UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to_________________
Commission file number 33-95298;33-95298-01
GALAXY TELECOM, L.P.
GALAXY TELECOM CAPITAL CORP.
(Exact name of co-registrants as specified in their charters)
Delaware 43-1697125
43-1719476
- - - ---------------------------------------- ----------------------------------
(States of Other Jurisdictions of (IRS Employer Identification No.)
Incorporation or Organization)
1220 North Main
Sikeston, Missouri 63801
________________________________________ _________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (573) 472-8200
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark whether the co-registrants (1) have 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) have been subject to such
filing requirements for the past 90 days. Yes_____X_____ No__________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the co-registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of thes Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting equity securities held by non-affiliates of
Galaxy Telecom, L.P.: $0
Aggregate market value of the voting equity securities held by non-affiliates of
Galaxy Telecom Capital Corp.: $1,000
Number of shares of Galaxy Telecom Capital Corp. outstanding as of March 31,
1996: 100
DOCUMENTS INCORPORATED BY REFERENCE: Not applicable.
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GALAXY TELECOM, L.P.
GALAXY TELECOM CAPITAL CORP.
FORM 10-K
Year Ended December 31, 1995
TABLE OF CONTENTS
Item No. Topic Page
PART I
1. Business...................................................... 3
2. Properties.................................................... 28
3. Legal Proceedings............................................. 28
4. Submission of Matters to a Vote of Security Holders........... 28
PART II
5. Market for the Registrant's Securities and Related
Security Holder Matters....................................... 29
6. Selected Financial Data....................................... 29
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 30
8. Financial Statements and Supplementary Data................... F-1
9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure........................... S-2
PART III
10. Directors and Executive Officers of the Registrant............ 38
11. Executive Compensation........................................ 40
12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 40
13. Certain Relationships and Related Transactions................ 42
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................... 47
15. Signatures.................................................... 48
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PART I
Item 1. Business.
General
The Company owns, operates and develops classic cable television
systems (the "Systems") primarily in small communities in the Midwest and
Southeast United States. As of December 31, 1995, the Current Systems passed
approximately 265,400 homes and served approximately 162,400 subscribers in 16
states, predominantly including Mississippi, Nebraska, Kansas, Missouri,
Illinois, Kentucky, Iowa, Alabama, Georgia and Florida.
The Company believes there are significant advantages to acquiring and
operating classic cable television systems. Typically, in classic cable
television markets, cable television service is necessary in order to receive a
full complement of over-the-air television stations (including network-
affiliated stations). In addition, these markets generally offer fewer competing
entertainment alternatives than larger urban or suburban markets. As a result,
classic cable television systems usually have higher basic penetration rates and
lower churn rates than systems serving larger markets. As compared with urban
and suburban systems, classic systems have more programming flexibility for a
given channel capacity because they are generally in areas with fewer
over-the-air broadcast stations that must be carried and have fewer local
programming obligations. In addition, the Company believes that it and other
classic cable system operators have lower capital costs per subscriber than
urban and suburban operators. Based on the generally lower cost of living in its
operating areas, the Company also believes that classic systems have lower labor
and marketing costs than many urban and suburban systems.
Over 90% of the plant in the Systems have a channel capacity of 36
channels or more. This compares favorably to the industry-wide average of
approximately 70% of systems having channel capacity of 30 channels or more. In
addition, substantially all of the Systems presently have the capacity to
increase the number of channels offered to subscribers without having to
increase existing bandwidth. The Company intends to reduce the number of
headends in the Systems by more than 100 by consolidating headend locations over
the next two years. The Company believes that this consolidation will reduce
maintenance costs, increase system reliability and allow the redeployment of the
associated electronic equipment to remaining headends, thus enabling the Company
to expand the number of channels it can offer to its customers and increase
average revenue per subscriber.
The six key individuals who manage the Company's day-to-day operations
(the"Senior Managers") have developed and refined the operating strategy
utilized by the Company to efficiently and economically provide high quality
customer service to classic cable television systems spread over a wide
geographic area. The Company's existing infrastructure includes two customer
service centers which receive customer calls at any time through a toll-free
telephone number. At the service centers, customer service representatives can
address virtually any request or problem a customer may have through an online
customer support computer system utilizing advanced software. The central
computer system is integrated with the Qualcomm OmniTRACS satellite-based
dispatch system, which has been installed in all of the Company's service
vehicles. The OmniTRACS system provides the customer service representatives
with direct, real-time, two-way interactive communication with the Company's
field technicians and generates comprehensive customer service information on a
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timely basis. The integration of the OmniTRACS system with the centralized
computer system allows the Company to control costs, better manage the customer
service function and provide its customers with high quality service, generally
within a 24-hour period.
The Company believes that consistently high quality performance of its
local field technicians is important in maintaining good community relations.
The Company has an ongoing program of training its field technicians not only in
technical areas but also in customer service and sales functions. The Company
strives to have its local field technicians represent the Company in each of
their respective service areas as well-trained, responsible and respected
members of their communities.
Background
The Senior Managers, Tommy L. Gleason, Jr., James M. Gleason, J. Keith
Davidson, Ronald Voss, Terry M. Cordova and Thomas Morris, have been involved in
the construction, acquisition, ownership, management and operation of classic
cable television systems as a team for more than a decade and have collective
experience in the cable television industry exceeding 100 years. From 1987
through 1994, the Senior Managers operated over 10 classic cable television
systems for Galaxy Cablevision, L.P. ("Galaxy Cablevision"), a master limited
partnership traded on the American Stock Exchange. Prior thereto, between 1981
and 1987, the Senior Managers constructed and operated cable television systems
in Alabama, Illinois, Indiana, Tennessee and Texas through a number of related
entities.
In response to changes in the federal tax laws regarding master limited
partnerships, Galaxy Cablevision commenced in 1994 the liquidation of its cable
television holdings. Thereafter, the Senior Managers organized Galaxy Systems
Management, Inc. ("Galaxy Management") to acquire selected cable television
properties. Commencing in May, 1994, Galaxy Management entered into definitive
agreements to acquire selected cable television systems from Galaxy Cablevision,
Vantage Cable Associates, L.P. ("Vantage Cable"), Vista Communications Limited
Partnership, III ("Vista Communications") and Chartwell Cable of Colorado, Inc.
("Chartwell"). Each of these agreements were later assigned to, and assumed by,
the Company prior to the consummation of each of the transactions. To facilitate
the Company's acquisition of these Systems, TA Associates, Inc., Spectrum Equity
Investors, L.P. and Fleet Equity Partners (the "Equity Investors"), who since
the 1960's have financed numerous cable television companies at all stages of
development in urban, suburban and classic markets, and the Senior Managers,
collectively invested equity capital of approximately $30 million in the
Company. A summary of the acquisitions of each of the Systems is set forth
below.
Galaxy Cablevision Acquisitions. On December 23, 1994, the Company
acquired all of the operating assets comprising the 27 cable television systems,
substantially all of which were located in western Kentucky and southern
Illinois, that were owned by Galaxy Cablevision (the "Galaxy Cablevision
Systems"). The purchase price for the Galaxy Cablevision Systems was
approximately $18.5 million. Upon acquisition by the Company, the Galaxy
Cablevision Systems passed approximately 23,500 homes with 570 miles of plant,
resulting in a density of approximately 41.2 homes per mile, served
approximately 15,400 basic subscribers and had a basic penetration rate of
approximately 65.5%.
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On March 31, 1995, the Company acquired all of the operating assets
comprising Galaxy Cablevision's eight Cameron, Texas cable television systems
(the "Cameron Systems"). The Cameron Systems are located northeast of Austin,
Texas. The purchase price for the Cameron Systems was approximately $3.6
million. Upon acquisition by the Company, the Cameron Systems passed
approximately 7,730 homes with 143 miles of plant, resulting in a density of
approximately 54.1 homes per mile, served approximately 3,500 basic subscribers
and had a basic penetration rate of approximately 45.3%.
All of the Senior Managers were affiliated with Galaxy Cablevision
prior to the dates of acquisition by the Company of the Galaxy Cablevision
Systems and the Cameron Systems. Galaxy Cablevision retained a broker to sell
the systems pursuant to an auction in each of the transactions and, with respect
to the sale of the Galaxy Cablevision Systems, obtained a fairness opinion from
an independent investment adviser. The independent directors of Galaxy
Cablevision's general partner and the unitholders of Galaxy Cablevision approved
each of the transactions. For the foregoing reasons, the Senior Managers believe
that the price paid for each of such systems was negotiated on an arm's length
basis.
Vantage Cable Acquisition. On December 23, 1994, the Company acquired
all of the operating assets comprising the 109 cable television systems located
in Colorado, Iowa, Missouri, Nebraska, South Dakota and Wyoming that were owned
by Vantage Cable (the "Vantage Cable Systems"). The purchase price for the
Vantage Cable Systems was approximately $38.4 million. Upon acquisition by the
Company, the Vantage Cable Systems passed approximately 44,800 homes with 969
miles of plant, resulting in a density of approximately 46.2 homes per mile,
served approximately 30,000 basic subscribers and had a basic penetration rate
of approximately 67.0%
Vista Communications Acquisition. On December 23, 1994, the Company
acquired all of the operating assets comprising the 85 cable television systems
located in Alabama, Florida, Georgia, Louisiana and Mississippi that were owned
by Vista Communications (the "Vista Communications Systems"). The purchase price
for the Vista Communications Systems was approximately $36.6 million. Upon
acquisition by the Company, the Vista Communications Systems passed
approximately 50,700 homes with 1,420 miles of plant, resulting in a density of
approximately 35.7 homes per mile, served approximately 31,000 basic subscribers
and had a basic penetration rate of approximately 61.1%.
Chartwell Cable Acquisition. On December 23, 1994, the Company acquired
all of the operating assets comprising two cable television systems located in
Larimer and Weld Counties, Colorado and in an apartment complex in Denver,
Colorado that were owned by Chartwell Cable (the "Chartwell Systems"). The
purchase price for the Chartwell Systems was approximately $.75 million. Upon
acquisition by the Company, the Chartwell Systems passed approximately 1,500
homes with 79 miles of plant, resulting in a density of approximately 19.0 homes
per mile, served approximately 830 basic subscribers and had a basic penetration
rate of approximately 55.3%.
Douglas Communications Acquisition. On December 1, 1995, the Company
acquired all of the operating assets comprising the 226 cable television systems
located in Illinois, Missouri, Nebraska and Kansas that were owned by Douglas
Communications (the "Douglas Communications Systems"). The purchase price for
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the Douglas Communications Systems was approximately $45.797 million. Upon
acquisition by the Company, the Douglas Communications Systems passed
approximately 72,945 homes, with 1,613 miles of plant, resulting in a density of
approximately 45.2 homes per mile, served approximately 43,000 basic
subscribers, and had a basic penetration rate of approximately 59.0%.
Friendship Cable Acquisition. On December 29, 1995, the Company
acquired all of the operating assets comprising the 35 cable television systems
located in Florida, Georgia, and South Carolina that were owned by Friendship
Cable (the "Friendship Cable Systems"). The purchase price for the Friendship
Cable Systems was approximately $21 million. Upon acquisition by the Company,
the Friendship Cable Systems passed approximately 35,637 homes, with 1,676 miles
of plant, for a density of 21.3 homes per mile, served approximately 17,500
basic subscribers and had a basic penetration rate of approximately 49.1%.
Vista-Narragansett Acquisition. On December 29, 1995, the Company
acquired all of the operating assets comprising the 18 cable television systems
located in Mississippi, Alabama, Louisiana and Tennessee (the
"Vista-Narragansett Systems"). The purchase price for the Vista-Narragansett
systems, net of systems sold, was approximately $13.715 million. Upon
acquisition by the Company, the Vista-Narragansett systems passed approximately
16,155 homes, with 433 miles of plant, resulting in a density of approximately
37.3 homes per mile, served approximately 11,000 basic subscribers and had a
basic penetration rate of approximately 68.1%.
Vista I Acquisition. On December 29, 1995, the Company acquired all of
the operating assets comprising the 18 cable television systems located in
Mississippi and Alabama of Vista I (the "Vista I Systems"). The purchase price
for the Vista I Systems was approximately $7.61 million. Upon acquisition by the
Company, the Vista I Systems passed approximately 9,073 homes, with 323 miles of
plant, resulting in a density of 28.1 homes per mile, served approximately 6,100
basic subscribers and had a basic penetration rate of approximately 67.2%.
Phoenix Cable Acquisition. On November 2, 1995, the Company acquired
all of the operating assets comprising the 3 cable television systems located in
Mississippi that were owned by Phoenix Cable (the "Phoenix Cable Systems"). The
purchase price for the Phoenix Cable Systems was approximately $0.55 million.
Upon acquisition by the Company, the Phoenix Cable Systems passed approximately
1,115 homes with 71 miles of plant, resulting in a density of approximately 15.7
homes per mile, served approximately 600 basic subscribers and had a penetration
rate of approximately 53.8%.
Pending Acquisitions and Trades
Consistent with its business strategy, the Company has entered into
purchase agreements to purchase or acquire through the trade of certain of its
Systems certain cable television system assets described below (the "Pending
Acquisitions"). The systems to be acquired in the Pending Acquisitions (the
"Pending Systems") will have a net effect of increasing the Company's homes
passed by 24,500 and its basic subscribers by 15,400. The following is a summary
of each of the Pending Acquisitions.
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Cablevision of Texas Systems
On March 29, 1996, the Company entered into a definitive agreement to purchase
certain assets comprising 30 cable television systems of Cablevision of Texas
III, Empire Communications, and Empire Cable of Kansas (the "Cablevision of
Texas Systems") for a purchase price of $10.62 million which is subject to
reduction in the event fewer than 9,100 basic subscribers exist at closing. As
of December 31, 1995, the Cablevision of Texas Systems passed 11,771 homes
located in Kansas, with 347 miles of plant, for a density of 33.9 homes per
mile. The Cablevision of Texas Systems served approximately 8,756 basic
subscribers and had a basic penetration rate of 74.4% as of December 31, 1995.
