10-Q 1 d92405e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO__________ COMMISSION FILE NUMBER: 333-63643 CLASSIC CABLE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION 74-2750981 OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 6151 PALUXY ROAD BUILDING A TYLER, TEXAS 75703 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (903) 581-2121 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of October 31, 2001, there were 1,000 shares of Common Stock outstanding. CLASSIC CABLE, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS

---------- This Quarterly Report on Form 10-Q is for the quarter ended September 30, 2001. This Quarterly Report modifies and supersedes documents filed prior to this Quarterly Report. The SEC allows us to "incorporate by reference" information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this Quarterly Report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this Quarterly Report. In this Quarterly Report, "Classic," "we," "us" and "our" refer to Classic Cable, Inc. and its subsidiaries. You should carefully review the information contained in this Quarterly Report, but should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the SEC. The statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q are forward-looking statements. These statements include, but are not limited to: o statements regarding our bankruptcy proceedings; o statements regarding future financing transactions; o statements regarding our plans to obtain waivers and amendments to our current financing arrangements; o statements regarding our planned capital expenditures and system upgrades; and o statements regarding the offering of video and Internet access on our systems. Forward-looking statements generally can also be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or "believe." 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: o the uncertainties and/or potential delays associated with our bankruptcy proceedings; o the uncertainties and/or potential delays associated with integrating past and future acquisitions; o our ability to acquire additional cable systems on terms favorable to us; o the passage of legislation or court decisions adversely affecting the cable industry; 2 o our ability to repay or refinance our outstanding indebtedness; o the timing, actual cost and allocation of our capital expenditures and system upgrades; o our potential need for additional capital; o competition in the cable industry; and o the advent of new technology. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Classic Cable, Inc. Consolidated Balance Sheets (in thousands, except share data) (unaudited)

See notes to consolidated financial statements. 4 Classic Cable, Inc. Consolidated Statements of Operations (in thousands) (unaudited)

See notes to consolidated financial statements. 5 Classic Cable, Inc. Consolidated Statements of Cash Flows (in thousands) (unaudited)

See notes to consolidated financial statements. 6 Classic Cable, Inc. Notes to Consolidated Financial Statements As of September 30, 2001 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Classic Cable, Inc. (the "Company") 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 management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2000 included in the Company's Form 10-K. Certain reclassifications have been made in the 2000 financial statements to conform to the 2001 presentation. 2. BANKRUPTCY PROCEEDINGS On November 13, 2001, the Company, its parent, Classic Communications, Inc. ("CCI"), and all of its wholly owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Court"). The Company and each of its debtor subsidiaries continue to manage their businesses as a debtor-in-possession. As debtors-in-possession, management is authorized to operate the businesses, but may not engage in transactions outside the ordinary course of business unless approved by the Court. After the Chapter 11 filings, the Company obtained several Court orders authorizing the payment of certain pre-petition liabilities (such as employee wages and benefits and programming fees) and taking certain actions designed to preserve the going concern value of the business and thereby enhance the reorganization prospects. These financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and payment of post-petition liabilities in the ordinary course of business. As a result of the Chapter 11 filings, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be settled for amounts recorded. After negotiations with various parties in interest, the Company expects to present a plan of reorganization to restructure its obligations. The proposed plan of reorganization could change the amounts reported in the financial statements and cause a material change in the carrying amount of assets and liabilities. Future financial statements will be prepared in accordance with the AICPA's Statement of Position 90-7 Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). SOP 90-7 requires segregating pre-petition liabilities that are subject to compromise and identifying all transactions and events that are directly associated with the reorganization of the Company. A significant portion of the liabilities recorded at September 30, 2001 are expected to be subject to compromise. Also in accordance with SOP 90-7, after the filing date, interest will no longer be accrued on any unsecured and undersecured debt. Under bankruptcy law, actions by creditors to collect pre-petition indebtedness owed by the Company at the filing date are stayed and other pre-petition contractual obligations may not be enforced against the Company. In addition, the Company has the right, subject to Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these rejections may file claims with the Court. The Company is in the process of preparing and submitting the schedules setting forth the Company's assets and liabilities as of the filing date as reflected in the accounting records. The amounts of claims filed by creditors could be significantly different from the amounts recorded by the Company. Due to material uncertainties, it is not possible to predict the length of time the Company will operate under Chapter 11 protection, the outcome of the proceedings in general, whether the Company will continue to operate under its current organizational structure, the effect of the proceedings on the Company's businesses or the recovery by creditors and equity holders of the Company. 