dated as of May 24, 1999.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for taxes
on such gain (but not loss), realized in connection with: (a) any Asset
Sale; or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness
of such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Classic or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), 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.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Classic nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebted-
121
<PAGE> 123
ness), (b) is directly or indirectly liable as a guarantor or
otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder
of any other Indebtedness (other than the notes) of Classic or any of
its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Classic or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"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 Capital 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 Permitted 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 a
Restricted Subsidiary in connection with a Credit Facility or in an
Unrestricted Subsidiary in any circumstance, where recourse to Classic
is limited to the value of the Equity Interests so pledged;
(6) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
(7) 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);
(8) leases or subleases granted to third Persons not interfering with the
ordinary course of business of Classic;
(9) deposits made in the ordinary course of business to secure liability to
insurance carriers;
122
<PAGE> 124
(10) 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;
(11) Liens on the assets of Classic to secure Hedging Obligations with
respect to Indebtedness permitted by the Indenture to be incurred;
(12) attachment or judgment Liens not giving rise to a Default or an Event
of Default; and
(13) any interest or title of a lessor under any capital lease or operating
lease.
"Permitted Business" means a cable television, media and communications,
telecommunications, internet service provider or data transmission business, and
businesses ancillary, complementary or reasonably related to those businesses.
"Permitted Group" means any group of investors that is deemed to be a
"person" (as that term is used in Section 13(d)(3) of the Exchange Act) by
virtue of the Stockholders' Agreement, as the same may be amended, modified or
supplemented from time to time, provided that no single Person (other than the
Principals and their Related Parties) Beneficially Owns (together with its
Affiliates) more of the Voting Stock of Classic that is Beneficially Owned by
such group of investors than is then collectively Beneficially Owned by the
Principals and their Related Parties in the aggregate.
"Permitted Investments" means:
(1) any Investment in Classic or in a Restricted Subsidiary of Classic that
is a Guarantor;
(2) any Investment in Cash Equivalents;
(3) any Investment by Classic or any Subsidiary of Classic in a Person, if
as a result of or concurrently with such Investment:
(a) such Person becomes a Restricted Subsidiary of Classic and a
Guarantor; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Classic or a Restricted Subsidiary of Classic that
is a Guarantor; provided that such Person's primary business is a
Permitted Business;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales;"
(5) any Investment in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance
and other similar deposits;
(6) the extension of credit to vendors, suppliers and customers in the
ordinary course of business;
(7) any Investment 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;
(8) any Investment consisting of a Guarantee permitted under clause (1) of
the second paragraph of the covenant described above under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
(9) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of Classic;
(10) any Investment made with the net cash proceeds received by Classic
from the sale of Equity Interests of Classic (other than (i) sales of
Disqualified Stock, (ii) Equity Interests sold to any
123
<PAGE> 125
of Classic's Subsidiaries and (iii) Equity Interests sold in the
Private Equity Sale); provided that the amount of any such net cash
proceeds that are utilized for such Investment will be excluded from
clause 3(b) of the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments;"
(11) Hedging Obligations; and
(12) other Investments, in addition to those in clauses (1) through (11) of
this definition, in any Person, other than CCI or an Affiliate of CCI
that is not also a Subsidiary of Classic, having an aggregate fair
market value (measured on the date each such Investment was made and
without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (12)
since the date of the indenture, not to exceed $10.0 million at any
one time outstanding.
"Permitted Junior Securities" means:
(1) Equity Interests in Classic or any Guarantor; or
(2) debt securities that are subordinated to all Senior Debt and any debt
securities issued in exchange for Senior Debt to substantially the same
extent as, or to a greater extent than, the notes and the Subsidiary
Guarantees are subordinated to Senior Debt under the indenture.
"Permitted Refinancing Indebtedness" means any Indebtedness of Classic or
any of its Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of Classic or any of its Subsidiaries (other than intercompany Indebtedness);
provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount
(or accreted value, if applicable) of the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus all accrued
interest thereon and the amount of all expenses and premiums incurred
in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of
payment to, the notes on terms at least as favorable to the Holders of
notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(4) such Indebtedness is incurred either by Classic or by the Subsidiary
who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Permitted Tower Sale and Leaseback" means the sale and leaseback by
Classic or any of its Restricted Subsidiaries, in one or more transactions, for
aggregate consideration of up to $50.0 million, of any communications towers
used to facilitate the transmission of telecommunication, voice, data and video
signals.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Principals" means Brera Classic, L.L.C., so long as that entity is an
Affiliate of Brera Capital Partners Limited Partnership, Austin Ventures, L.P.,
BT Capital Partners, Inc., The Texas Growth Fund, BA SBIC Management, L.L.C., J.