High Plains Systems
On March 29, 1996, the Company entered into a definitive agreement to purchase
certain systems comprising 8 cable television systems of High Plains Cable (the
"High Plains Systems") for a purchase price of $0.35 million which is subject to
reduction in the event fewer than 377 basic subscribers exist at closing. As of
December 31, 1995, the High Plains Systems passed 580 homes located in Kansas,
with 20 miles of plant, for a density of 29 homes per mile. The High Plains
Systems served approximately 323 basic subscribers and had a basic penetration
rate of approximately 55.7% as of December 31, 1995.
Midcontinent Systems
On January 12, 1996, the Company entered into a definitive agreement to purchase
certain assets comprising 6 cable television systems of Midcontinent Cable
Systems (the "Midcontinent Systems") for a purchase price of $1.4 million which
is subject to reduction in the event fewer than 1,300 basic subscribers exist at
closing. As of December 31, 1995, the Midcontinent Systems passed 1,853 homes
located in Nebraska, with 32 miles of plant, for a density of 57.9 homes per
mile. The Midcontinent Systems served approximately 1,326 basic subscribers and
had a basic penetration rate of approximately 71.6% as of December 31, 1995.
Five Rivers Systems
On August 16, 1995, the Company signed a letter of intent to purchase certain
assets comprising a cable television system of Five Rivers Cable Company (the
"Five Rivers System") for a purchase price of $.5 million which is subject to
reduction in the event fewer than 588 basic subscribers exist at closing. As of
December 31, 1995, the Five Rivers System passed approximately 730 homes located
in Tennessee, with 24 miles of plant, for a density of 30.4 homes per mile. The
Five Rivers System served approximately 600 basic subscribers and had a basic
penetration rate of approximately 82.2% as of December 31, 1995.
Hurst Communications Systems
On February 15, 1996, the Company entered into a definitive agreement to
purchase certain assets comprising 8 cable television systems of Hurst
Communications (the "Hurst Systems") for a purchase price of $1.05 million,
which is subject to reduction in the event fewer than 1,370 basic subscribers
exist at closing. As of December 31, 1995, the Hurst Systems passed
approximately 1,830 homes located in Kansas, with 50 miles of plant, for a
density of 36.6 homes per mile. The Hurst Systems served approximately 1,406
basic subscribers and had a basic penetration rate of 76.8% as of December 31,
1995.
TCI Systems
On March 14, 1996, the Company entered into a definitive agreement to trade
certain of its assets located in Shawnee County and Jefferson County, Kansas
(the "Shawnee County System") for certain assets comprising approximately 7
cable television systems of TCI (the "TCI Systems") located in northern
Mississippi. As of December 31, 1995, the Company's Shawnee County System passed
9,143 homes, with 315 miles of plant, resulting in a density of 29.0 homes per
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mile. The Shawnee County System served approximately 7,200 basic subscribers and
had a basic penetration rate of approximately 78.7% as of December 31, 1995. As
of December 31, 1995, the TCI Systems passed 16,897 homes, with 445 miles of
plant, resulting in a density of 38.0 homes per mile. The TCI System served
approximately 10,275 basic subscribers and had a basic penetration rate of
approximately 60.8% as of December 31, 1995.
General Terms of Pending Acquisitions. The terms of the agreements for
each of the Pending Acquisitions (collectively, the "Purchase Agreements")
similarly provide for the cash purchase by the Company of assets used in
connection with the Pending Systems, including, without limitation, rights of
the respective sellers under all subscription contracts with subscribers,
franchises and other appropriate agreements, consents, licenses and permits,
headend and associated electronic equipment, cable plant, owned and leased real
property, and various other related assets. The Purchase Agreements provide for
the placement of a portion of the purchase price in escrow, which funds
generally may be used to reduce the purchase price in the event of certain
misrepresentations and breaches of warranties, covenants or agreement by the
respective sellers or to resolve outstanding claims or contingencies. The
purchase price is also subject to downward adjustment at closing depending upon
the difference between the number of subscribers served by the acquired systems
at the time of closing and a number expressly set forth in the Purchase
Agreement. The dollar amount of adjustment is based on such difference
multiplied by a specific dollar amount per subscriber.
The Purchase Agreements contain certain customary representations and
warranties by, and covenants of, the Company and the respective sellers. The
completion of each of the Pending Acquisitions is subject to certain customary
conditions, including among others (i) the parties obtaining certain third-party
consents and governmental approvals and (ii) the absence of any materially
adverse change in the condition of the assets or systems to be acquired or the
business of the seller. The Purchase Agreements also contain customary rights to
indemnification against certain damages or losses. Each of the Purchase
Agreements is independent of all other Purchase Agreements, and the consummation
of any of the Pending Acquisitions is not conditioned upon the consummation of
any other Pending Acquisition.
Service, Installation and Repair
The Company believes that providing exceptional customer service is a
critical element in maximizing the value of services provided to customers of
the Systems. Accordingly, the Company has equipped its customer service centers
with advanced computer technology and communications that allow the Company to
efficiently manage classic cable television systems over a large geographic
area. Centralizing the customer service function enables the Company to employ a
smaller number of highly trained customer service representatives than in a more
decentralized operational structure. The Company invests significant resources
in providing its customer service representatives with ongoing telephone,
computer and sales training to assure that the customer receives a consistently
high level of service.
The Company utilizes advanced software systems to facilitate effective
interaction with its customers. A potential or existing customer can call at any
time the Company's toll-free telephone number for installation, repairs or other
services. The call is automatically routed to one of the Company's two customer
service centers. At the service centers, customer service representatives who
receive the calls can address virtually any request or problem a customer may
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have through access to an online customer support computer system utilizing
advanced software. If a customer is reporting a service problem, the customer
service representative will enter a service call request into the central
computer system, which prioritizes and schedules the service call. The computer
system automatically prioritizes the call based upon the severity of the problem
reported. If, for example, the customer is experiencing a complete disruption of
service, the call is given the highest priority and is dispatched immediately to
the local field technician. If the customer requests new or additional services,
the customer service representative will enter a work order into the computer
system which automatically assigns and schedules the order for the appropriate
field technician.
All of the Company's service vehicles are equipped with the Qualcomm
OmniTRACS satellite-based dispatch system, and the Company intends to install
the OmniTRACS system in all service vehicles of acquired systems. Through
direct, real-time access to the field technician and his work schedule via the
OmniTRACS system, the customer service representative transmits the service call
request or the work order directly to the field technician's service vehicle.
The OmniTRACS system, together with the central computer system utilized by the
Company, enables the Company to provide the requested service generally within
24 hours of the customer's call. When the technician has completed the service
call or the work order, the service or work order information is entered into
the OmniTRACS unit in the field technician's vehicle and transmitted back to the
central computer system. The computer system completes and closes the service
call or work order, updates the customer's account, posts any payments received
from the customer by the field technician and starts the billing for any new
services. This interactive system helps the Company control its costs and
improve its service by avoiding the inefficiencies and costs associated with
printing service calls or work orders and using pagers, facsimile machines,
two-way radios and cellular phones to communicate with its field technicians.
The OmniTRACS system also provides regional managers the ability to determine
the exact location of all service vehicles at any time and keeps a record of all
movements of service vehicles.
Marketing, Rates and Collections
The company aggressively markets and promotes its cable television
systems with the objective of increasing penetration and average revenue per
subscriber. The Company actively markets the basic and premium programming of
the Systems primarily through door-to-door selling efforts and telemarketing,
and, to a lesser degree, through media advertising and direct mail. Each of the
Company's customer service centers has a Marketing Director who coordinates
direct door-to-door campaigns throughout the geographic areas of the Systems and
is responsible for internal incentives for the customer service and technical
staffs. The Marketing Director also insures that the Company is providing high
quality sales and service by supervising and training direct sales
representatives and assessing picture and service quality within the Company's
cable systems. Customer service representatives follow up by telephone contact
with the customer on three separate occasions, generally 10, 30 and 60 days
following a new installation, to assess the quality of the installation and the
overall service the customer is receiving and to assure customer satisfaction.
Customer service representatives are also trained to market upgrades in service
to existing customers. Each service center also has a Director of Training, who
works closely with the Marketing Department to ensure that all employees are
informed of current rates, programming packages and promotions.
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The Company's current monthly rates for full basic service range from
$19.95 to $26.95 and rates for premium services generally range from $6.95 to
$12.95 per service. The Company's marketing strategy calls for the continued
rollout of The Disney Channel as part of its basic service, as well as selected
channel additions, with corresponding rate increases. Because the Systems have
been owned and operated by various other cable television operators, differing
strategies with regard to channel lineups, pricing and security for premium
services have been employed. It is the Company's goal to attempt to standardize
its programming, rates and premium security over all of the Systems within the
next few years.
The Company utilizes a billing system based on modern computer
technology. The system is run on an IBM AS/400 using software written
specifically for the cable television industry. The Company operates the billing
system "in house" and produces statements for customers on a monthly basis.
Billing statements are printed and mailed directly to customers, who have 15
days after receipt of the statement to remit payment to the Company's central
payment processing center. If after 15 days a customer has not made a payment,
the customer is charged a late payment fee. After 22 days, if the customer has
not made a payment a "Past Due Invoice" is generated. The Company aggressively
pursues collection of past due amounts by telephoning the customer at 35 days
past due and attempts to collect payments through its field technicians at 45
days past due. If this final attempt to collect payment fails, the customer is
notified and then disconnected. A final statement is sent within a week after
disconnection and, 30 days thereafter, the account is referred to a collection
agency. The Company's approach to its accounts receivable and collections has
resulted in a bad debt expense averaging less than 2% of its revenues since the
Company's inception.
In addition to monthly and installation fees, additional potential
sources of revenue for cable operators are the sale of local spot advertising
time on locally originated and satellite-delivered programming. Cable systems
also generate revenue through sales of products offered through home shopping
programming and purchased from the systems' respective service areas. Other
potential sources of revenue for cable television systems include the sale of
programming featuring movies and special events (such as concerts, sports
programming and other entertainment features) to customers on a pay-per-view
basis. The Company would need to invest in addressable converter equipment to
provide pay-per-view services on its systems. The Company currently does not
generate significant revenues from any of these areas but believes that certain
of these areas could become possible sources of revenue in the future.
Programming
The Systems typically offer two tiers of basic cable television
programming service: a broadcast basic programming tier (consisting generally of
network and public television signals available over-the-air in the franchise
community and superstation signals) and a satellite programming tier (consisting
primarily of satellite-delivered programming such as CNN, USA, ESPN and TNT).
Substantially all of the customers of the Systems subscribed to both tiers of
basic service as of December 31, 1995. To enhance value for its customers, the
Company analyzes and selectively modernizes its cable plant to increase the
number of channel offerings and to improve the quality of the signal delivered
to its systems. The Company regularly evaluates the programming offered by its
systems and continuously seeks to provide innovative packages of premium service
in order to assure customer satisfaction. As an example, the Company provides
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the Disney Channel as part of the basic subscription service without charging a
separate fee. From time to time, the Company enhances the value of its basic
service by adding additional programming to its basic tier.
The Systems offer premium programming services, both on a per-channel,
or a la carte, basis and as part of a variety of premium programming packages
designed to be attractive to customers while, at the same time, enabling the
Company to enjoy the benefits of programming agreements which offer the Company
financial incentives based upon premium service unit growth. Premium channels
such as HBO, Cinemax, Showtime, The Movie Channel and Encore are offered
individually or in value packages designed to increase premium penetration.
These packages offer two or more premium services for a discounted price as
compared to the a la carte pricing of individual services, and in some cases
offer a "mini-pay," such as Encore or Flix, at no additional charge if the
customer subscribes to two or more services. In the Systems premium-to-basic
penetration is 54.5% and the Company believes that the opportunity exists to
increase this premium-to-basic penetration.
Although classic cable television systems do not usually require
expensive systems enhancements, such as additional channel capacity to handle
significant locally generated programming and a greater number of channel
offerings, that larger urban and suburban systems require, the Company carries
over-the-air broadcast channels and the principal satellite-delivered cable
television programming on its systems. The Company believes that this leads to a
high degree of customer satisfaction and increased revenues.
The Company generally plans to upgrade the channel offerings of
recently acquired systems. The Company believes that many of the Systems present
opportunities to improve basic and premium penetration levels and average
revenues per subscriber. The Company believes it has an opportunity to
restructure the programming of the Systems, including launching The Disney
Channel on the basic service and repackaging premium channels. The Company
intends to utilize aggressive marketing efforts and its focus on high quality
customer service to enable it to increase penetration of and overall customer
satisfaction with the Systems.
The Company has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per subscriber. The Company has negotiated programming agreements with
premium service suppliers that offer cost incentives to the Company under which
premium unit prices decline as certain premium service growth thresholds are
met. In addition to volume pricing discounts, some program suppliers offer
marketing support to the Company in the form of advertising funds, promotional
material, rebates and other incentives. The Company's programming contracts are
generally for a fixed period of time, typically three to five years, and are
subject to negotiated renewal.
The Company is also a member of the National Cable Television
Cooperative (the "NCTC"), a purchasing cooperative that negotiates volume
discounts on behalf of its members, which serve in the aggregate nearly three
million cable subscribers. As an NCTC member, the Company is able to obtain
programming and cable system hardware discounts available to all members.