7 An interim order of the Court approved a $30 million secured super-priority debtor-in-possession revolving credit agreement ("Credit Agreement") with Goldman Sachs Credit Partners L.P. ("Goldman Sachs") as administrative agent, lead arranger and syndication agent ("DIP Financing"). The DIP Financing is collateralized by, among other things, a senior lien on substantially all Company assets, including assets that had previously been subject to a lien. Each of the Company's subsidiaries and CCI has guaranteed the Company's obligations under the DIP Financing and CCI has pledged the Company's outstanding stock as well as that of its subsidiaries in connection with the DIP Financing. The DIP Financing expires on the one-year anniversary of the first loan under the Credit Agreement, unless it is extended to fifteen months following the closing of the first loan. The Credit Agreement can be terminated if an event of default occurs and the Company can terminate portions of the revolving credit commitment in certain circumstances. If a loan under the Credit Agreement is a base rate loan, the Company will pay interest equal to the greater of (a) 7.00% per annum, and (b) the base rate plus 2.50%. The base rate for any period is a fluctuating rate equal to the greater of (i) the rate announced by Goldman Sachs in New York from time to time as its base rate, and (ii) the sum of 0.5% and the federal funds rate. If a loan is a Eurodollar rate loan, the Company will pay interest equal to the greater of (a) 7.00% per annum and (b) the Eurodollar rate plus 4.50%. The Eurodollar rate is determined by Goldman Sachs to be the offered rate for deposits in dollars for the applicable period which appears on the Dow Jones Markets Telerate Page 3750. Interest accrued on a base rate loan is generally payable in arrears on the first day of each calendar month after the making of each base rate loan. Interest accrued on a Eurodollar rate loan is generally payable in arrears on the first day of each month during an interest period applicable to such loan. The interest period may be one, two, three or six months as selected by the Company in its borrowing notice. 3. ASSET IMPAIRMENT During the three months ended September 30, 2001, the Company incurred a net basic subscriber decline of approximately 24,000 subscribers. This represented a 6% decline in the basic subscriber base. Overall for the nine months ended September 30, 2001, the Company has incurred a net basic subscriber decline of approximately 40,000 subscribers. As a result of these declines, the Company determined that various long-lived assets associated with the subscriber base were impaired. Based upon recent third-party cable systems sales of comparable systems, the Company recognized in the third quarter of 2001 an impairment charge of $200 million. 4. INCOME TAXES The effective tax rates for the three and nine months ended September 30, 2001 and 2000 differ from the statutory rates primarily due to the impact of permanent differences and increases in the valuation allowance on deferred tax assets. The Company believes it is more likely than not that such deferred tax assets will not be utilized in the near term. 5. STAR ACQUISITION In February 2000, a wholly owned subsidiary purchased substantially all of the assets of Star Cable Associates ("Star"), which operates cable television systems in Texas, Louisiana and Ohio, for an aggregate purchase price of approximately $111 million in cash and 555,555 shares of CCI's Class A Voting Common Stock. The purchase was financed from proceeds of the $225 million private debt offering of 10.5% Senior Subordinated Notes due 2010 and available cash. The acquisition was accounted for using the purchase method and, accordingly, the operating results of the systems acquired have been included in the Company's consolidated financial statements since the date of acquisition. The following summarized unaudited pro forma financial information for the nine months ended September 30, 2000 assumes the Star acquisition, the related financing, and other changes to the Company's debt structure had occurred on January 1, 2000. The following pro forma information is not necessarily indicative of the results that would have occurred had the transactions been completed at the beginning of the period indicated, nor is it indicative of future operating results (in thousands, except per share data):

8 6. LONG-TERM DEBT The Company's long-term debt consists of the following as of September 30, 2001 (in thousands): 1999 credit facility: Revolver.............................. $ 35,500 Term loan B........................... 86,842 Term loan C........................... 78,158 10.5% Senior Subordinated Notes......... 225,000 9.375% Senior Subordinated Notes........ 150,000 9.875% Senior Subordinated Notes........ 3,000 Other................................... 26 ---------- $ 578,526 ==========