Merritt Belisle and Steven E. Seach.
124
<PAGE> 126
"Private Equity Sale" means the sale for $100.0 million in cash of common
stock of CCI, to be consummated concurrently with this offering, the proceeds of
which will be contributed by CCI to Classic.
"Public Equity Offering" means an underwritten public offering by Classic
or its direct parent for cash (in an amount not less than $25.0 million) of its
common stock pursuant to the Securities Act registration statement (not
including Forms S-4 or S-8).
"Related Party" means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of any
Principal; or
(2) any trust, corporation, partnership or other entity, whose
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of such entity consist of
any one or more Principals and/or such other Persons referred to in the
immediately preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means:
(1) all Indebtedness of Classic or any Guarantor outstanding under Credit
Facilities and all Hedging Obligations with respect thereto;
(2) any other Indebtedness of Classic or any Guarantor permitted to be
incurred under the terms of the indenture (which Indebtedness includes
interest, whether or not allowable, accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy law), unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated
in right of payment to the notes or any Subsidiary Guarantee; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or owing by
Classic;
(2) any Indebtedness of Classic to any of its Subsidiaries or other
Affiliates;
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in violation of the
indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stockholders' Agreement" means the agreement by and between Brera Classic,
L.L.C., CCI, 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 CCI, dated
as of the date of the consummation of the Private Equity Sale.
125
<PAGE> 127
"Strategic Equity Investment" means an investment in CCI or 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 CCI of more than $1.0 billion
or, if not a public company, had total revenues of more than $1.0 billion during
its previous fiscal year.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or
more of the other Subsidiaries of that Person (or a combination
thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the redemption date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to August 1, 2004; provided,
however, that if the period from the redemption date to August 1, 2004 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 (or any successor
to any of them) that is designated by the board of directors as an Unrestricted
Subsidiary pursuant to a Board Resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with Classic or any Restricted Subsidiary of Classic 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;
(3) is a Person with respect to which neither Classic nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Classic or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Classic or any of its Restricted
Subsidiaries and has at least one executive officer that is not a
director or executive officer of Classic or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Classic as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted
126
<PAGE> 128
Subsidiary of Classic as of such date and, if such Indebtedness is not permitted
to be incurred as of such date under the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," Classic shall be in default of such covenant. The board of directors of
Classic may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of Classic of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (1) such Indebtedness is permitted under the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the three-month reference period;
and (2) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors 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 payments of principal, including payment at 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
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person or by such Person and one or more Wholly
Owned Restricted Subsidiaries of such Person.
127
<PAGE> 129
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. This
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, and assumes that the old notes were not issued with "original issue
discount," as defined in the Internal Revenue Code. 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 or resident 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.
128
<PAGE> 130
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 December 12, 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
129
<PAGE> 131
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 for Classic by
Winstead Sechrest & Minick P.C., Austin, Texas.
EXPERTS
The consolidated financial statements of Classic Cable, 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.
130
<PAGE> 132
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CLASSIC CABLE, 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' Equity 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 Sheets as of June 30,
1999.................................................. F-15
Unaudited Consolidated Statements of Operations for the
six months ended June 30, 1999 and 1998............... F-16
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998............... F-17
Notes to Unaudited Consolidated Financial Statements... F-18
BUFORD GROUP, INC.
Audited Annual Financial Statements
Independent Auditors' Report........................... F-20
Consolidated Balance Sheets as of December 31, 1998 and
1997.................................................. F-21
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997, and 1996............... F-22
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996......... F-23
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996............... F-24
Notes to Consolidated Financial Statements............. F-25
Unaudited Interim Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of
June 30, 1999......................................... F-33
Unaudited Condensed Statements of Operations for the
six months ended June 30, 1999 and 1998............... F-34
Unaudited Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 1999 and
1998.................................................. F-35
Notes to Unaudited Condensed Consolidated Financial
Statements............................................ F-36
</TABLE>
F-1
<PAGE> 133
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
CLASSIC CABLE, INC.