The Company has various retransmission consents with several commercial
broadcast stations. None of these consents require direct payment of fees for
carriage; however, in some cases the Company has entered into agreements with
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certain stations to carry satellite-delivered cable programming which is
affiliated with the network carried by such stations. In some cases, the Company
agreed to spend actual dollars on advertising with the station on an annual
basis over the three-year term of the agreement. These agreements are required
to be renewed before December 31, 1996. There can be no assurance that such
agreements can or will be renewed under similar terms. See "--Legislation and
Regulation - General."
The Company's cable programming costs have increased in recent years
and are expected to continue to increase due to additional programming being
provided to customers, increased costs to produce or purchase cable programming
and other factors. The Company believes it will continue to have access to cable
programming services at reasonable price levels, although there can be no
assurances with respect thereto. The Company believes that a significant amount
of new cable television programming is becoming available and that the Company
will be able to identify and take advantage of available incentives associated
with channel position and additional channels to selectively accommodate such
expanding programming. The Company expects it will be able to recoup programming
cost increases through rate increases.
Technology and Engineering
Over 90% of the plant in the Systems have a channel capacity of 36 channels
or more. Substantially all of the Systems presently have the capability to
increase the number of channels offered to subscribers without having to
increase existing bandwidth. At December 31, 1995, the Company maintained over
7,500 miles of coaxial plant that passed more than 265,400 homes. The following
table sets forth certain information with regard to the channel capacities of
the Systems as of December 31, 1995.
Up to 29 30 to 53 54 or more
Channels Channels Channels Totals
Current Systems:
Number of systems ................. 23 426 71 520
Percent of total Current Systems .. 4.4% 81.9% 13.7% 100.0%
Miles of plant .................... 127 5,818 1,571 7,516
Percent of total plant miles ...... 1.7% 77.4% 20.9% 100.0%
The Company continually monitors and evaluates new technological
developments to make optimal use of its existing assets and to anticipate the
introduction of new services and program delivery capabilities. The use of fiber
optic cable as a transportation medium is playing a major role in enhancing
channel capacity and improving the performance and reliability of cable
television systems. Fiber optic cable is capable of carrying hundreds of video,
data and voice channels. To date, the Company has implemented fiber optic
technology and, to a lesser degree, microwave technology to interconnect
headends throughout its Current Systems by interconnecting headends of adjacent
systems with one master headend facility, the Company can reduce the number of
headends, lower maintenance costs and add new channels more efficiently. The
Company generally plans to continue to reduce the number of headends through
consolidation to take advantage of these efficiencies, including reducing the
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number of headends used in the Systems by more than 100 (from a Company-wide
total of 520 for the Systems) over the next two years. Such reduction in the
number of headends is expected to reduce maintenance costs, increase system
reliability and allow the redeployment of the associated electronic equipment to
remaining headends, thus enabling the Company to expand the number of channels
offered on the Systems to its customers and increase average revenue per
subscriber.
The Company intends to deliver distance learning and teacher in-service
type training video to Kindergarten through Grade 12 schools primarily in those
areas where the Company has implemented fiber optics to interconnect adjacent
headend facilities from one master facility. The distance learning will enable
classrooms of students at several adjacent school districts to receive
real-time, interactive lectures via the fiber optic network from one lecturer's
classroom. The in-service teacher's training utilizes the same concept of
distance learning except its programming comes from one in-service training
facility. The company is also continuing to explore the possibility of being the
Internet provider to those schools, and to its subscribers in those areas where
fiber interconnects will be in place.
Additionally, the Company is exploring the business opportunities that may
be available by using its extensive fiber network as a source of transport of
voice and high speed data for both long distance and local exchange carriers.
The Company currently is in discussions with several telephone companies
concerning the use of the redundant facilities.
The Company intends to explore the use of digital compression
technology to enhance the current channel capacities of the Company's cable
systems. This technology is expected to allow up to 10 channels to be carried in
the space of one analog channel. Digital signals not only offer the potential
for allowing cable television systems to carry more programming but also for
improving the quality and reliability of the television signals carried. This
technology may also allow cable systems to offer additional products and
services, including video games (such as SEGA). Although the Company believes
that the use of digital technology in the future offers the potential for the
Company to increase channel capacity in a more cost efficient manner than
rebuilding such systems with high capacity distribution plant, digital
compression technology is still in the developmental stage and is not yet widely
implemented by cable system operators. There can be no assurance as to whether
or when such technology can or will be implemented by the Company and, if it can
be implemented, whether such technology will result in significant cost savings
over alternative methods of expanding channel capacities of the Company's
systems.
Community Relations
The Company is dedicated to developing strong community relations in
the locations served by its cable television systems and believes that good
relations with its local franchising authorities are primarily a result of
effective communications by the Company's field management with local
authorities. A customer service representative is assigned to each municipality
in which the Systems operate. The same customer service representative calls the
mayor, city clerk or city manager by telephone once each month to determine if
any problems have arisen or if any customers have complained to municipal
officials about their cable service. The Company immediately addresses any
problems discovered during these monthly contacts. Regional managers also
contact the state or local franchising authorities at least quarterly, and the
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Company prepares a newsletter highlighting any changes in operations or new
programming offerings and introducing any new employees which it send
semiannually to each of its franchising authorities.
The Company also believes that consistent, high quality performance of
its local field technicians is important to maintain good community relations.
Since the Company's cable television systems are spread over a large geographic
area, a local field technician in many cases may be the only Company
representative a customer ever meets. To improve the effectiveness of technician
interaction with the Company's customers, the Company has an ongoing program of
training its field technicians not only in technical areas but also in customer
service and sales functions. The Company strives to have its local field
technicians represent the Company in each of their respective service areas as
well-trained, responsible and respected members of their communities. Through
its community communications and field technician training programs, the Company
seeks to maintain good community relations to position itself to address any
problem in a timely manner.
Centralized Management Functions
Management functions such as billing, payments processing, accounting,
engineering and marketing are centralized at the Company's headquarters and
regional customer service centers. Upon acquiring a system, the Company will
also consolidate certain management functions at its headquarters and regional
customer service centers at minimal incremental costs.
The Company is able to process hundreds of customer service calls per
day through the use of the IBM AS/400 computer system, which is centrally based
at the Company's headquarters in Sikeston, Missouri. The computer operates with
advanced software which provides online access to up-to-date subscriber,
marketing and accounting information. The computer system also manages
information flow to and from the field technician staff via the OmniTRACS
system. The system software also allows for many other applications that the
Company may implement in the future including video-on-demand, transactional
billing services and telephony.
The central computer system allows both the Senior Managers and the
regional managers to access subscriber information as soon as it is entered from
the customer service centers or the field technicians. The centralized nature of
the system allows each of the Company's customer service centers to back up the
other if there is an interruption of telephone service to such center. The
customer service centers also can utilize the centralized computer system to
communicate with local payment offices, headquarters, the other customer service
center and the field technicians, all of which have online access through the
central platform. Finally, the system provides a centralized reporting location
for all subscriber billing information which enables the accounting staff to
prepare timely and accurate financial information. These features of the central
computer system, along with the system's integration with the OmniTRACS system,
allow the Company to reduce the incremental cost associated with expanding its
subscriber base while consolidating many of the management functions for newly
acquired systems.
Franchises
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
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franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and provision of free service to
schools and certain other public institutions; and maintenance of insurance and
indemnity bonds. The provisions of local franchises are subject to federal
regulation under the 1984 Cable Act, the 1992 Cable Act, and the 1996 Cable Act.
See "--Legislation and Regulation - General."
As of December 31, 1995, the Company held approximately 586 franchises.
The non-exclusive franchises provide for the payment of fees to the issuing
authority. The 1984 Cable Act prohibits franchising authorities from imposing
franchise fees in excess of 5.0% of gross revenues and also permits the cable
system operator to seek renegotiation and modification of franchise requirements
if warranted by changed circumstances. See "--Legislation and Regulation -
General."
The table below illustrates the grouping of the franchises of the
Systems by date of expiration.
Year of Percentages
Franchise Number of of Total
Expiration Franchises Franchises
- - - ---------- ---------- ----------
1996-1998 ............................... 168 28.7%
1999-2001 ............................... 70 11.9%
After 2001 .............................. 348 59.4%
--- -----
Total ................................ 586 100.0%
=== =====
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is withheld, the franchise authority must pay the
operator the "fair market value" for the system covered by such franchise. In
addition, the 1984 Cable Act establishes comprehensive renewal procedures that
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
See "--Legislation and Regulation - General."
The Company believes that it generally has good relationships with its
franchising communities. As of December 31, 1995, no franchise of the Company
represented more than 5.0% of total subscribers of the Systems. The Company has
a minimal amount of seasonal subscribers, the vast majority of which are located
around Kentucky Lake and Central Florida. As the Kentucky seasonal subscribers
are disconnecting about the same time the Florida subscribers are connecting,
the effect on the Company's monthly total subscriber count is minimal.
Competition
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include broadcast television and radio, newspapers, magazines and other
printed sources of information and entertainment, as well as satellite and
wireless video distribution systems and directly competitive cable television
operations. Federal law prohibits cities from granting exclusive cable
franchises and from unreasonably refusing to grant additional, competitive
franchises. In addition, an increasing number of cities are exploring the
feasibility of owning their own cable systems in a manner similar to city-
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provided utility services. The enactment of the Telecommunications Act of 1996
(the "1996 Telecom Act") may initiate more competition with cable service,
because it allows local exchange carriers to provide video services in their
local service areas, in direct competition with local cable companies.
The Company has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete. There are a large number of individual and multiple system
cable television operators in the United States. The full extent to which other
media or home delivery services will compete with cable television systems may
not be known for some time, and there can be no assurances that existing,
proposed or as yet undeveloped technologies will not become dominant in the
future.
There are alternative methods of distributing the same or similar video
programming offered by cable television systems, although cable television
systems currently account for over 91% of total subscribership to multichannel
video programming distributors ("MVPDs"). Further, these technologies have been
encouraged by Congress and the FCC to offer services in direct competition with
existing cable systems. In addition to broadcast television stations, the
Company competes in a variety of areas with other multichannel programming
service providers on a direct over-the-air basis. Multichannel programming
services are distributed by communications satellites directly to home satellite
dishes ("HSDs") serving residences, private businesses and various nonprofit
organizations. Cable programmers have developed marketing efforts directed to
HSD owners. The Company estimates that there are currently between 3.5 million
and 4 million HSDs in the United States, most of which are in the 4 to 8 foot
range.
A more significant competitive impact is expected from medium power and
higher power communications ("DBS') satellites that transmit signals that can be
received by dish antennas much smaller in size. DirecTV, Inc., a subsidiary of
GM Hughes Electronics, and United States Satellite Broadcasting Company, Inc., a
subsidiary of Hubbard Broadcasting, Inc., began offering multichannel
programming services in 1994 via high power communications satellites that
require a dish antenna of only approximately 18 inches. They served an estimated
900,000 subscribers in September 1995, but their reach has been increasing
rapidly and they expected subscribership to increase to 1.5 million by the end
of 1995. PrimeStar Partners, L.P., a joint venture of five cable multiple
systems operators and GE American Communications, Inc., began offering a medium
power direct-to-home service in 1994 that requires a dish antenna of 36 to 40
inches. It served approximately 775,000 subscribers in September 1995. EchoStar
Communications, Inc. and its affiliate, Directsat Inc., launched their first DBS
satellite in late 1995, and plan to offer multichannel programming services
beginning in early 1996 via high power communications satellites that also
require an 18-inch dish. AlphaStar, a Canadian DBS provider, has leased space on
a medium power satellite and intends to offer direct-to- home service in early
1996 that requires a 24-inch dish for reception. Such DBS services could become
substantial as developments in technology continue to increase satellite
transmitter power and decrease the cost and size of equipment needed to receive
these transmissions.
DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home. Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
subscribers receiving satellite transmission; that DBS is not currently subject
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to local regulation of service or required to pay franchise fees; and that the
capital costs for the ground segment of a DBS system (the reception equipment)
are directly related to and limited by the number of service subscribers. DBS's
disadvantages presently include limited ability to tailor the programming
package to the interests of different geographic markets, such as providing
local news, other local origination services and local broadcast stations;
signal reception being subject to line of sight angles; and intermittent
interference from atmospheric conditions and terrestrially generated radio
frequency noise. The effect of competition from these services cannot be
predicted. The Company nonetheless assumes that such competition could be
substantial in the near future.
Prior to enactment of the 1996 Telecom Act, local exchange carriers
("LECs") were prohibited from offering video programming directly to subscribers
in their telephone service areas (except in limited circumstances in rural areas
or as "video-dialtone" providers, which could deliver video services to the home
over telephone-provided circuits without a local franchise). Elimination of the
former restrictions on LECs means that the Company may face increased
competition from local telephone companies which, in most cases, have greater
financial resources than the Company. All major LECs have announced plans to
acquire cable television systems or provide video services to the home through
fiber optic technology.
The 1996 Telecom Act eliminates the FCC's video-dialtone rules, except
where a video- dialtone service is currently in operation. In place of the
video-dialtone model, the 1996 Telecom Act provides LECs with four options for
providing video programming directly to customers in their local exchange areas.
Telephone companies may provide video programming by radio-based systems, common
carrier systems, "open video" systems, or "cable systems." LECs that elect to
provide "open video" systems must allow others to use up to two-thirds of their
activated channel capacity. They will be relived of regulation as "common
carriers," and are not required to obtained local franchises, but are still
subject to many other regulations applicable to cable systems. LECs operating as
"cable systems" are subject to all rules governing cable systems, including
franchising requirements. It is unclear which model LECs will ultimately choose,
but the video distribution services developed by local telephone companies are
likely to represent a direct competitive threat to the Company.