In February 2001, the Company borrowed an additional $19.5 million on its revolver. The 1999 credit facility is collateralized by essentially all the assets of the Company. The terms of the credit facility and the DIP Financing restrict certain activities of the Company, including the incurrence of additional indebtedness and the payment of certain dividends. Accordingly, substantially all the assets and operations of the Company are restricted as to transfer to CCI and may not be available for dividends and/or debt service of CCI. As of September 30, 2001, the Company was not in compliance with certain financial covenants specified in its credit facility. The Company failed to make an aggregate $7.2 million of interest payments due on its 9.375% Senior Subordinated Notes and its 9.875% Senior Subordinated Notes that were due on August 1, 2001. In addition, the Company failed to make the $11.8 million interest payment on its 10.5% Senior Subordinated Notes that was due on September 4, 2001. The failure of the Company to make the interest payments is an event of default under the Indentures under which the Notes were issued. The Company is a holding company with no assets or operations other than its investments in its subsidiaries. The subsidiary guarantors are wholly owned subsidiaries of the Company and have fully and unconditionally guaranteed the notes (the 10.5% Senior Subordinated Notes, the 9.375% Senior Subordinated Notes, and the 9.875% Senior Subordinated Notes) on a joint and several basis. The subsidiary guarantors comprise all of the direct and indirect subsidiaries of the Company. The Company has not presented separate financial statements and other disclosures concerning each subsidiary guarantor because management has determined that such information is not material to investors. See further discussion in footnote 2. 7. SEVERANCE COSTS During the first nine months of 2001, the Company paid severance benefits of $974,000, all of which were accrued during 2000, to 154 employees. There were no other adjustments to the accrued benefits. 8. CORPORATE OVERHEAD The Company has been engaged in various negotiations related to potential financing and restructuring transactions. The Company has incurred substantial fees related to the due diligence efforts and commitments related to these potential transactions. During the first, second and third quarters of 2001, the Company incurred $123,000, $2,686,000 and $3,018,000, respectively, related to such activities. The Company initiated a reorganization plan in the fourth quarter of 2000. See note 7. Other costs related to the Company's reorganization efforts incurred during the first, second and third quarters of 2001 were $11,000, $309,000 and $19,000, respectively. In June 2001, the Company forgave certain indebtedness of an officer of the Company. The amount forgiven was $443,000. Other costs incurred related to the forgiveness totaled $325,000. 9 9. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt FAS 144 as of January 1, 2002 and does not expect that the adoption of the Statement will have a significant impact on its financial position and results of operations. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets ("FAS 142"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with FAS 142. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 10. SUBSEQUENT EVENTS In October 2001, the Company, through its subsidiaries, sold assets associated with the Breckenridge, Colorado cable system to TCI Cable Partners of St. Louis, L.P. for approximately $13.7 million plus approximately $2.5 million to be paid in the future if certain conditions are met. On October 24, 2001, the Company's 1999 credit facility was amended to permit the Breckenridge disposition. 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We do not believe the discussion and analysis of our historical financial condition and results of operations set forth below are indicative nor should they be relied upon as an indicator of our future performance. On November 13, 2001 we, our parent, Classic Communications, Inc. ("CCI"), and our subsidiaries listed below filed voluntary petitions for reorganization (the "Petitions") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Court"). The following subsidiaries filed Chapter 11 petitions: Callcom 24, Inc. Classic Cable of Oklahoma, Inc. Classic Cable Holding, Inc. Classic Telephone, Inc. Friendship Cable of Texas, Inc. Correctional Cable TV, Inc. Friendship Cable of Arkansas, Inc. Universal Cable Holdings, Inc. Television Enterprises, Inc. Universal Cable Communications, Inc. W.K. Communications, Inc. Universal Cable of Beaver, Oklahoma, Inc. Universal Cable Midwest, Inc. WT Acquisition Corporation

We will continue to manage our business as a debtor-in possession. As debtors-in-possession, management is authorized to operate the businesses, but may not engage in transactions outside the ordinary course of business unless approved by the Court. After the Chapter 11 filings, we obtained several Court orders authorizing the payment of certain pre-petition liabilities (such as employee wages and benefits and programming fees) and taking certain actions designed to preserve the going concern value of the business and thereby enhance the reorganization prospects. Under bankruptcy law, actions by creditors to collect pre-petition indebtedness owed by us at the filing date are stayed and other pre-petition contractual obligations may not be enforced against us. In addition, we have the right, subject to Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these rejections may file claims with the Court. We are in the process of preparing and submitting the schedules setting forth all assets and liabilities as of the filing date as reflected in our accounting records. The amounts of claims filed by