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Impairment Charges, Sub Losses Hamper Classic

12/02/2001 7:00 PM Eastern

Classic Communications Inc. — which filed for Chapter 11 bankruptcy protection on Nov. 13 — released its third-quarter results last Tuesday, shedding some light on the once-promising rural MSO's current predicament.

Revenue for the quarter fell 4 percent to $44 million, and cash flow was down 47.8 percent to $9.5 million. The company also reported a net loss of $235.1 million, or $13.25 per share, compared to a loss of $12.5 million (71 cents per share) in the prior year.

That loss was due mainly to one-time charges.

According to its 10-Q quarterly earnings document filed Nov. 27 with the Securities and Exchange Commission, Classic took a one-time impairment charge of $200 million in the quarter, reflecting its loss of subscribers and the declining valuation of its systems.

Classic lost 24,000 basic subscribers in the third quarter, and 40,000 over the nine months ended Sept. 30. The company closed the quarter with 353,000 subscribers.

"As a result of these declines, the company determined that various long-lived assets associated with the subscriber base were impaired," Classic said in the 10-Q, adding that it reached the $200 million figure "based upon recent third-party cable systems sales of comparable systems."

Classic also said that the NASDAQ stock exchange — which halted trading on Classic stock on Nov. 13 — has notified the company that its shares would be delisted on Nov. 29, subject to Classic's right to appeal. In the document, the company said it had not determined whether it will appeal the ruling.

Classic's stock last traded at 13 cents per share. The stock had traded as high as $39 per share last year.

Classic added about 27,000 digital subscribers in the quarter, representing 12 percent penetration. That pales to comparable digital penetration rates of 20 percent to 30 percent for larger MSOs.

Classic said in the document that it continues to upgrade its plant, and it plans to spend $268.3 million between November 2001 and January 2003. But just how it will get that money remains to be seen.

As part of its bankruptcy filing, Classic received $30 million in debtor in possession financing from Goldman Sachs Inc. While that gives Classic some breathing room by allowing it to meet payroll and continue operations through the bankruptcy, the company said in the filing that the process could take a very long time.

"Due to material uncertainties, it is not possible to predict the length of time we will operate under Chapter 11 protection," Classic said in the document.

In order to remain in compliance with the loan agreement, which is payable in about 12 months, Classic will have to maintain minimum cash flow and revenue benchmarks. According to the document, Classic agreed to maintain a minimum cash flow of $2.7 million for the 30 days ended Nov. 30 and $5.6 million for the 60-days ended Dec. 31. Thereafter, the company must hit minimum cash flow levels of between $8.4 million and $9.3 million per quarter.

On the revenue side, Classic must reach an $11.5 million target for each quarter over the course of the loan period.

Classic also will have to hit those markets with fewer employees. In the report, Classic said it paid nearly $1 million in severance benefits during the nine-month period for 154 employees who were terminated in 2000, reducing its total work force to about 816. Hiring outside investment bankers to help form a turnaround plan also cost Classic big bucks in the period. Fees to these parties were in excess of $5.8 million: $3 million in the third quarter, $2.7 million in the second quarter and $123,000 in the first quarter.

 

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