The ability of local telephone companies to compete with the Company by
acquiring an existing cable system however, is limited. The 1996 Telecom Act
prohibits a LEC or its affiliate from acquiring more than a 10 percent financial
or management interest in any cable operator providing cable service in its
telephone service area. It further prohibits a cable operator or its affiliate
from acquiring more than a 10 percent financial or management interest in any
LEC providing telephone exchange service in its franchise area. A LEC and cable
operator that have a telephone service area and cable franchise area in the same
market may not enter into a joint venture to provide telecommunications services
or video programming. There are exceptions to these limitations for rural
facilities, very small cable systems, and small LECs in non-urban areas.
Another alternative method of video distribution is through the use of
multichannel multipoint distribution systems ("MMDS"), which deliver programming
services over microwave channels received by subscribers with a special antenna.
MMDS systems are less capital intensive, are not required to obtain local
franchises or pay franchise fees, and are subject to fewer regulatory
requirements than cable television systems. Although there are relatively few
MMDS systems in the United States that are currently in operation or under
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construction, many markets have been licensed or tentatively licensed. The FCC
has taken a series of actions intended to facilitate the development of these
"wireless cable systems" as alternative means of distributing video programming,
including reallocating the use of certain frequencies to these services and
expanding the permissible use of certain channels reserved for educational
purposes. The FCC's actions enable a single entity to develop an MMDS system
with a potential of up to 35 channels, and thus compete more effectively with
cable television. Developments in compression technology have significantly
increased the number of channels that can be made available from other
over-the-air technologies. Subscribership to MMDS services is projected to
continue over the next several years.
The Company also competes with master antenna television ("MATV")
systems and satellite master antenna television ("SMATV") systems, which provide
multichannel program services directly to hotel, motel, apartment, condominium
and similar multiunit complexes within a cable television system's franchise
area, generally free of any regulation by state and local governmental
authorities. The 1996 Telecom Act changes the definition of a "cable system" to
include only systems that cross public rights-of-way. Therefore, SMATV systems
that serve buildings that are not commonly owned or managed, but which do not
cross public rights of way, are no longer considered "cable systems" and no
longer require a franchise to operate.
Legislation and Regulation
The cable television industry currently is regulated by the FCC, some
state governments and most local governments. In addition, legislative and
regulatory proposals under consideration by the Congress and federal agencies
may materially affect 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.
Cable Communications Policy Act of 1984. The Cable Communications
Policy Act of 1984 ("the 1984 Cable Act"), which amended the Communications Act
of 1934 (the "Communications Act"), established comprehensive national standards
and guidelines for the regulation of cable television systems and identified the
boundaries of permissible federal, state and local government regulation. The
FCC was charged with responsibility for adopting rules to implement the 1984
Cable Act. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions. It also
prohibited non-grandfathered cable television systems from operating without a
franchise in such jurisdictions. The 1984 Cable Act provides that in granting or
renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories.
Cable Television Consumer Protection and Competition Act of 1992. In
October 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992 ("the 1992 Cable Act"). The 1992 Cable Act permitted a
greater degree of regulation of the cable industry with respect to, among other
things; (i) cable system rates for both basic and certain cable programming
services; (ii) programming access and exclusivity arrangements; (iii) access to
cable channels by unaffiliated programming services; (iv) leased access terms
and conditions; (v) horizontal and vertical ownership of cable systems; (vi)
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customer and service requirements; (vii) television broadcast signal carriage
and retransmission consent; (viii) technical standards; and (ix) cable equipment
compatibility. Additionally, the legislation encouraged competition with
existing cable television systems by allowing municipalities to own and operate
their own cable television systems without a franchise, preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to award
additional franchises covering an existing cable system's service area, and
prohibiting the common ownership of cable systems and co-located MMDS or SMATV
systems. The 1992 Cable Act also precluded video programmers affiliated with
cable television companies from favoring cable operators over competitors and
required such programmers to sell their programming to other multichannel video
distributors. The legislation required the FCC to initiate a number of
rulemaking proceedings to implement various provisions of the statute, the
majority of which have been completed.
Various cable operators have challenged the constitutionality of
several sections of the 1992 Cable Act, although the courts have disposed of
most of these challenges. In April 1993, a three- judge panel of the United
States District Court for the District of Columbia upheld the constitutional
validity of the must-carry provisions of the 1992 Cable Act. That decision was
appealed directly to the United States Supreme Court, which vacated the decision
in June 1994 and remanded it to the three-judge panel to determine whether the
must-carry rules were necessary to preserve the economic health of the
broadcasting industry. The three-judge panel found in December 1995 that the
must- carry rules were necessary to preserve the economic health of the
broadcasting industry, and upheld the must-carry rules. In February 1996, the
United States Supreme Court agreed to review the District Court's decision. The
must-carry rules will remain in place during the pendency of the proceedings
before the United States Supreme Court.
In June 1995, the United States Court of Appeals for the District of
Columbia Circuit determined that the provision of the 1992 Cable Act which
allows cable television operators to prohibit indecent or obscene programming on
leased access channels and public, educational, and governmental access channels
does not violate the First Amendment. The United States Supreme Court granted
certiorari and heard oral arguments in February 1996. The Court will issue an
opinion by the summer of 1996.
Telecommunications Act of 1996. On February 8, 1996, the
Telecommunications Act of 1996 ("the 1996 Telecom Act") was enacted. Some of the
provisions of the 1996 Telecom Act became effective immediately, but other
provisions will not take effect until they are implemented by the FCC. This
legislation reverses much of the cable rate regulation established by the 1992
Cable Act over a three-year period. The rates for cable programming service
("CPS " or "non-basic") tiers offered by small cable operators in small cable
systems are deregulated immediately. The FCC's authority to regulate the CPS
tier rates of all other cable operators will expire on March 31, 1999. The
legislation also (i) eliminates the uniform rate requirements of the 1992 Cable
Act where effective competition exists; (ii) repeals the anti-trafficking
provisions of the 1992 Cable Act; (iii) limits the rights of franchising
authorities to require certain technology and prohibit or condition the
provision of telecommunications services by the cable operator; (iv) requires
cable operators to fully block or scramble both the audio and video on
sexually-explicit or indecent programming or channels primarily dedicated to
sexually-oriented programming; (v) allows cable operators to refuse to carry
access programs containing "obscenity, indecency or nudity"; (vi) adjusts the
pole attachment laws; and (vii) allows cable operators to enter
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telecommunications markets which historically have been closed to them, while
also allowing some telecommunications providers to begin providing competitive
cable service in their local service areas.
Cable programmers have challenged the constitutionality of the
provision of the 1996 Telecom Act requiring cable operators to scramble
sexually-explicit or indecent adult programming in the United States District
Court of the District of Delaware. On March 7, 1996, the Court issued a
temporary restraining order against enforcement of the provisions until the
challenge can be heard by a three-judge court.
Federal Regulation
The FCC is the principal federal regulatory agency with jurisdiction
over cable television. The FCC has promulgated regulations covering a broad
variety of areas, and is required to adopt additional regulations or repeal or
modify existing regulations to implement the 1996 Telecom Act. The FCC may
enforce its regulations through the imposition of 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. A brief summary of
certain federal regulations follows.
Rate Regulation. Prior to implementation of the 1992 Cable Act, most
cable systems were largely free to adjust cable service rates without
governmental approval. The 1992 Cable Act authorized rate regulation for certain
cable communications services and equipment in communities that are not subject
to "effective competition." The 1992 Cable Act requires the FCC to resolve
complaints about rates for non-basic cable programming services and to reduce
any such rates found to be unreasonable. It also limits the ability of many
cable systems to raise rates for basic and certain non-basic cable programming
services (collectively, the "Regulated Services"). Cable services offered on a
per channel or on a per program basis are not subject to rate regulation by
either franchising authorities or the FCC. Notwithstanding the above, the 1996
Telecom Act immediately deregulates the CPS rates of "small cable operators" and
will deregulate the CPS rates of all other cable operators by March 31, 1999.
The 1992 Cable Act requires communities to certify with the FCC before
regulating basic cable rates. Upon certification, the local community obtains
the right to approve basic rates. Certified franchising authorities are also
empowered to regulate rates charged for additional outlets and for the
installation, lease, and sale of equipment used by customers to receive the
basic service tier, such as converter boxes and remote control units. These
equipment rates must be based on actual cost plus a reasonable profit, as
defined by the FCC. Cable operators may be required to refund overcharges with
interest. The 1992 Cable Act permits communities to certify at any time, so it
is possible that the Company's franchising authorities may choose in the future
to certify to regulate the Company's basic rates. FCC review of CPS rates is
triggered by franchising authority complaints filed within 45 days of a rate
increase.
The FCC's rate regulations do not apply where a cable operator
demonstrates that it is subject to "effective competition." Under the 1992 Cable
Act, a system is subject to effective competition where (i) fewer than 30% of
the households in the franchise area subscribe to the cable service of a cable
system; (ii) the franchise area is served by at least two unaffiliated
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multichannel video programming distributors ("MVPDs") each of which offers
comparable video programming to at least 50% of the households in the franchise
area and the number of households subscribing to programming services offered by
the MVPDs other than the largest MVPDs exceeds 15% of the households in the
franchise area; or (iii) a MVPD operated by the franchising authority offers
video programming to at least 50% of the households in the franchise area. The
1996 Telecom Act also provides that effective competition exists if a local
exchange carrier provides video programming in the franchise area.
In implementing the 1992 Cable Act, the FCC adopted a benchmark
methodology as the principal method of regulating rates for Regulated Services.
Cable operators with rates above the allowable level under the FCC's benchmark
methodology may attempt to justify such rates using a cost-of-service
methodology. The FCC has instituted rate relief for small cable operators. Cable
operators with fewer than 400,000 nationwide subscribers are eligible to file a
streamlined cost-of- service analysis to justify their per-channel rates in
those systems serving 15,000 or fewer subscribers. Per-channel rates that fall
below a prescribed benchmark are presumed reasonable.
The 1992 Cable Act also requires cable systems to permit customers to
purchase video programming offered by the operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service, other
than the basic service tier, unless the system's lack of addressable converter
boxes or other technological limitations does not permit it to do so. The
statutory exemption for cable systems that do not have the technological
capability to offer programming in the manner required by the statute is
available until a system obtains such capability, but not later than December
2002. Systems facing effective competition are not subject to the tier
buy-through prohibition.
The 1996 Telecom Act deregulates immediately CPS rates for small cable
operators that have less than 50,000 subscribers in the franchise area. A "small
operator" is an operator that, with its affiliates, serves less than 1% of all
subscribers in the United States (about 600,000 subscribers) and is not
affiliated with entities with annual aggregate gross revenues of more than $250
million. Rates for basic service continue to be regulated, however, unless the
system had a single regulated tier as of December 31, 1994. For all other cable
systems, the FCC's rate regulation authority for CPS tiers expires March 31,
1999. Rates for basic tiers will continue to be subject to regulation.
The 1996 Telecom Act allows cable operators to pass through franchise
fees and regulatory fees to subscribers without any prior notice. Notices of
other rate changes may be given by any reasonable written means, at the cable
operator's "sole discretion." Bulk discounts for multi-dwelling units no longer
must meet any uniform rate requirement. A cable operator need not maintain
uniform rates throughout a franchise area where there is effective competition.
In addition, franchising authorities may not file complaints with the FCC unless
they have actually received subscriber complaints.
Carriage of Broadcast Television Signals. The 1992 Cable Act
established new signal carriage requirements. These requirements allow
commercial television broadcast stations which are "local" to a cable system, to
elect every three years whether to require the cable system to carry the
station, subject to certain exceptions, or whether to require the cable system
to negotiate for "retransmission consent" to carry the station. The first
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must-carry/retransmission consent elections were made in June 1993. The next
elections will be made in October 1996. Stations are generally considered local
to a cable system where the system is located in the station's Area of Dominant
Influence ("ADI"), as determined by Arbitron. This method for determining
whether a station is local to a cable system may change because Arbitron no
longer updates ADIs and the 1996 Telecom Act requires the FCC to use commercial
publications which delineate markets based on viewing patterns. 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 WTBS). All commercial stations
entitled to carriage were to have been carried by June 1993, and any
non-must-carry stations (other than superstations) for which retransmission
consent had not been obtained could no longer be carried after October 5, 1993.
The Company carries some stations pursuant to must-carry and others pursuant to
retransmission consent agreements. In some cases, the Company agreed to carry
additional services, like FX, pursuant to retransmission consent agreements.
Local non-commercial television stations are also given mandatory
carriage rights, subject to certain exceptions, within the larger of (i) a
50-mile radius of the station's city of license; or (ii) the station's Grade B
contour (a measure of signal strength). Non-commercial stations are not given
the option to negotiate for retransmission consent. All non-commercial stations
entitled to carriage were to have been carried by December 1992.
Nonduplication of Network Programming. Cable television systems that
have 1,000 or more customers must, upon the appropriate request of a local
television station, delete or "black out" the simultaneous or nonsimultaneous
network programming of a distant station when the local station also has
contracted for such programming on an exclusive basis.
Deletion of Syndicated Programming. Cable television systems that have
1,000 or more subscribers must, upon the appropriate request of a local
television station, delete or "black out" the simultaneous or nonsimultaneous
syndicated programming of a distant station when the local station also has
contracted for such programming on an exclusive basis.
Registration Procedures and Reporting Requirements. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators periodically
are required to file various informational reports with the FCC. Cable operators
that operate in certain frequency bands are required on an annual basis to file
the results of their periodic cumulative leakage testing measurements. Operators
that fail to make this filing or who exceed the FCC's allowable cumulative
leakage index risk being prohibited from operating in those frequency bands in
addition to other sanctions.
Technical Requirements. Historically, 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 were in conflict with or more restrictive than those established by the
FCC. The FCC has applied its standards to all classes of channels which carry
downstream National Television System Committee ("NTSC") video programming. The
FCC also has adopted 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 cable system signal leakage.