creditors could be significantly different from the amounts recorded by us. Due to material uncertainties, it is not possible to predict the length of time we will operate under Chapter 11 protection, the outcome of the proceedings in general, whether we will continue to operate under our current organizational structure, the effect of the proceedings on our business or the recovery by our creditors and equity holders. An interim order of the Bankruptcy Court approved a $30 million secured super-priority debtor-in-possession revolving credit agreement ("Credit Agreement") with Goldman Sachs Credit Partners L.P. ("Goldman Sachs") as administrative agent, lead arranger and syndication agent ("DIP Financing"). The DIP Financing is collateralized by, among other things, a senior lien on substantially all of CCI and our assets, including assets that had previously been subject to a lien. Each of our subsidiaries and CCI has guaranteed the obligations under the DIP Financing and our outstanding stock as well as that of our subsidiaries has been pledged in connection with the DIP Financing. The DIP Financing expires on the one-year anniversary of the first loan under the Credit Agreement, unless it is extended to fifteen months following the closing of the first loan. The Credit Agreement can be terminated if an event of default occurs and we can terminate portions of the revolving credit commitment in certain circumstances. If a loan under the Credit Agreement is a base rate loan, we will pay interest equal to the greater of (a) 7.00% per annum, and (b) the base rate plus 2.50%. The base rate for any period is a fluctuating rate equal to the greater of (i) the rate announced by Goldman Sachs in New York from time to time as its base rate, and (ii) the sum of 0.5% and the federal funds rate. If a loan is a Eurodollar rate loan, we will pay interest equal to the greater of (a) 7.00% per annum and (b) the Eurodollar rate plus 4.50%. The Eurodollar rate is determined by Goldman Sachs to be the offered rate for deposits in dollars for the applicable period which appears on the Dow Jones Markets Telerate Page 3750. Interest accrued on a base rate loan is generally payable in arrears on the first day of each calendar month after the making of each base rate loan. Interest accrued on a Eurodollar rate loan is generally payable in arrears on the first day of each month during an interest period applicable to such loan. The interest period may be one, two, three or six months as selected by us in our borrowing notice. 11 GENERAL REVENUES. Revenues are primarily attributable to monthly subscription fees charged to subscribers for our basic, premium and digital cable television product offerings. Basic revenues consist of monthly subscription fees for all services, other than digital services and 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. Digital revenues consist of the incremental revenues over and above our full basic revenues for digital based programming. In addition, other revenues are derived from: o installation and reconnection fees charged to basic subscribers to commence or reinstate service; o pay-per-view charges; o late payment fees; o advertising revenues; and o commissions related to the sale of merchandise by home shopping services. At September 30, 2001, our collective systems served approximately 353,000 basic subscribers, 203,000 premium subscribers and 38,000 digital subscribers. We have a basic penetration rate of approximately 49%, a premium penetration rate of approximately 58% and a digital penetration rate of approximately 12%. The table below sets forth the percentage of our total revenues attributable to the various sources for the nine months ended September 30, 2001 and 2000:

OPERATING EXPENSES. Our operating expenses consist primarily of (a) programming fees, (b) plant and operating costs, (c) general and administrative expenses, (d) marketing costs, (e) corporate overhead, and (f) amortization and depreciation of intangible assets and property, plant and equipment. 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. 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 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 consists primarily of expenses incurred by our executive management, which are not directly attributable to any one system. NET LOSSES. The high level of depreciation and amortization associated with our 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. The following discussion pertains to our results of operations and financial condition for the three and nine months ended September 30, 2001 and 2000. THREE MONTHS ENDED SEPTEMBER 30, 2001 VS. SEPTEMBER 30, 2000 Revenues decreased $1.7 million, or 4%, in the three months ending September 30, 2001. Basic subscriber declines of 40,000 were partially mitigated by rate increases implemented in the first quarter of 2001, all of which resulted in basic revenue decline of $2.3 million. Basic revenue per subscriber increased from $32.20 to $32.62. Digital subscribers increased by 27,000 which led to increased revenue of $0.9 million. Premium and other revenue sources declined $0.3 million. Revenue per subscriber increased from $39.08 to $40.55. Operating expenses increased $212.8 million, or 421%, in the three months ending September 30, 2001. Programming expenses increased $1.3 million primarily due to increased rates charged by 12 programming vendors. In 2001, plant and operating and general and administrative costs increased $5.7 million, or 50%, primarily due to increased labor costs, contract labor and bad debt expense. Corporate overhead increased $2.9 million primarily due to $3.0 million of professional fees incurred in 2001 related to our various financing and