We have audited the accompanying consolidated balance sheets of Classic
Cable, Inc. and its subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of Classic's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Classic Cable,
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.
/s/ ERNST & YOUNG LLP
Austin, Texas
March 30, 1999
F-2
<PAGE> 134
CLASSIC CABLE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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............................... 6,454 4,494
Advances to parent.......................................... 306 56
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......................................... $252,445 $220,218
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 647 $ 772
Subscriber deposits and unearned income................... 4,846 3,507
Other accrued expenses.................................... 6,106 5,921
Accrued interest.......................................... 5,883 1,444
Long-term debt............................................ 220,804 187,967
Deferred taxes, net....................................... 1,017 3,276
-------- --------
Total liabilities.................................... 239,303 202,887
Commitments and contingencies
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........................................ -- 1,293
Stockholders' equity:
Common Stock: $.01 par value per share; 1,000 shares
authorized, issued and outstanding...................... -- --
Additional paid-in capital.................................. 86,142 62,338
Accumulated deficit......................................... (73,000) (46,300)
-------- --------
Total stockholders' equity........................... 13,142 16,038
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity................................. $252,445 $220,218
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 135
CLASSIC CABLE, 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......................................... (20,688) (20,759) (20,164)
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........................................... (23,515) (20,936) (19,499)
Income tax benefit....................................... 2,339 7,149 6,633
-------- -------- --------
Loss before extraordinary item................... (21,176) (13,787) (12,866)
Extraordinary loss on extinguishment of debt............. (5,524) -- --
-------- -------- --------
Net loss......................................... $(26,700) $(13,787) $(12,866)
======== ======== ========
Loss applicable to common stockholders................... $(26,767) $(13,888) $(12,967)
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 136
CLASSIC CABLE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
SHARES ADDITIONAL ACCUMULATED STOCKHOLDERS'
ISSUED AMOUNT PAID-IN CAPITAL DEFICIT EQUITY
------ ------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... 1,000 -- $60,424 $(19,647) $ 40,777
Dividends on preferred stock...... -- -- (101) -- (101)
Capital contribution from
parent.......................... -- -- 1,058 -- 1,058
Net loss.......................... -- -- -- (12,866) (12,866)
----- ---- ------- -------- --------
Balance at December 31, 1996........... 1,000 -- 61,381 (32,513) 28,868
Dividends on preferred stock...... -- -- (101) -- (101)
Capital contribution from
parent.......................... -- -- 1,058 -- 1,058
Net loss.......................... -- -- -- (13,787) (13,787)
----- ---- ------- -------- --------
Balance at December 31, 1997........... 1,000 -- 62,338 (46,300) 16,038
Dividends on preferred stock...... -- -- (67) -- (67)
Capital contribution from
parent.......................... -- -- 23,871 -- 23,871
Net loss.......................... -- -- -- (26,700) (26,700)
----- ---- ------- -------- --------
Balance at December 31, 1998........... 1,000 -- $86,142 $(73,000) $ 13,142
===== ==== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 137
CLASSIC CABLE, 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................................................ $ (26,700) $(13,787) $(12,866)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for bad debt............................... 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............. 1,119 1,373 1,491
Discount accretion on bank debt...................... 227 457 490
Gain on sales of cable systems....................... -- (3,644) (4,901)
Deferred tax benefit................................. (2,259) (7,404) (6,635)
Non-cash compensation................................ 1,108 1,058 1,058
Extraordinary loss................................... 5,524 -- --
Changes in working capital, net of acquisition
amounts:
Change in accounts receivable...................... (1,841) (321) (3,952)
Change in prepaid and other assets................. (84) 135 689
Change in other accruals and payables.............. 1,099 413 2,684
Change in accrued interest......................... 4,439 532 789
--------- -------- --------
Net cash provided by operating activities............... 13,996 7,892 7,848
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............................ 221,227 759 2,208
Repayments of long-term debt............................ (190,292) (7,246) (13,345)
Financing costs......................................... (6,928) -- (232)
Redemption of preferred stock........................... (1,267) -- --
Cash dividends paid on preferred stock.................. (92) (101) (101)
Purchase of subsidiary stock............................ -- -- (600)
Capital contribution from parent........................ 22,764 -- --
--------- -------- --------
Net cash provided by (used in) financing activities..... 45,412 (6,588) (12,070)
--------- -------- --------
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...................................... $ 15,039 $ 18,397 $ 17,367
</TABLE>
See accompanying notes.