22
<PAGE>
The 1992 Cable Act requires the FCC to update periodically its technical
standards. The 1996 Telecom Act requires that minimal regulations to assure
compatibility among televisions, VCRs and cable systems, leaving all features,
functions, protocols and other product and service options for selection through
open competition in the market. The 1996 Telecom Act also prohibits States or
franchising authorities from prohibiting, conditioning or restricting a cable
system's use of any type of subscriber equipment or transmission technology.
Franchise Authority. The 1984 Cable Act affirmed the right of
franchising authorities (the cities in which the Company provides cable service)
to award one or more franchises within their jurisdictions and prohibited
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The Company's affiliates hold cable franchises in all areas in
which they provide service where cable franchises are required. The 1992 Cable
Act encouraged competition with existing cable systems by (i) allowing
municipalities to operate their own cable systems without franchises; (ii)
preventing franchising authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area; and (iii) prohibiting (with limited exceptions) the
common ownership of cable systems and co-located multichannel multipoint
distribution service ("MMDS") or satellite master antenna television ("SMATV")
systems (a prohibition which is limited by the 1996 Telecom Act to cases in
which the cable operator is not subject to effective competition).
The 1996 Telecom Act exempts from franchise requirements those
telecommunications services provided by a cable operator or its affiliate.
Franchise authorities may not require a cable operator to provide
telecommunications service or facilities, other than institutional networks, as
a condition of franchise grant, renewal, or transfer. Similarly, franchise
authorities may not impose any conditions on the provision of such service.
Franchise Fees. Although franchising authorities may impose franchise
fees under the 1984 Cable Act, as modified by the 1996 Telecom Act, such
payments cannot exceed 5% of a cable system's annual gross revenues derived from
the operation of the cable system to provide cable services. Franchise fees
apply only to revenues for cable services. Franchising authorities are permitted
to charge a fee for any telecommunications providers' use of public right-of-way
"on a competitively neutral and nondiscriminatory basis."
Franchise Renewal. The 1984 Cable Act established renewal procedures
and criteria designed to protect incumbent franchises against arbitrary denials
of renewal. These formal procedures are mandatory only if timely invoked by
either the cable operator or the franchising authority. Even after the formal
renewal procedures are invoked, franchising authorities and cable operators
remain free to negotiate a renewal outside the formal process. Although the
procedures provide substantial protection to incumbent franchisees, 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 which may make
it easier in some cases for a franchising authority to deny renewal. The cable
operator's timely request to commence renewal proceedings must be in writing and
23
<PAGE>
the franchising authority must commence renewal proceedings not later than six
months after receipt of such notice. Within a four-month period beginning with
the submission of the renewal proposal the franchising authority must grant or
deny the renewal. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
Franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped only if, after giving the cable
operator notice and opportunity to cure, the authority fails to respond to a
written notice from the cable operator of its failure or inability to cure.
Courts may not reverse a denial of renewal based on procedural violations found
to be "harmless error."
Channel Set-Asides. The 1984 Cable Act permits local franchising
authorities to require 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. The 1992 Cable Act requires leased access rates to
be set according to an FCC-prescribed formula. The 1996 Telecom Act explicitly
gives cable operators the right to refuse to carry any public access or leased
access program containing "obscenity, indecency, or nudity."
Ownership. The 1996 Telecom Act eliminates the 1984 Cable Act
provisions prohibiting local exchange carriers ("LECs") from providing video
programming directly to customers within their local exchange telephone service
areas, except in rural areas or by specific waiver. Under the 1996 Telecom Act,
LECs may provide video programming by radio-based systems, common carrier
systems, "open video" systems, or "cable systems." LECs that elect to provide
"open video" systems must allow others to use up to two-thirds of their
activated channel capacity. These LECs are relieved of regulation as "common
carriers," and are not required to obtain local franchises, but are still
subject to many other regulations applicable to cable systems. LECs operating as
"cable systems" are subject to all rules governing cable systems, including
franchising requirements.
The 1996 Telecom Act prohibits a LEC or its affiliate from acquiring
more than a 10 percent financial or management interest in any cable operator
providing cable service in its telephone service area. It also prohibits a cable
operator or its affiliate from acquiring more than a 10 percent financial or
management interest in any LEC providing telephone exchange service in its
franchise area. A LEC and cable operator whose telephone service area and cable
franchise area are in the same market may not enter into a joint venture to
provide telecommunications services or video programming. There are exceptions
to these limitations for rural facilities, very small cable systems, and small
LECs in non-urban areas.
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 covers any portion of the
community served by the cable system. The 1996 Telecom Act repeals this
statutory restriction on broadcast-cable cross-ownership, but does not require
the FCC to repeal its cross-ownership rule. Nevertheless, the FCC intends to
review this rule by the end of the fourth quarter of 1996. The 1996 Telecom Act
also eliminates the FCC's restriction against the ownership or control of both a
broadcast network and cable system, but it authorizes the FCC to adopt
regulations which will ensure carriage, channel positioning and
nondiscriminatory treatment of non-affiliated broadcast stations by cable
systems which are owned by a broadcast network.
24
<PAGE>
The 1992 Cable Act prohibits the common ownership, affiliation, control
or interest in cable television systems and MMDS facilities or SMATV systems
with overlapping service areas. However, a cable system may acquire a co-located
SMATV system if it provides cable service to the SMATV system in accordance with
the terms of its cable television franchise. The 1996 Telecom Act provides that
these rules shall not apply where the cable operator is subject to effective
competition.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems a single cable operator may own. In general, no cable
operator may hold 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.
Equal Employment Opportunity. The 1984 Cable Act includes provisions to
ensure that minorities and women are provided Equal Employment Opportunities
("EEO") within the cable television industry. The FCC has adopted reporting and
certification rules that apply to all cable system operators with more than five
full-time employees. Failure to comply with the EEO requirements can result in
the imposition of fines and/or other administrative sanctions, or may, in
certain circumstances, be cited by a franchising authority as a reason for
denying a franchisee's renewal request.
Privacy. The 1984 Cable Act imposes a number of restrictions on the
manner in which cable system operators can collect and disclose data about
individual system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements are strengthened to require
that cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
Anti-Trafficking. The 1996 Telecom Act repeals most of the
anti-trafficking restrictions imposed by the 1992 Cable Act, which prevented a
cable operator from selling or transferring ownership of a cable system within
36 months of acquisition. However, a local franchise may still require prior
approval of a transfer or sale. The 1992 Cable Act requires franchising
authorities to act on a franchise transfer request within 120 days after receipt
of all information required by FCC regulations and the franchising authority.
Approval is deemed granted if the franchising authority fails to act within such
period.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of the royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
25
<PAGE>
carried, and the location of the cable system with respect to over-the-air
television stations. Cable operators are liable for interest on underpaid and
unpaid royalty fees, but are not entitled to collect interest on refunds
received for overpayment of copyright fees. Adjustments in copyright royalty
rates are now made through an arbitration process supervised by the U.S.
Copyright Office.
Various bills have been introduced in Congress in the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators might need to negotiate rights
from the copyright owners for each program carried on each broadcast station in
the channel line-up.
Copyright music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and cable programming networks (such
as USA Network) has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers ("ASCAP") and
BMI, Inc. ("BMI"), the two major performing rights organizations in the United
States. ASCAP and BMI offer "through to the viewer" licenses to the cable
networks which cover the retransmission of the cable networks' programming by
cable television systems to their subscribers.
Regulatory Fees and Other Matters. The FCC requires payment of annual
"regulatory fees" by the various industries it regulates, including the cable
television industry. In 1995, cable television systems were required to pay
regulatory fees of $0.49 per subscriber. Per-subscriber regulatory fees may be
passed on to subscribers as "external cost" adjustments to rates for basic cable
service. Fees are also assessed for other FCC licenses, including licenses for
business radio, cable television relay systems ("CARS") and earth stations.
These fees, however, may not be collected directly from subscribers as long as
the FCC's rate regulations remain applicable to the cable system.
In December 1994, the FCC adopted new cable television and broadcast
technical standards to support a new Emergency Alert System. Cable operators
must install and activate equipment necessary to implement the new Emergency
Broadcast System by July 1, 1997.
FCC regulations also address the carriage of local sports programming;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts; customer service
standards; home wiring and limitations on advertising contained in nonbroadcast
children's programming.
Telecommunications Regulation. The 1996 Telecom Act has substantially
revised communications regulation in the United States. The legislation is
intended to allow providers to enter communications markets that have
historically been closed to them as a result of legal restrictions, as well as
practical and economic considerations. At the same time, implementation of the
1996 Telecom Act may leave incumbent providers in previously closed markets
sufficiently free from regulation that they will be able to defend their markets
aggressively. The Company is unable to predict the outcome of the proceedings
that will implement the legislation.
For example, the 1996 Telecom Act establishes local exchange
competition as a national policy by preempting laws that prohibit competition in
the local exchange and by establishing uniform requirements and standards for
26
<PAGE>
interconnection, unbundling and resale. These standards will be developed and
implemented by the FCC in conjunction with the states in numerous proceedings
and through a process of negotiation and arbitration. By establishing national
standards for interconnection, unbundling, and resale of competitive local
exchange services, the 1996 Telecom Act significantly enhances the Company's
opportunity to enter this market.
At the same time, the Company's ability to compete in offering certain
services may be adversely affected, depending on the degree and form of
regulatory flexibility ultimately afforded LECs by the FCC and the states, as
well as on the pricing scope and applicability of these interconnection
requirements. In addition, if the Company offers local exchange services within
the meaning of the 1996 Telecom Act, other service providers may take advantage
of the interconnection duty to require the Company to use its local exchange
facilities to carry their customer traffic.
The 1996 Telecom Act also opens the way for Bell operating companies
("BOCs") and their affiliates to provide long distance telecommunications
services between a local access and transport area and points outside that area.
Prior to the Act, BOCs were generally prohibited from offering such "interLATA"
services. Under the 1996 Telecom Act such services may be offered outside of a
BOC's local exchange service states immediately. BOCs may offer interLATA
services inside such states (in-region) when the FCC determines either that the
BOC is providing access and interconnection to a competent exchange service
provider under a state-approved agreement or that no such provider has requested
such access and interconnection within ten months after enactment, and the state
has approved the BOC's general terms for providing such access and
interconnection. In either case, the FCC also must conclude that the BOC has
satisfied a "competitive checklist" of interconnection and other requirements
specified in the 1996 Telecom Act. If the Company decides itself to provide
interLATA service, it will likely face vigorous competition from BOC entrants,
as well as from existing long distance carriers.
Telecommunications common carriers subject to the jurisdiction of the
FCC generally must file tariffs detailing the prices, terms and conditions of
services whether the terms offered by the carrier are just, reasonable, and
nondiscriminatory. The 1996 Telecom Act provides that the FCC, in response to a
petition from a carrier, shall forbear from enforcing regulations, including
those requiring tariffs, if the FCC determines that (1) enforcement of the
regulations is not necessary to ensure that carriers' terms are reasonable and
nondiscriminatory; (2) enforcement of the regulations is not necessary for the
protection of consumers; and (3) forbearance from applying the regulations is
consistent with the public interest and, in particular, that such forbearance
would promote competition. The FCC may take action under these provisions of the
Act to reduce or eliminate tariff filing and other requirements. Such actions
could free the Company from regulatory burdens, but might also increase the
pricing flexibility of its competitors.
State and Local Regulation. Cable systems are subject to state and
local regulation, typically imposed through the franchising process because a
cable television system uses local streets and rights-of-way. Regulatory
responsibility for essentially local aspects of the cable business such as
franchisee selection, billing practices, system design and construction, and
safety and consumer protection remains with either state or local officials and,
in some jurisdictions, with both.
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
27
<PAGE>
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable for noncompliance with material
provisions. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. State and local franchising jurisdiction must be exercised
consistently with federal law.
Employees
At December 31, 1995, the Company had approximately 251 full-time
employees and 44 part-time employees, none of whom are subject to a collective
bargaining agreement. The Company considers its relations with its employees to
be excellent. In addition, Galaxy Management employs 26 people who are dedicated
primarily to servicing the Company.
Item 2. Properties.
The Company owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices, and owns most of its service vehicles. The Company believes that its
properties, both owned and leased, are in good condition and are suitable and
adequate for the Company's business operations.
The Company's 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 physical
components of the Company's systems require maintenance and periodic upgrading
to keep pace with technological advances.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which either the
Company or Galaxy Telecom Capital Corp., its wholly owned subsidiary, is a party
or to which any of its properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
28
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for the Company's classes
of common equity.
Item 6. Selected Financial Data.
The combined statement of operations data for the periods from January
1, 1992 to December 22, 1994 set forth below have been derived from the
unaudited financial statements of the cable television systems acquired from
Vantage Cable and Vista Communications and the Western Kentucky Region
("Wickliffe") and Cameron, Texas ("Cameron") cable television systems of Galaxy
Cablevision, and the cable systems of Chartwell Cable (collectively, the
"Initial Systems"). The combined statement of operations data for the period
from December 23, 1994 to December 31, 1994 and calendar year 1995, and the
balance sheets data as of December 31, 1994 and December 31, 1995 set forth
below have been derived from the Company's audited financial statements, and the
unaudited financial statements of Cameron and Chartwell Cable. The data should
be read in conjunction with the historical financial statements, the notes
related thereto and the other financial information included in the exhibits and
elsewhere herein.