restructuring activities. Depreciation and amortization expense in 2001 was $25.9 million, an increase of $3.2 million over the same period in 2000. The increase is due to continuing capital spending on digital services and the utilization of inventory balances. During the three months ended September 30, 2001, we incurred a net basic subscriber decline of approximately 24,000 subscribers. This represented a 6% decline in the basic subscriber base. Overall for the nine months ended September 30, 2001, we have incurred a net basic subscriber decline of approximately 40,000 subscribers. As a result of these declines, we determined that various long-lived assets associated with the subscriber base were impaired. Based upon recent third-party cable systems sales of comparable systems, we recognized in the third quarter of 2001 an impairment charge of $200 million. Interest expense increased $2.5 million, or 19%, in 2001. The increase is primarily due to higher average debt balances and interest rates in 2001. Other income decreased $0.5 million in 2001. This decrease is primarily the result of decreased interest income on cash reserves. No income tax benefit was recognized in 2001. The income tax benefit was $6.1 million in 2000. The effective tax rates for 2001 and 2000 differ from the statutory rates primarily due to increases in the valuation allowance on deferred tax assets. As a result of the above described fluctuations in our results of operations, the net loss of $235.1 million in 2001 increased by $223.7 million, as compared to the net loss of $11.5 million in 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. SEPTEMBER 30, 2000 Revenues remained flat at $136.5 million from period to period. The Star acquisition added approximately 57,000 subscribers in February 2000. Basic subscriber declines in 2001 were partially mitigated by rate increases implemented in the first quarter of 2001, all of which resulted in basic revenue decline of $1.4 million. Revenue per subscriber increased from $38.58 to $40.73. Digital revenue increased $2.9 million. Premium and other revenue sources declined $1.5 million. Operating expenses increased $228.3 million, or 155%, in 2001. Programming expenses increased $5.0 million primarily due to increased rates charged by programming vendors. Plant and operating and general and administrative costs increased $5.2 million, or 15%. Capitalization of internal labor and overhead increased as we completed significantly larger numbers of digital service installations as compared to the previous year. This positive impact on the expenses was offset by increased labor costs, contract labor and bad debt expense. Corporate overhead increased $7.1 million primarily due to $5.8 million of professional fees incurred in 2001 related to our various financing and restructuring activities. Depreciation and amortization expense in 2001 was $75.9 million, an increase of $11.1 million over the same period in 2000. The increase is due to continuing capital spending on digital services and the utilization of inventory balances. During the three months ended September 30, 2001, we incurred a net basic subscriber decline of approximately 24,000 subscribers. This represented a 6% decline in the basic subscriber base. Overall for the nine months ended September 30, 2001, we have incurred a net basic subscriber decline of approximately 40,000 subscribers. As a result of these declines, we determined that various long-lived assets associated with the subscriber base were impaired. Based upon recent third-party cable systems sales of comparable systems, we recognized in the third quarter of 2001 an impairment charge of $200 million. Interest expense increased $6.0 million, or 15%, in 2001. The increase is primarily due to higher average debt balances and interest rates in 2001. Other income decreased $1.9 million in 2001. This decrease is primarily the result of decreased interest income on cash reserves. No income tax benefit was recognized in 2001. The income tax benefit was $17.5 million in 2000. The effective tax rates for 2001 and 2000 differ from the statutory rates primarily due to increases in the valuation allowance on deferred tax assets. 13 In February 2000, the 1999 credit facility was amended resulting in an extraordinary loss of $8.5 million ($5.5 million, net of taxes). As a result of the above described fluctuations in our results of operations, the net loss of $285.8 million in 2001 increased by $248.1 million, as compared to the net loss of $37.6 million in 2000. LIQUIDITY AND CAPITAL RESOURCES The cable television industry is a capital intensive business that generally requires financing for the upgrade, expansion and maintenance of the technical infrastructure. Historically, 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. Our ability to generate cash to meet our future needs will depend generally on our results of operations and the continued availability of external financing. For the nine months ended September 30, 2001 and 2000, cash provided by operating activities totaled $17.8 million and $14.9 million, respectively. Cash used for investing activities totaled $56.2 million and $164.2 million (including $111 million related to the Star acquisition) for the nine months ended September 30, 2001 and 2000, respectively. Cash provided by financing activities was $19.5 million and $79.8 million for the nine months ending September 30, 2001 and 2000, respectively. Our aggregate outstanding borrowings as of September 30, 2001 were $578.5 million. EBITDA for the three months ended September 30, 2001 and 2000, before non-cash charges and restructuring and financing related professional fees, was $9.5 million and $18.2 million, respectively. EBITDA represents earnings before interest, taxes, depreciation and amortization. 