F-6
<PAGE> 138
CLASSIC CABLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION
Classic Cable, Inc. and its subsidiaries (collectively, the "Company" or
"Classic") acquire, develop and operate cable television systems throughout the
United States. Classic is a wholly-owned subsidiary of Classic Communications,
Inc. ("Classic Communications").
2. ACQUISITIONS AND DISPOSITIONS OF CABLE TELEVISION SYSTEMS
Acquisitions
In December 1998, Classic 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, Classic 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 Classic'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
Classic's consolidated financial statements since the date of acquisition.
Dispositions
During 1998, Classic sold or disposed of some smaller systems that did not
fit into Classic's long-term strategic plans.
In April and May 1997, Classic 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, Classic 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.......................... $(19,753) $(9,730)
Net loss.................................................... $(25,277) $(9,730)
</TABLE>
F-7
<PAGE> 139
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Classic and all of its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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 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
Classic 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
F-8
<PAGE> 140
disposition less the future cash outflows expected to be necessary to obtain
those inflows. At this time, future cash inflows exceed future cash outflows;
thus, no impairment loss has been recognized. Management reviews the 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
Classic's operations are included in consolidated income tax returns filed
by Classic Communications. The consolidated amount of current and deferred
income tax expense is allocated to Classic by applying the principles of
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes, to Classic as if it were a separate taxpayer.
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax reporting purposes.
Cash and Cash Equivalents
For financial reporting purposes, Classic 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 Classic 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 Classic'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 Classic'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 Classic's bonds is based on quoted market prices. The carrying amount of
Classic's bonds was $124.4 million and the fair value was $129.7 million at
December 31, 1998.
Classic 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. Classic
does not utilize financial instruments for trading or other speculative
purposes. The counterparties to these contractual arrangements are major
financial institutions with which Classic also has other financial
relationships. Classic is exposed to credit loss in the event of nonperformance
by these counterparties. However, Classic 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> 141
June 15, 1999. Because of Classic'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 Classic.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
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 Classic'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 OF COSTS AND END OF
FOR THE PERIOD ENDED PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998.................................. $262 $ 971 $ (908) $325
1997.................................. $513 $1,248 $(1,499) $262
1996.................................. $249 $1,491 $(1,227) $513
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist 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> 142
6. LONG-TERM DEBT
Balances of amounts outstanding under Classic's various debt agreements are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
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....................................................... 567 634
-------- --------
$220,804 $187,967
======== ========
</TABLE>
In July 1998, Classic issued $125.0 million of 9.875% Senior Subordinated
Notes due 2008. Interest payments on the Senior Subordinated Notes begin in
1999. Concurrent with the offering, Classic 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. Classic 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 Classic, 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 1998 Credit Agreement is collateralized by a security interest in
essentially all the assets of Classic. Classic Communications has no operations
of its own. Consequently, it will rely on dividends and cash flow of Classic to
meet its debt service obligations. The guarantors are wholly owned and the
guarantees are full, unconditional, and joint and several, and separate
financial statements of the guarantors are not presented because management has
determined that they would not be material to investors. The terms of the Credit
Agreement restrict certain activities of Classic, including the incurrence of
additional indebtedness and the payment of certain dividends.
In connection with the 1998 Credit Agreement, Classic 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 Classic, 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.
Classic 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 Classic 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 Classic to change the interest rate of their debt from variable rate
to fixed rate.
F-11
<PAGE> 143
The swap is a contractual Agreement between Classic 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................................................ 217,800
--------
$221,368
========
</TABLE>
7. PREFERRED STOCK
In July 1998, Classic redeemed the outstanding shares of TVE Preferred
Stock at a redemption price per share of $100 plus accrued and unpaid dividends.
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.