<TABLE>
<CAPTION>
Initial Systems (Combined) Company
-------------------------------------------- ---------------------------------
Period from Period from
Year Ended Dec. 31 Jan. 1 Dec. 23 Year
--------------------------------- 1994 to 1994 to Historical Ended
Dec. 22 Dec. 31 pro forma Dec. 31
1991 1992 1993 1994 1994 1994(b) 1995
-------- -------- -------- -------- ------ --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................................... $ 23,181 $ 25,919 $ 27,285 $ 27,117 $ 577 $ 27,694 $ 29,995
Operating Expenses:
Systems operations ....................... 9,868 9,518 9,938 10,338 260 10,599 13,219
Selling, general & administrative ........ 4,578 4,951 4,722 5,272 99 5,335 3,681
Management fees .......................... 1,099 1,334 1,320 1,316 32 1,523 1,605
Depreciation & amortization .............. 16,469 16,232 15,681 14,541 214 9,498 10,206
-------- -------- -------- -------- ----- -------- --------
Total operating expenses ............... 32,014 32,035 31,661 31,467 605 26,955 28,711
-------- -------- -------- -------- ----- -------- --------
Operating income (loss) .................... (8,833) (6,116) (4,376) (4,350) (28) 739 1,284
Interest expense ......................... (14,320) (8,657) (6,229) (6,015) (153) (7,697) (10,442)
Other income (expense) ................... (365) (1,090) 37 (248) 6 (242) 608
-------- -------- -------- -------- ----- -------- --------
Net loss ................................... $(23,518) $(15,863) $ 10,568) $(10,613) $(175) $ (7,200) $ (8,550)
======== ======== ======== ======== ===== ======== ========
EBITDA (a) ................................. $ 7,636 $ 10,116 $ 11,305 $ 10,191 $ 186 $ 10,237 $ 11,490
Balance Sheet Data (at end of period):
Total assets $102,736 $199,913
Total debt 63,650 145,527
Partners' capital 35,521 42,171
<FN>
(a) EBITDA represents income (loss) before interest expense, income taxes, depreciation and amortization, and other income
(expense). EBITDA is not presented in accordance with GAAP and should not be considered an alternative to, or more
meaningful than, operating income or operating cash flows as an indicator of the Company's operating performance.
(b) Statement of operations data reflect the combined historical financial data for the Initial Systems adjusted to give
historical pro forma effect to management fees, depreciation and amortization, interest expense and debt issue costs
that would have been incurred if the acquisitions of the Initial Systems had occurred as of January 1, 1994.
</FN>
</TABLE>
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
On December 23, 1994, the Company commenced operations. The Company
acquired certain cable television systems of Galaxy Cablevision, Vantage Cable,
Vista Communications and Chartwell Cable on December 23, 1994, and certain other
cable systems of Galaxy Cablevision, L.P. on March 31, 1995, for aggregate
consideration of $98.8 million. See "Business -- Background" for a description
of the Initial Systems. The following discussion of results of operations for
the years ended December 31, 1993 and 1994 is based on the combined historical
results of operations for the Initial Systems. The discussion of the results of
operations for the years ended December 31, 1994 and December 31, 1995 is based
on the combined historical financial data for the Current Systems adjusted to
give historical pro forma effect to management fees, depreciation and
amortization, interest expense and debt issue costs that would have been
incurred if the Initial Systems had been acquired as of January 1, 1994. The
combined results of operations of the Current Systems and the historical pro
forma results of operations of the Company do not reflect any changes in the
operation or management of the Current Systems that the Company has made or
intends to make and are not necessarily indicative of the results of operations
that would have been achieved had the Current Systems been owned and operated by
the Company during the periods presented.
Results of Operations
Overview
In each of the past three years, the Initial Systems have generated
substantially all of their revenues from monthly customer fees for basic,
premium and other services (such as the rental of converters and remote control
devices) and from installation charges. Minimal additional revenues were
generated from the sale of advertising and from home shopping networks.
The Current Systems have generated increases in revenues in each of the
past three fiscal years. This growth was accomplished primarily through internal
subscriber growth. Except for fiscal year 1993 to fiscal year 1994, Total
systems operations expenses and selling, general and administrative expenses
have increased, but at a lower rate than revenues. Although the Company expects
to experience increases in programming expenses for the foreseeable future, the
Company believes it will be able, under the FCC's existing cable rate
regulations, to increase its rates for cable services to recover increases in
the costs of programming to the extent such increases exceed the general rate of
inflation. 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 the
Company's and the prior owners' financing activities, have caused the prior
owners of the Current Systems and the Company to report net losses. The Company
believes that such net losses are common for cable television companies.
The following table sets forth for the periods indicated certain statement
of operations items expressed in dollar amounts (in thousands) and a percentage
of total revenues from continuing operations on a combined historical basis.
30
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1993 1994(a) 1995 1994(b) 1995(b)
------------------ ------------------ ------------------ ------------------ ----------------
% of % of % of % of % of
Amount Revenues Amount Revenues Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues .............. $ 27,285 100.0% $ 27,694 100.0% $ 29,995 100.0% $ 55,438 100.0% $ 57,459 100.0%
Operating Expenses:
System Operations ... 9,938 36.4% 10,599 38.3% 13,219 44.1% 21,791 39.3% 24,531 42.7%
Selling, general
and administrative 4,722 17.3% 5,335 19.3% 3,681 12.3% 9,283 16.7% 7,546 13.1%
Management fees ..... 1,320 4.8% 1,523 5.5% 1,605 5.4% 2,492 4.5% 2,582 4.5%
Depreciation and
amortization ..... 15,681 57.5% 9,498 34.3% 10,206 33.9% 18,702 33.7% 19,105 33.3%
Total operating
expenses ......... 31,661 116.0% 26,955 97.3% 28,711 95.7% 52,268 94.2% 53,764 93.6%
Operating income (loss) (4,376) (16.0%) 739 2.7% 1,284 4.3% 3,170 5.8% 3,695 6.4%
Interest expense .... (6,229) (22.8%) (7,697) (27.8%) (10,442) (34.8%) (18,718) (33.8%) (18,813) (32.7%)
Other income
(expense) ........ 37 0.1% (242) (0.9%) 608 2.0% (263) (0.5%) (10) 00
Net Loss .............. $(10,568) (38.7%) $ (7,200) (26.0%) $ (8,550) (28.5%) $(15,811) (28.5%) $(15,128) (26.3%)
EBITDA ................ $ 11,305 41.4% $ 10,237 37.0% $ 11,490 38.3% $ 21,872 39.5% $ 22,800 39.7%
<FN>
(a) Reflects the combined historical financial data for the Initial Systems adjusted to give historical pro forma effect to
management fees, depreciation and amortization, interest expense and debt issue costs that would have been incurred if
the acquisitions of the Initial Systems had occurred as of January 1, 1994.
(b) Reflects the combined historical financial data for the Current Systems adjusted to give historical pro forma effect to
management fees, depreciation and amortization, interest expense and debt issue costs that would have been incurred if
the acquisitions of the Current Systems had occurred as of January 1, 1994.
</FN>
</TABLE>
Pro Forma Fiscal 1995 Compared to Pro Forma Fiscal 1994
Revenues increased 3.6%, or approximately $2.0 million, from fiscal
1994 to fiscal 1995. The increase in revenues resulted primarily from
inflationary rate increases in the Friendship systems and a few of the Douglas
systems. Rates were also increased in the Initial Systems that requested The
Disney Channel be placed on basic service.
Systems operations expenses increased 12.6%, or approximately $2.7
million, from fiscal 1994 to fiscal 1995. The growth in expenses was due
primarily to increases in programming and other subscriber related expenses
which typically vary with revenues and the increased number of channels carried.
Systems operations expenses, as a percentage of revenues, increased from 39.3%
in 1994 to 42.7% in 1995.
Selling, general and administrative expenses decreased 18.7%, or
approximately $1.7 million, from fiscal 1994 to fiscal 1995. Selling general and
administrative expenses, as a percentage of revenues, decreased to 13.1% in 1995
from 16.7% in 1994. The decrease was due primarily to reduced administrative
costs due to the closing of certain offices in acquired systems and the
economies of scale that resulted from folding the acquisitions into existing
operating management and facilities.
30
<PAGE>
Management fees increased 3.6%, or approximately $0.1 million, from fiscal
1994 to fiscal 1995. The increase was proportionate to the increase in revenue.
Depreciation and amortization expense increased 2.2%, or approximately
$0.4 million, from fiscal 1994 to fiscal 1995. Depreciation and amortization
decreased from 33.7% of revenues in 1994 to 33.3% of revenues in 1995.
Interest expense increased 0.5%, or approximately $0.1 million, from
fiscal 1994 to fiscal 1995. Interest expense, as a percentage of revenues,
decreased from 33.8% in 1994 to 32.7% in 1995 because of lower interest rates
for Bank Debt in the last half of 1995.
Other income (expense) varied by $253,000 between fiscal 1994 and
fiscal 1995.
The prior owners of the Current Systems as separate entities paid no
income taxes, although they were required to file federal and state income tax
returns for informational purposes only. All income or loss flowed through to
the partners of such entities as specified in the governing partnership
agreements.
Net loss decreased 4.3%, or approximately $0.7 million, from fiscal
1994 to fiscal 1995, primarily as a result of the increases in revenues and
changes in expenses as described above. As a percentage of revenues, net loss
decreased from 28.5% in 1994 to 26.3% in 1995.
EBITDA increased 4.2%, or approximately $0.9 million, from fiscal 1994
to fiscal 1995, due primarily to the increase in revenues. As a percentage of
revenues, EBITDA increased from 39.5% in 1994 to 39.7% in 1995, primarily as a
result of the decrease in selling, general and administrative expense offset by
the increase of systems operations expense as a percentage of revenues. EBITDA
represents income (loss) before interest expense, income taxes, depreciation and
amortization, and other income (expense). EBITDA is not presented in accordance
with GAAP and should not be considered an alternative to, or more meaningful
than, operating income or operating cash flows as an indicator of the Company's
operating performance.
Fiscal 1995 Compared to Historical Pro Forma Fiscal 1994
Revenues increased 8.3%, or approximately $2.3 million, from fiscal
1994 to fiscal 1995. Revenues increased primarily due to increased subscribers
generated from the Douglas and Friendship acquisitions which closed effective
December 1.
Systems operations expenses increased 24.7%, or approximately $2.6
million, from fiscal 1994 to fiscal 1995. Systems operations expenses, as a
percentage of revenues, increased from 38.3% in 1994 to 44.1% in 1995. These
increases were due primarily to the increases in programming expenses due to
channel additions and increases in net Technical Salaries and benefits due to a
smaller percentage of such expenses being capitalized to Drop Installation
Costs.
Selling, general and administrative expenses decreased 31.0%, or
approximately $1.7 million, from fiscal 1994 to fiscal 1995. Selling, general
and administrative expenses, as a percentage of revenues, decreased from 19.3%
in 1994 to 12.3% in 1995. The decreases were due primarily to reduced
administrative costs due to the closing of certain offices in acquired systems
and the
32
<PAGE>
economies of scale that resulted from folding the acquisitions into existing
operating management and facilities.
Management fees increased 5.4%, or approximately $0.1 million, from
fiscal 1994 to fiscal 1995. Management fees, as a percentage of revenues,
decreased from 5.5% in 1994 to 5.4% in 1995. Management fees are calculated as a
percentage of revenue and are proportionate, except that in December, 1995, such
fees were adjusted from 5.5% of revenue to 4.5% of revenue.
Depreciation and amortization expense increased 7.5%, or approximately $0.7
million, from fiscal 1994 to fiscal 1995. As a percentage of revenues,
depreciation and amortization decreased from 34.3% in 1994 to 33.9% in 1995. The
increase was due primarily to increased depreciation due to Capital Expenditures
implemented in 1995, and, to a lesser extent, increased expense due to the
amortization of acquired intangible assets.
Interest expense increased 35.7%, or approximately $2.7 million, from
fiscal 1994 to fiscal 1995. As a percentage of revenues, interest expense
increased from 27.8% in 1994 to 34.8% in 1995. These increases were incurred
primarily because of the Notes issued in September for the acquisition of
systems which closed in December, and the approximate two months of interest
paid less escrow interest income as compared to the associated Revenue and cash
flow of the acquired properties.
Other income (expense) increased by approximately $0.9 million, from
expense of approximately $0.2 million in 1994 to income of approximately $0.6
million in 1995. The change was due primarily to the $0.7 million of interest
income related to Note proceeds less repayment of Bank Debt that accrued while
funds were in escrow and not immediately being utilized for the closing of the
acquired properties.
The prior owners of the Current Systems and the Company as separate
entities paid no income taxes, although they were required to file federal and
state income tax returns for informational purposes only. All income or loss
flowed through to the partners of such entities as specified in the governing
partnership agreements.
Net loss increased 18.4%, or approximately $1.3 million, from fiscal
1994 to fiscal 1995, primarily as a result of the increase in interest expense
and other income (expense). As a percentage of revenues, net loss increased from
26.0% in 1994 to 28.4% in 1995, primarily as a result of the increase in
depreciation and amortization expense during 1995.
EBITDA increased 12.2%, or approximately $1.3 million, from fiscal 1994
to fiscal 1995, and, as a percentage of revenues, increased from 37.0% to 38.3%
over such periods due primarily to increased revenue, with decreases in selling,
general and administrative expenses at a greater rate than the increases in
systems operations expense. EBITDA represents income (loss) before interest
expense, income taxes, depreciation and amortization, and other income
(expense). EBITDA is not presented in accordance with GAAP and should not be
considered an alternative to, or more meaningful than, operating income or
operating cash flows as an indicator of the Company's operating performance.
33
<PAGE>
Historical Pro Forma Fiscal 1994 Compared to Fiscal 1993
Revenues increased 1.5%, or approximately $0.4 million, from fiscal
1993 to fiscal 1994. Revenue growth was negatively affected by rate freezes and
other consequences of rate regulation by the FCC. See "Business--Legislation and
Regulation". Average basic service subscribers increased from approximately
78,000 during fiscal 1993 to 79,000 during fiscal 1994, and average monthly
revenue per basic subscriber increased from $29.14 to $29.23 from 1993 to 1994.