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 debt service, 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. EBITDA is included because our management believes that EBITDA is a meaningful measure of performance as it is commonly used by the cable television industry and by the investment community to analyze and compare cable television companies. Our definition of EBITDA may not be identical to similarly titled measures reported by other companies. Capital expenditures (excluding the Star acquisition) for the nine months ended September 30, 2001 and 2000 were approximately $48.8 million and $46.6 million, respectively. In February 2001, we borrowed an additional $19.5 million on our revolver. All of our debt is fully and unconditionally guaranteed by our wholly owned direct and indirect subsidiaries on a joint and several basis. There are presently no restrictions on the ability of these subsidiaries to make distributions to us. An interim order of the Bankruptcy Court approved a $30 million secured super-priority debtor-in-possession revolving credit agreement with Goldman Sachs Credit Partners L.P. as administrative agent, lead arranger and syndication agent. INTANGIBLES At September 30, 2001, we have recorded net intangible assets of $201.8 million, 41% of total assets. These assets arose during the acquisition of cable systems throughout our history. These intangible assets are amortized over their estimated useful lives. We review the valuation and amortization periods of these intangibles on a periodic basis, taking into consideration any events or circumstances that might result in diminished fair value or revised useful life. In September 2001, we recognized an impairment charge on intangibles of $160 million. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and 14 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. We expect to adopt FAS 144 as of January 1, 2002 and do not expect that the adoption of the Statement will have a significant impact on our financial position and results of operations. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets ("FAS 142"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with FAS 142. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, we will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and have not yet determined what the effect of these tests will be on our earnings and financial position. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk including changes in interest rates. To manage the volatility relating to these exposures, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. Positions are monitored using techniques including market value and sensitivity analyses. We do not hold or issue any derivative financial instruments for trading purposes and are not a party to leveraged instruments. The credit risks associated with our derivative financial instruments are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. Although we may be exposed to losses in the event of nonperformance by the counterparties, we do not expect such losses, if any, to be significant. 15 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On November 13, 2001, the Company, its parent, Classic Communications, Inc., and all of its wholly owned subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company and its subsidiaries remain in possession of their assets and properties, and continue to operate their businesses and manage their properties as debtors-in-possession pursuant to the provisions of the Bankruptcy Code. The Company, in the ordinary course of its business, is the subject of various pending or threatened legal actions. Prosecution of certain of these actions may be stayed by the Company's Chapter 11 filing. The Company believes any ultimate liability arising from these actions should not have a material adverse effect on its consolidated financial position at September 30, 2001. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES As of September 30, 2001, we were in default under the senior credit agreement and our Senior Subordinated Notes. See notes 2 and 6 to the consolidated financial statements in Part 1 of this Form 10-Q and "Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding these defaults. Such information is incorporated herein by reference. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit -------------- ------- 10.1 Secured Super-Priority Debtor in Possession Revolving Credit Agreement, dated as of November 13, 2001, among Classic Cable, Inc., as debtor and debtor in possession, as Borrower; Classic Communications, Inc., as debtor and debtor in possession, as Parent Guarantor; the subsidiaries of the borrower party thereto, as debtors and debtors in possession, as Subsidiary Guarantors; the lenders and issuers from time to time party thereto; and Goldman Sachs Credit Partners L.P., as Administrative Agent, Lead Arranger and Syndication Agent. (b) Reports on Form 8-K (1) On August 1, 2001, we filed a Form 8-K announcing that we filed a press release on August 1, 2001, announcing material financial developments and second quarter guidance. (2) On August 31, 2001, we filed a Form 8-K announcing that we failed to make interest payments due on August 1, 2001, on our 9 3/8% and 9 7/8% Senior Subordinated Notes, which constitutes an event of default under the indentures. (3) On November 13, 2001, we filed a Form 8-K announcing that we, our parent and our subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLASSIC CABLE, INC. Date: November 21, 2001 /s/ JIMMIE TAYLOR ---------------------------------------- Jimmie Taylor Chief Financial Officer 17 INDEX TO EXHIBITS

CLASSIC CABLE INC 10-Q