8. INCOME TAXES
Significant components of income tax benefit from continuing operations are
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ (80) $ 255 $ --
State............................................... -- -- 2
------- ------- -------
Total current.................................... (80) 255 2
Deferred:
Federal............................................. (1,876) (6,573) (5,890)
State............................................... (383) (831) (745)
------- ------- -------
Total deferred................................... (2,259) (7,404) (6,635)
------- ------- -------
Income tax benefit............................... $(2,339) $(7,149) $(6,633)
======= ======= =======
</TABLE>
Classic'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>
YEARS ENDED 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........................... 25.1 -- --
Other nondeductible items................................. 2.9 3.7 3.9
----- ----- -----
(9.9)% (34.1)% (34.0)%
===== ===== =====
</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
F-12
<PAGE> 144
purposes. Significant components of Classic'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.................................................... 3,073 5,414
-------- -------
Total deferred tax liabilities......................... 3,771 7,505
Deferred tax assets:
Net operating loss carryforwards:
Acquired............................................... 4,880 4,880
Other.................................................. 12,839 6,440
Other..................................................... 709 570
-------- -------
Total deferred tax assets.............................. 18,428 11,890
Less valuation allowance.................................... (15,674) (7,661)
-------- -------
Net deferred tax assets................................... 2,754 4,229
-------- -------
Net deferred tax liabilities.............................. $ 1,017 $ 3,276
======== =======
</TABLE>
At December 31, 1998, Classic had net operating loss carryforwards of
$46,276,000 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 Classic 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 Classic. Classic has recorded a
deferred tax asset of $584,000 for this item and a corresponding reduction to
goodwill related to the subsidiary's acquisition.
9. EMPLOYEE BENEFIT PLAN
Classic 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. Classic 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.
10. ABANDONMENT OF TELEPHONE OPERATIONS
At December 31, 1995 Classic was negotiating an Agreement to purchase four
telephone exchanges in Kansas. For various reasons, Classic 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, Classic 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. Classic revised their estimate of costs associated with
the abandonment and took an additional charge of $500,000 in 1997.
F-13
<PAGE> 145
In November 1998, Classic 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, Classic received cash consideration
of $348,000 in 1999 in connection with the settlement. The settlement resulted
in a loss of approximately $220,000.
11. SETTLEMENT OF CLAIMS
In February 1998, Classic Communications settled claims that arose in
conjunction with divorce proceedings of an officer of Classic Communications.
Classic Communications purchased certain stock of Classic Communications in
which the officer's wife held a community property interest and provided
monetary consideration for the release of the claims. The related expenses,
including legal, consultant and other fees of approximately $1,411,000 are
included in corporate overhead expenses of Classic in 1997.
In March 1997, the company settled certain litigation in which Classic was
seeking damages related to a previous year's acquisition. Classic received
approximately $3.5 million in the settlement. A receivable of $500,000 existed
at December 31, 1996 related to this claim. The net proceeds of $3 million were
recorded as a reduction of goodwill.
12. COMMITMENTS AND CONTINGENCIES
Obligations of Parent
Classic's parent, Classic Communications, has certain obligations that
currently would require resources of Classic if Classic Communications were to
satisfy these obligations. These obligations primarily consist of the $114.0
million of 13.25% Senior Discount Notes issued in July 1998. These notes are due
in 2009. Interest payments do not commence until 2004.
Lease Arrangements
Classic, 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
Classic 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 Classic.
F-14
<PAGE> 146
CLASSIC CABLE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1999
--------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 638
Accounts receivable, net.................................... 5,136
Prepaid expenses............................................ 1,341
Property, plant, and equipment.............................. 135,177
Less accumulated depreciation............................... (47,486)
--------
87,691
Advances to parent.......................................... 519
Deferred financing costs, net............................... 6,429
Intangible assets:
Subscriber relationships.................................. 95,367
Franchise rights.......................................... 71,500
Noncompete agreements..................................... 8,425
Goodwill.................................................. 40,865
--------
216,157
Less accumulated amortization............................... (76,415)
--------
139,742
--------
Total assets......................................... $241,496
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 489
Subscriber deposits and unearned income................... 5,203
Accrued expenses.......................................... 5,465
Accrued interest.......................................... 5,731
Long-term debt............................................ 222,016
Deferred taxes, net....................................... 1,017
--------
Total liabilities.................................... 239,921
Stockholders' equity:
Common Stock.............................................. --
Additional paid-in capital................................ 86,805
Accumulated deficit....................................... (85,230)
--------
Total stockholders' equity........................... 1,575
--------
Total liabilities and stockholders' equity........... $241,496
========
</TABLE>
See accompanying notes.