Homes passed decreased from 127,114 at December 31, 1993 to 126,733 at December
31, 1994, primarily as a result of the sale of a system in Collins, Mississippi
by Vista Communications. However, basic subscribers increased from 77,618 to
80,287 at such dates.
System operations expenses increased 6.7%, or approximately $0.7
million, from fiscal 1993 to fiscal 1994. Systems operations expenses, as a
percentage of revenues, increased from 36.4% in 1993 to 38.3% in 1994. These
increases were due primarily to the classification of bad debt expense in the
Vista Communications systems totaling approximately $0.3 million as selling,
general and administrative expenses in 1993 rather than as systems operations
expenses and, to a lesser degree, to acquired Galaxy Cablevision systems bearing
proportionally higher expenses as Galaxy Cablevision disposed of certain other
cable systems. Bad debt expense decreased approximately $0.1 million in the
Vista Communications systems from 1993 to 1994.
Selling, general and administrative expenses increased 13.0%, or
approximately $0.6 million, from fiscal 1993 to fiscal 1994. Selling, general
and administrative expenses, as a percentage of revenues, increased from 17.3%
in 1993 to 19.3% in 1994. The increases were due primarily to acquired Galaxy
Cablevision systems bearing proportionally higher expenses as Galaxy Cablevision
disposed of certain other cable systems, and increased insurance premiums and
employee severance costs in the Vista Communications systems.
Management fees increased 15.4%, or approximately $0.2 million, from
fiscal 1993 to fiscal 1994. Management fees, as a percentage of revenues,
increased from 4.8% in 1993 to 5.5% in 1994. The increases resulted from the
historical pro forma application of the Company's 5.5% management fee rate for
1994.
Depreciation and amortization expense decreased 39.4%, or approximately
$6.2 million, from fiscal 1993 to fiscal 1994. As a percentage of revenues,
depreciation and amortization decreased from 57.5% in 1993 to 34.3% in 1994. The
decreases were due to the historical pro forma application of the Current
Systems' depreciation and amortization methods applied to acquired assets valued
in accordance with APB No. 16. As a result, depreciation increased approximately
$0.4 million, while amortization decreased approximately $5.1 million. The
decrease in amortization resulted from a reduction of recorded intangible assets
from approximately $40.0 million and approximately $30.4 million in the Vantage
Cable systems and Vista Communications systems, respectively, to approximately
$38.0 million in the Company.
Interest expense increased 23.6%, or approximately $1.5 million, from
fiscal 1993 to fiscal 1994. As a percentage of revenues, interest expense
increased from 22.8% in 1993 to 27.8% in 1994. The increase resulted from the
historical pro forma application of the Company's debt structure and related
interest rates as if such debt structure were in place as of January 1, 1994.
Interest rates were approximately 8.0% and 12.0% in 1993 and 1994, respectively.
34
<PAGE>
Other income (expense) decreased by approximately $0.3 million, from
income of approximately $37,000 in 1993 to expense of approximately $0.2 million
in 1994. Other income (expense), as a percentage of revenues, changed from
income of 0.1% in 1993 to expense of 0.9% in 1994. The change was due primarily
to costs incurred and losses on the sales of systems and assets by Vista
Communications totaling approximately $0.3 million partially offset by interest
income earned by the Vantage Cable systems totaling approximately $74,000.
The prior owners of the Current Systems and the Company as separate
entities paid no income taxes, although they were required to file federal and
state income tax returns for informational purposes only. All income or loss
flowed through to the partners of such entities as specified in the governing
partnership agreements.
Net loss deceased 31.9%, or approximately $3.4 million, from fiscal
1993 to fiscal 1994, primarily as a result of the decrease in depreciation and
amortization, offset in part by the increase in interest expense and other
income (expense). As a percentage of revenues, net loss decreased from 38.7% in
1993 to 26.0% in 1994, primarily as a result of the decrease in depreciation and
amortization expense during 1994.
EBITDA decreased 9.4%, or approximately $1.1 million, from fiscal 1993
to fiscal 1994, and, as a percentage of revenues, decreased from 41.4% to 37.0%
over such periods due primarily to the increases in systems operations expenses
and selling, general and administrative expenses. EBITDA represents income
(loss) before interest expense, income taxes, depreciation and amortization, and
other income (expense). EBITDA is not presented in accordance with GAAP and
should not be considered an alternative to, or more meaningful than, operating
income or operating cash flows as an indicator of the Company's operating
performance.
Liquidity and Capital Resources
The cable television business requires substantial financing for
construction, expansion and maintenance of plant. In addition, the Company
intends to continue pursuit of a business strategy which includes selective
acquisitions. Since December of 1994 the Company received cash equity
contributions of approximately $44.6 million from the Equity Investors and the
Senior managers. The Company also received equity from Vantage Cable totaling
approximately $6.4 million. The Company had an aggregate of approximately $146
million of indebtedness as of December 31, 1995, representing $120 million of
senior subordinated notes, approximately $8.5 million related to the term loan
and $17.5 million drawn under the Company's revolving line of credit. See
"Description of Other Indebtedness -- Existing Loan Agreement". This debt and
equity financing was utilized principally in the December 1994 acquisitions of
the Initial Systems, and the December, 1995 acquisitions of the remaining
systems that now make up the Current Systems. The Company's cash flows provided
by operating activities totaling approximately $7.6 million for the twelve
months of 1995 have been sufficient to meet the Company's debt service, working
capital and capital expenditure requirements with the exception of the
acquisition of the Cameron, Phoenix, Douglas, Buford, and Vista systems
completed in 1995, totaling approximately $93.1 million, which was funded
principally through borrowings under the Revolver and the Notes.
35
<PAGE>
Capital Expenditures
During the twelve months of 1995, the Company's capital expenditures
(exclusive of system acquisitions) were approximately $5.195 million. These
expenditures were primarily for new vehicles and OmniTRACS units in such
vehicles, office expansions, expansion and replacement of headend buildings and
rewires of associated electronic equipment, drop installation, converters, traps
and other drop related items, and routine maintenance and replacement of the
cable plant. Exclusive of the completion of the Pending Acquisitions, the
Company expects capital expenditures over the next two years to total
approximately $25.5 million, of which approximately $5.0 million per year
represents anticipated maintenance capital expenditures. The remaining capital
expenditures will consist primarily of installation of fiber optic cable and
microwave links which will allow for the reduction in the number of headends by
more than 100 through headend consolidation. These expenditures also include
expansion and replacement of headend buildings, rewires of associated electronic
equipment, new vehicles, test equipment, computer equipment and continued
installation of OmniTRACS units. The remaining capital items include the
expenses and capital expenditures required to add new subscribers and the
expansion and upgrade of the cable television facilities. The Company expects to
finance the anticipated capital expenditures described above with cash flows
generated from operations, and borrowings under the Revolving Credit Facility.
The Revolving Credit Facility and Term Loan
Pursuant to the Loan Agreement, the Lenders have provided the Company
with an $8.0 million term loan. The Term Loan accrues interest at 15% with
current payments of the interest of 325 basis points over the costs of funds
(LIBOR). The interest accrued in excess of interest paid currently is deferred
and due at maturity of the loan. It is anticipated that the Term Loan will be
retired out of the proceeds of the Revolver or simply converted to the same
basis as the Revolver. The Loan Agreement was amended in September, 1995 to a
Revolving Credit Facility under which the Company may make revolving borrowings
of up to $58.5 million until December 31, 1997, subject to compliance with
certain conditions, including certain financial covenants. Outstanding balances
on December 31, 1997 will convert to a term loan amortizing quarterly until a
final maturity on December 31, 2002. The Revolving Credit Facility will require
the Company to maintain compliance with certain financial ratios and other
covenants. The financial covenants in the Revolving Credit Facility may
significantly limit the Company's ability to borrow under the Revolving Credit
Facility. See "Description of Other Indebtedness -- Revolving Credit Facility".
The Company presently intends to utilize the Revolving Credit Facility
to fund capital expenditures, repay Loan B and acquire additional cable systems,
including but not limited to the Pending Systems, and for general corporate
purposes. The Company expects that it will be able to meet its debt service,
working capital and capital expenditure requirements through its operating cash
flows and borrowings under the Revolving Credit Facility.
Senior Subordinated Notes
Pursuant to an indenture dated September 28, 1995 (the "Indenture")
between the Company and Capital Corp., and the Boatmen's Trust Company as
trustee, the Company issued $120.0 million aggregate principal amount of senior
subordinated obligations (the "Notes") maturing in October 2005. The Notes bear
an interest rate of 12.375% per annum payable semiannually on April 1 and
October 1, commencing April 1, 1996.
36
<PAGE>
The payment of principal and interest on the Notes is subordinated in
right of payment to the Revolving Credit Facility and Term Loan Agreement. The
Notes will rank pari passu with all other senior subordinated indebtedness of
the Company, if any, and is senior to all subordinated debt of the Company.
The Indenture contains various restrictive covenants, including
limitations on indebtedness, certain restricted payments and affiliate
transactions as defined, purchases, asset sales and capital expenditures in
addition to reporting requirements.
37
<PAGE>
Item 8. Financial Statements and Supplementary Data
GALAXY TELECOM, L.P. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
--------
Consolidated Financial Statements:
Report of Independent Accountants ............................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 .... F-3
Consolidated Statements of Operations for the Year Ended
December 31, 1995 and for the Period From December 23, 1994
(Inception) to December 31, 1994 ............................. F-4
Consolidated Statements of Changes in Partners' Capital
for the Year Ended December 31, 1995 and for the Period
From December 23, 1994 (Inception) to December 31, 1994 ....... F-5
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1995 and for the Period From December 23,
1994 (Inception) to December 31, 1994 ......................... F-6
Notes to Consolidated Financial Statements ...................... F-7 to F-23
Financial Statement Schedule:
Report of Independent Accountants ............................... S-1
Schedule II - Valuation and Qualifying Accounts ................. S-2
All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements, related
notes or other schedules.
F-1
<PAGE>
Report of Independent Accountants
To the Partners
Galaxy Telecom, L.P.
We have audited the accompanying consolidated balance sheets of Galaxy Telecom,
L.P. and Subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in partners' capital, and cash
flows for the year ended December 31, 1995 and for the period from December 23,
1994 ("inception") to December 31, 1994. These financial statements are the
responsibility of the Partnership'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 Galaxy Telecom,
L.P. and Subsidiary as of December 31, 1995 and 1994 and the consolidated
results of their operations and their cash flows for the year ended December 31,
1995 and for the period from inception to December 31, 1994 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 28, 1996
F-2
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
ASSETS 1995 1994
------------ ------------
Cash and cash equivalents $ 3,430,835 $ 2,890,410
Subscriber receivables, net of
allowance for doubtful accounts of
$834,425 and $320,605, respectively 3,512,141 1,383,801
Systems and equipment, net 126,312,055 59,392,047
Intangible assets, net 65,047,002 38,500,140
Prepaids and other 1,611,158 569,479
------------ ------------
Total assets $199,913,191 $102,735,877
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 9,569,072 $ 2,247,337
Subscriber deposits and deferred revenue 2,646,413 1,318,022
Long-term debt 145,526,955 63,650,000
------------ ------------
Total liabilities 157,742,440 67,215,359
------------ ------------
Commitments and contingencies
Partners' capital:
General partners 35,169,751 28,719,518
Limited partners 7,001,000 6,801,000
------------ -----------
Total partners' capital 42,170,751 35,520,518
---------- ----------
Total liabilities and partners' capital $199,913,191 $102,735,877
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
December 23,
Year 1994 (Inception)
Ended To
December 31, December 31,
1995 1994
------------ -----------
Revenues $ 29,995,187 $ 576,922
------------ -----------
Operating expenses:
Systems operations 13,219,170 260,352
Selling, general and administrative 3,680,945 98,517
Management fee to affiliate 1,605,404 31,731
Depreciation and amortization 10,205,635 214,139
------------ -----------
Total operating expenses 28,711,154 604,739
Operating income (loss) 1,284,033 (27,817)
Interest expense (10,442,205) (153,425)
Interest income and other 608,405 5,931
------------ -----------
Net loss $ (8,549,767) $ (175,311)
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Limited Partners
General ---------------------------------------------------------------
Partners Class B Class C Class D Class E Total Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Contributions $ 29,625,000 $ 1,000 $ 416,000 $ 6,384,000 $ 6,801,000 $ 36,426,000
Syndication and trans-
action costs (730,171) (730,171)
Net loss for period (175,311) (175,311)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1994 28,719,518 1,000 416,000 6,384,000 6,801,000 35,520,518
Contributions 15,000,000 $ 200,000 200,000 15,200,000
Net loss for year (8,549,767) (8,549,767)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1995 $ 35,169,751 $ 1,000 $ 416,000 $ 6,384,000 $ 200,000 $ 7,001,000 $ 42,170,751
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 23,
Year 1994 (Inception)
Ended To
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,549,767) $ (175,311)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 10,205,635 214,139
Amortization of debt issue costs 801,058
Financeable interest 446,046
Provision for doubtful accounts
receivable 383,547 8,219
Loss on disposal of equipment 72,587
Changes in assets and liabilities:
Subscriber receivables (2,023,046) (499,816)
Prepaids and other (258,916) (236,482)
Accounts payable and accrued expenses 5,241,429 553,509
Subscriber deposits and deferred revenues 1,328,391 211,478
------------- -------------
Net cash provided by operating activities 7,646,964 75,736
------------- -------------
Cash flows from investing activities:
Acquisition of cable systems (95,614,673) (86,980,136)
Proceeds from sale of cable systems 2,101,345
Capital expenditures (4,815,014)
Other intangible assets (164,248)
------------- -------------
Net cash used in investing activities (98,492,590) (86,980,136)
------------- -------------
Cash flows from financing activities:
Borrowings under term debt and revolver 20,984,943 63,650,000
Payments on term debt and other (59,129,728)
Proceeds from bond issue 119,400,000
Payment of debt issue costs (4,869,164) (2,831,314)
Partner contributions 15,000,000 28,976,124
------------- -------------
Net cash provided by financing activities 91,386,051 89,794,810
------------- -------------
Net increase in cash 540,425 2,890,410
Cash and cash equivalents, beginning of period 2,890,410
Cash and cash equivalents, end of period $ 3,430,835 $ 2,890,410
------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
Galaxy Telecom, L.P. (the "Partnership"), a Delaware limited partnership, was
formed in December 1994 to acquire, develop, hold, improve, construct, manage,
operate and use cable television systems and related businesses. The Partnership
commenced operations on December 23, 1994 ("inception") with the initial funding
of term debt, partners contributions and acquisition of certain cable television
systems.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Partnership and its wholly-owned subsidiary, Galaxy Telecom Capital Corp.