F-15
<PAGE> 147
CLASSIC CABLE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
-------- -------
<S> <C> <C>
Revenues.................................................... $ 39,286 $32,214
Operating expenses:
Programming............................................... 10,427 8,218
Plant and operating....................................... 4,401 3,865
General and administrative................................ 5,755 5,357
Marketing and advertising................................. 452 339
Corporate overhead........................................ 1,725 1,259
Depreciation and amortization............................. 18,096 14,169
-------- -------
Total operating expenses............................... 40,856 33,207
-------- -------
Loss from operations........................................ (1,570) (993)
Interest expense............................................ (10,675) (10,223)
Other income (expense)...................................... 15 64
-------- -------
Loss before taxes........................................... (12,230) (11,152)
Income tax benefit.......................................... -- 1,371
-------- -------
Net loss.................................................... $(12,230) $(9,781)
======== =======
</TABLE>
See accompanying notes.
F-16
<PAGE> 148
CLASSIC CABLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
1999 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(12,230) $(9,781)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for bad debt................................. 386 365
Depreciation........................................... 7,509 5,505
Amortization of intangibles............................ 10,587 8,678
Amortization of deferred financing costs............... 342 660
Discount accretion on long-term debt................... 29 217
Non-cash compensation.................................. 663 476
Change in operating assets and liabilities:
Accounts receivable.................................. (48) (363)
Prepaid expenses..................................... (917) 236
Advances to parent................................... (213) (180)
Accounts payable..................................... (158) (450)
Subscriber deposits and unearned income.............. 357 574
Accrued expenses..................................... (641) (686)
Accrued interest..................................... (152) 613
Deferred taxes....................................... -- (1,362)
-------- -------
Net cash provided by (used in) operating activities....... 5,514 4,502
INVESTING ACTIVITIES
Payments for other intangibles............................ (513) (18)
Purchase of property, plant and equipment................. (8,008) (4,201)
-------- -------
Net cash used in investing activities..................... (8,521) (4,219)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. 5,500 1,015
Repayments of long-term debt.............................. (4,317) (42)
Financing costs........................................... (317) (1)
Exchanges and conversions of common stock................. -- (1)
Cash dividends paid on preferred stock.................... -- (51)
-------- -------
Net cash provided by financing activities................. 866 920
-------- -------
Change in cash and cash equivalents....................... (2,141) 1,203
Cash and cash equivalents at beginning of period.......... 2,779 616
-------- -------
Cash and cash equivalents at end of period................ $ 638 $ 1,819
======== =======
</TABLE>
See accompanying notes.
F-17
<PAGE> 149
CLASSIC CABLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Classic
Cable, Inc. ("Classic"), 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
six month period ended June 30, 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 Classic's allowance for doubtful accounts for the six
months ending June 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
FOR THE SIX MONTHS ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1999.......................... $325 $386 $385 $326
June 30, 1998.......................... 260 365 374 251
</TABLE>
3. INCOME TAXES
Classic did not record an income tax benefit for the six months ended June
30, 1999. The effective tax rates for the six months ended June 30, 1999 and
June 30, 1998 differ primarily due to an increase in the valuation allowance on
deferred tax assets. Classic believes it is more likely than not that such
deferred tax assets will not be utilized in the near term.
Classic'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. CONTINGENCIES
Classic's parent, Classic Communications, Inc. ("CCI"), has no revenue
generating or cash generating assets other than its investment in Classic, its
wholly owned subsidiary. CCI does have certain obligations that currently would
require resources of Classic if CCI were to satisfy these obligations.
5. SUBSEQUENT EVENT
Acquisition
In July 1999, Classic acquired Buford Group, Inc., which operates cable
television systems in Arkansas, Louisiana, Missouri, and Texas, for
approximately $300 million (the "Buford Acquisition"). The purchase was financed
from (a) a $96 million capital contribution from CCI, (b) proceeds of a private
debt offering, and (c) proceeds from the refinancing of the Classic bank
agreement. See Debt Offering below.
The following summarized unaudited pro forma financial information assumes
the Buford Acquisition had occurred on January 1, 1999 and 1998, respectively.
The following pro forma information is not
F-18
<PAGE> 150
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>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues.................................................... $ 77,684 $ 74,777
Loss before cumulative effect of change in accounting
principle................................................. $(23,474) $ 30,398
Net loss.................................................... $(23,681) $(30,398)
</TABLE>
Debt Offering
In July 1999, Classic issued $150 million of 9.375% Senior Subordinated
Notes due 2009. Concurrently with the offering, Classic entered into an Amended
and Restated Credit Agreement. The proceeds from these transactions and the
capital contribution from CCI were approximately $425 million and were used to
(a) fund the acquisition of Buford Group, Inc., (b) repay the 1998 Credit
Agreement and (c) pay fees and expenses of these transactions.
The Amended and Restated Credit Agreement consists of (a) a $75 million
revolving credit facility which matures in 2007, (b) a $75 million Term A loan
facility which matures in 2007, (c) a $100 million Term B loan facility which
matures in 2008, and (d) a non-committed $100 million Term C loan facility which
matures in 2008. Mandatory payments commence in 2001. Interest is based upon
either a LIBOR rate plus an applicable margin or, at the option of Classic, a
base rate plus an applicable margin.
Change of Control Offering
CCI's sale of stock met the definition of a Change of Control as defined in
the indenture to both the Classic Communications 13.25% Senior Discount Notes
due 2009 and the Classic Cable 9.875% Senior Subordinated Notes due 2008. As a
result, CCI and Classic have initiated offers to repurchase these notes at a
price equal to 101% of their principal amount (or accreted value in the case of
the Discount Notes), together with accrued and unpaid interest, if any, to the
date of purchase. The offers are expected to expire in September 1999. Classic
expects to purchase any of its tendered notes with proceeds of the Amended and
Restated Credit Agreement. CCI has not arranged financing to purchase any of its
tendered notes.
F-19
<PAGE> 151
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-20
<PAGE> 152
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-21
<PAGE> 153
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-22
<PAGE> 154
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-23
<PAGE> 155
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-24
<PAGE> 156
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 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 (the "Company"). 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
F-25
<PAGE> 157
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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) 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
F-26
<PAGE> 158
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 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.
F-27
<PAGE> 159
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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>
(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>
F-28
<PAGE> 160
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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 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>
F-29
<PAGE> 161
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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>
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>
F-30
<PAGE> 162
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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. The
remaining operating agreements are primarily for office space and annual minimum
aggregate rentals under such leases are not considered material.
(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,
F-31
<PAGE> 163
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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.
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-32
<PAGE> 164
BUFORD GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 2,890
Accounts receivable, net of allowance for doubtful accounts
of $398................................................... 2,846
Prepaid expenses............................................ 484
Property, plant and equipment............................... 208,268
Less accumulated depreciation and amortization.............. (96,913)
--------
111,355
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............................... (18,613)
--------
46,441
Other assets................................................ 2,586
--------
$166,602
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 491
Deposits and unearned revenues.............................. 2,341
Accrued expenses............................................ 7,073
Long-term obligations....................................... 112,000
Deferred federal income taxes............................... 976
--------
Total liabilities................................. 122,881
--------
Stockholders' equity:
Common stock, $1 par value. Authorized 2,000 shares;
issued and outstanding 1,000 shares................... 1
Additional capital..................................... 14,058
Retained earnings...................................... 29,662
--------
Total stockholders' equity........................ 43,721
Commitments and contingencies...............................
--------
$166,602
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-33
<PAGE> 165
BUFORD GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Cable television revenues.............................. $19,537 $17,680 $38,398 $32,943
------- ------- ------- -------
Operating expenses:
Programming.......................................... 5,213 4,657 10,430 8,762
Plant and operating.................................. 1,683 1,688 3,377 3,345
General and administrative........................... 4,301 4,239 8,461 7,936
Marketing and advertising............................ 128 57 237 150
Corporate overhead................................... (430) 2,250 (72) 4,354
Depreciation and amortization........................ 6,378 5,767 12,105 10,137
------- ------- ------- -------
17,273 18,158 34,538 34,684
------- ------- ------- -------
Operating income (loss)........................... 2,264 (478) 3,860 (1,741)
------- ------- ------- -------
Other income (expense):
Interest expense..................................... (2,001) (2,089) (4,095) (3,681)
Interest income...................................... 74 90 166 172
Other, net........................................... (175) (77) (244) (99)
------- ------- ------- -------
(2,102) (2,076) (4,173) (3,608)
------- ------- ------- -------
Loss before income taxes and cumulative effect of
change in accounting principle.................. 162 (2,554) (313) (5,349)
Income tax benefit (expense)........................... 123 131 210 (25)
------- ------- ------- -------
Loss before cumulative effect of change in
accounting principle............................ 285 (2,423) (103) (5,374)
Cumulative effect of change in accounting principle,
net of income tax benefit of $52..................... -- -- 207 --
------- ------- ------- -------
Net loss.......................................... $ 285 $(2,423) $ (310) $(5,374)
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-34
<PAGE> 166
BUFORD GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (310) $ (5,374)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................ 12,105 10,137
Non-cash interest expense............................ 12 42
Employee stock appreciation expense.................. (775) 3,550
Deferred federal income tax benefit.................. (210) (274)
Cumulative effect of change in accounting
principle........................................... 207 --
Changes in assets and liabilities:
Accounts receivable............................... 32 (718)
Prepaid expenses.................................. (318) (188)
Accounts payable and accrued expenses............. (2,111) 1,272
Deposits and unearned revenues.................... 107 201
Other............................................. (212) (178)
------- --------
Net cash provided by operating activities......... 8,527 8,470
------- --------
Cash flows from investing activities:
Additions to property, plant and equipment................ (7,540) (10,980)
Acquisition of cable systems.............................. -- (29,900)
Other..................................................... -- (89)
------- --------
Net cash used in investing activities............. (7,540) (40,969)
------- --------
Cash flows from financing activities:
Proceeds from long-term obligations....................... -- 30,000
Payments of long-term obligations......................... (6,000) --
------- --------
Net cash provided by (used in) financing
activities...................................... (6,000) 30,000
------- --------
Net increase (decrease) in cash and cash equivalents........ (5,013) (2,499)
Cash and cash equivalents at beginning of period............ 7,903 7,890
------- --------
Cash and cash equivalents at end of period.................. $ 2,890 $ 5,391
======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-35
<PAGE> 167
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
(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
F-36
<PAGE> 168
BUFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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. On July 29, 1999,
the sale was consummated for a total selling price of approximately $297.8
million. In connection with the Buford Television Partnership Agreement (the
"Agreement"), the Buford Television Partnership granted ownership in 12% of
future appreciation in the market value of the Company's common stock to certain
key employees. At December 31, 1998, the Company had accrued an estimated
liability under this agreement of approximately $14.8 million. The key employees
covered by the Agreement received approximately $14.1 million in satisfaction of
their rights under the agreement at the time of sale. Accordingly, the Company
recorded a credit of approximately $0.7 million to corporate overhead expense
during the three months ended June 30, 1999.
Additionally, the Company paid out approximately $2.6 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 at June 30, 1999 related to these agreements as such amounts are payable
only upon consummation of a sale of cable system assets and were recognized when
the sale closed.
F-37
<PAGE> 169
This Page Intentionally Left Blank
<PAGE> 170
================================================================================
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 DECEMBER 12, 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................................ 2
Risk Factors........................... 16
Use of Proceeds of the Exchange
Notes................................ 22
Unaudited Pro Forma Consolidated
Financial Information................ 23
Selected Historical Consolidated
Financial Data -- Classic Cable,
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............. 58
Management............................. 68
Certain Relationships and Related
Transactions......................... 73
Principal Stockholders................. 76
Description of Other Indebtedness...... 77
The Exchange Offer..................... 81
Description of the Notes and
Guarantees........................... 89
United States Federal Income Tax
Considerations....................... 128
Plan of Distribution................... 129
Legal Matters.......................... 130
Experts................................ 130
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
================================================================================
OFFER TO EXCHANGE
ALL OUTSTANDING
9 3/8% SENIOR SUBORDINATED
NOTES DUE 2009
FOR
9 3/8% SENIOR SUBORDINATED
NOTES DUE 2009 OF
[CLASSIC CABLE LOGO]
CLASSIC CABLE, INC.
------------------------
PROSPECTUS
------------------------
SEPTEMBER 9, 1999
================================================================================