("Capital Corp."). All intercompany transactions have been eliminated in
consolidation. Capital Corp. was formed in July 1995 and maintains a
capitalization of $1,000 for the purpose of co-issuing with the Partnership the
Senior Subordinated Notes. Capital Corp. does not and is not expected to have
operations other than that which is related to its purpose as co-issuer.
Partners
General Partners include Galaxy Telecom Investments, L.L.C. and Galaxy Telecom,
Inc. with 99% and 1% interests, respectively. Limited Partners include Galaxy
Telecom Investments, L.L.C., Galaxy Telecom, Inc., and Vantage Cable Associates,
L.P. as Class B, C and D Limited Partners, respectively. A Class E Limited
Partner interest was issued upon closing of the Partnership's Cameron, Texas
cable television system acquisition in March 1995. Class C, D and E Limited
Partnership interests are subject to reductions resulting from potential set-off
adjustments to the respective cable television system acquisitions.
Priority Returns
The partnership agreement establishes priority returns for the General and
certain Limited Partners compounded annually on the respective partner's
unreturned contributions. Limited Partner priority returns range from 9% to 10%
through 1999 with General Partner priority returns of up to 35%. The aggregate
priority return totaled approximately $11,696,000 and $235,000 at December 31,
1995 and 1994, respectively.
Distributions
First, to Class C, D and E Limited Partners in proportion to their respective
capital contributions to the extent of such capital contributions and priority
returns.
Second, to General and Class B Limited Partners in proportion to their
respective capital contributions to the extent of such capital contributions.
F-7
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Organization, continued:
Distributions, continued
Third, to General Partners in proportion to their percentage interest to the
extent all distributions to the General Partners equal the first priority
return.
Fourth, 94.05% to General Partners in proportion to their percentage interest
and 5.95% to Class B Limited Partner to the extent all distributions to the
General Partners equal to the second priority return.
Thereafter, 88.10% to the General Partners in proportion to their percentage
interest and 11.90% to the Class B Limited Partner.
Distributions are restricted by the Senior Subordinated Notes and the Revolving
Credit Facility and Term Loan agreement to those amounts which are necessary for
the partners' federal and state income taxes and certain fees.
Allocations
Partnership losses are allocated to the General Partners in proportion to their
percentage interest, while Partnership profits are allocated to the General
Partners and the Class B Limited Partner in the same manner as the third, fourth
and subsequent distributions. Income is allocated to the Class C, D and E
Limited Partners to the extent of priority return distributions to such
partners.
2. Summary of Significant Accounting Policies:
Cash Equivalents
Cash equivalents include highly liquid investments purchased with a remaining or
original maturity of three months or less. At December 31, 1995 and 1994, cash
equivalents totaling $1,038,000 and $2,500,000, respectively consisted primarily
of money market account balances, reported at cost which approximates fair
market value.
F-8
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Concentrations of Credit Risk
Financial instruments which potentially subject the Partnership to concentration
of credit risk are cash, cash equivalents and subscriber and other receivables.
The Partnership invests excess cash in short-term liquid money instruments
issued by significant financial institutions. Cash and cash equivalents balances
in excess of FDIC coverage totaled $3.3 million at December 31, 1995. Though
limited primarily to cable television subscribers, the concentration of credit
risk with respect to receivables is minimized by geographical dispersion through
approximately 586 individual cable television systems ranging in size from
approximately 10 subscribers to approximately 2,800 subscribers located in
sixteen midwest and southern states, and the large number of customers with
individually small balances on short payment terms. Other receivables consist
primarily of amounts due from cable system sellers for working capital
adjustments and operational allocations to affiliates.
Fair Value of Financial Instruments
The Partnership's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," include cash and cash equivalents,
subscriber receivables, accounts payable and long-term debt, and are accounted
for on a historical cost basis, which, due to the nature of these financial
instruments, approximates fair value at December 31, 1995. The fixed rate senior
subordinated note is valued using closing bid price market quotes.
Revenue Recognition
Revenues from subscribers are recognized in the month that service is provided.
Installation fees are recognized as revenue upon origination of service to
subscribers to the extent of direct selling costs incurred, with excess
installation fees, if any, recognized over the estimated average period that
subscribers are expected to remain connected to the system.
Marketing Costs
Marketing costs are charged to operations in the period incurred totaling
approximately $569,000 for the year ended December 31, 1995 and approximately $0
for the period from inception to December 31, 1994.
F-9
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Federal Income Taxes
The Partnership as an entity pays no income taxes, although it is required to
file federal and state income tax returns for informational purposes only. All
income or loss "flows through" to the individual partners as specified in the
partnership agreement.
The differences between the results of operations presented in these financial
statements and taxable loss for Federal income tax reporting purposes result
primarily from the use of accelerated methods for computing tax depreciation.
Systems and Equipment
Systems and equipment obtained through the acquisition of cable television
systems is recorded at estimated fair value while other additions are recorded
at cost including amounts for material and labor. Direct costs, including labor,
associated with installations in homes not previously served by cable television
are capitalized as subscriber drops. Expenditures for maintenance and repairs
are charged to income as incurred and equipment replacements and betterments are
capitalized. When assets are sold or retired, the related cost and accumulated
depreciation are removed from the respective accounts, and any resulting gain or
loss is credited or charged to income.
Goodwill
The Partnership reviews goodwill for impairment from time to time, measuring
impairment based upon expected future undiscounted cash flows from operations.
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.
New Accounting Standards
In March 1995, the FASB issued Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("Statement 121"), which addresses the accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets and certain identifiable intangibles to be disposed of. Statement
121 has an effective date of January 1, 1996. The Partnership does not expect
application of Statement 121 to have a significant impact upon the Partnership's
financial statements.
F-10
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems:
Upon inception, the Partnership acquired certain cable television systems,
recorded under the purchase method of accounting in accordance with APB Opinion
16, as follows:
<TABLE>
<CAPTION>
Vantage Vista Chartwell
Cable Communications Galaxy Cable of
Associates, Limited Cablevision Colorado,
L.P. Partnership III L.P. Inc. Unallocated Total
---- --------------- ---- ---- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Purchase price $38,400,000 $36,650,000 $18,437,500 $741,000 $94,228,500
Acquisition expenses
incurred by:
The Partnership 500,000 368,590 868,590
Management Company 200,000 200,000
----------- ----------- ----------- -------- ----------- -----------
Total $38,400,000 $37,150,000 $18,437,500 $741,000 $ 568,590 $95,297,090
=========== =========== =========== ======== =========== ===========
</TABLE>
F-11
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
Purchase consideration consisted of the following:
<TABLE>
<CAPTION>
Vantage Vista Chartwell
Cable Communications Galaxy Cable of
Associates, Limited Cablevision Colorado,Inc
L.P. Partnership III L.P. Inc. Unallocated Total
----------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash To Seller Paid By:
The Partnership $32,012,304 $33,539,332 $18,237,500 $691,000 $84,480,136
Other 250,000 200,000 450,000
Cash To Escrow 2,000,000 50,000 2,050,000
Issuance Of Limited Partner
Interest 6,384,000 6,384,000
Notes Payable By General
Partner 416,000 416,000
Cash For Acquisition Expenses
Paid Or Accrued By:
The Partnership 500,000 568,590 868,590
Other 200,000 200,000
Net Liabilities And Deferred
Charges Assumed 3,696 444,668 448,364
----------- ----------- ----------- -------- -------- -----------
Total $38,400,000 $37,150,000 $18,437,500 $741,000 $568,590 $95,297,090
=========== =========== =========== ======== ======== ===========
</TABLE>
The aggregate purchase price is allocated as follows:
Systems and equipment $59,539,094
Intangible assets 35,612,643
Other assets and liabilities 145,353
-----------
$95,297,090
===========
The $2 million Vista acquisition escrow is to provide the Partnership security
against undisclosed liabilities until the seller provides mutually acceptable
guarantees. The escrow is scheduled to be released to the seller in $1 million
increments at 18 and 36 months following acquisition. Also, under both the Vista
and Vantage acquisition agreements, seller indemnification of Partnership
liabilities incurred from the respective cable television systems, if any, is
limited to that which exceeds $100,000.
F-12
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
In December 1995, except for the Cameron systems which were acquired in March
1995, the Partnership acquired certain cable television systems, recorded under
the purchase method of accounting in accordance with APB Opinion 16, as follows:
<TABLE>
<CAPTION>
Douglas Vista
Cameron Communications Narragansett Vista I Friendship Phoenix Total
---------- ------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase price $3,550,000 $46,338,560 $ 16,400,000 $7,610,000 $20,898,000 $ 550,225 $95,346,785
Resale of Vista
Narragansett
systems (2,685,150) (2,685,150)
Acquisition expenses 514,081 121,019 127,283 202,023 3,068 967,474
---------- ---------- -------------- ---------- ---------- ---------- ----------
Total $3,550,000 $46,852,641 $ 13,835,869 $7,737,283 $21,100,023 $ 553,293 $93,629,109
========== ========== ============== ========== ========== ========== ===========
</TABLE>
Purchase consideration consisted of the following:
<TABLE>
<CAPTION>
Douglas Vista
Cameron Communications Narragansett Vista I Friendship Phoenix Total
<S> <C> <C> <C> <C> <C> <C> <C>
---------- -------------- ----------- ---------- ----------- -------- -----------
Cash to seller paid by
the Partnership $3,350,000 $ 45,837,979 $16,057,020 $7,295,174 $20,874,519 $534,732 $93,949,424
Cash to escrow . 300,000 380,000 100,000 780,000
Due to escrow 100,000 100,000
Notes payable by
Limited Partner 200,000 200,000
Cash for acquisition
expenses paid or
accrued by the
Partnership 514,081 121,019 127,283 202,023 3,068 967,474
Cash proceeds from
resale of Vista
Narragansett
systems (2,101,345) (2,101,345)
Receivable from
resale of Vista
Narragansett
systems (594,000) (594,000)
Net (assets) liabilities
assumed 500,581 (46,825) (65,174) (76,519) 15,493 327,556
---------- ------------- ----------- ---------- ----------- -------- -----------
Total $3,550,000 $ 46,852,641 $13,835,869 $7,737,283 $21,100,023 $553,293 $93,629,109
========== ============= =========== ========== =========== ======== ===========
</TABLE>
F-13
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
The aggregate purchase price is allocated as follows:
Systems and equipment $69,539,127
Intangible assets 24,089,982
-----------
$93,629,109
===========
The operating results for each acquired cable television system are included in
net loss from the date of acquisition. The following unaudited pro forma results
of operations for the years ended December 31, 1995 and 1994 presents all
acquisitions as if they had occurred on January 1, 1994. The pro forma results
give effect to a decrease in depreciation and amortization, increase in interest
expense, and decrease in management fees.
Unaudited Pro Forma Results of Operations
December 31, December 31,
1995 1994
------------ -----------
Revenues $57,459,000 $55,438,000
Net loss $15,128,000 $15,811,000
The above pro forma statements do not purport to be indicative of the financial
results which actually would have occurred had the acquisitions been made on
January 1, 1994 or subsequent to that date.
F-14
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Systems and Equipment:
Systems and equipment consist of the following:
December 31,
----------------------
Method Term 1995 1994
--------- ------ ------------ ------------
Cable Television
Distribution Systems:
Head-end Straight-line 7 years $ 28,212,203 $ 11,598,906
Distribution plant Straight-line 12 years 81,553,565 37,242,888
Subscriber drops Straight-line 5 years 19,172,625 8,868,800
Inventories -- -- 943,825 800,000
------------- ------------
129,882,218 58,510,594
Other:
Vehicles Straight-line 5 years 1,956,175 573,000
Buildings Straight-line 5 years 954,282 300,000
Furniture, fixtures
and equipment Straight-line 5 years 1,348,301 110,500
Land -- -- 95,000 45,000
------------- ------------
134,235,976 59,539,094
------------- ------------
Accumulated depreciation (7,923,921) (147,047)
Systems and equipment, net $ 126,312,055 $ 59,392,047
============= ============
F-15
<PAGE>
GALAXY TELECOM, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Intangible Assets:
Intangible assets consist of the following:
December 31, December 31,
Method Term 1995 1994
------------- -------- ------------ ------------
Goodwill, franchise
costs and
subscriber lists Straight-line 15 years $ 59,814,225 $ 35,612,643
Debt issued costs:
Systems:
Senior Subor-
dinated Notes Straight-line 10 years 5,150,409
Revolver and
Term Loan Straight-line 8 years 2,518,955 2,230,413
Interest-rate
cap and other Straight-line 2 years 746,814 678,314
Organization costs:
Inventories Straight-line 15 years 98,510 45,862
------------ ------------
68,328,913 38,567,232
Accumulated amortization (3,281,911) (67,092)
------------ ------------
Intangible assets, net $ 65,047,002 $ 38,500,140
============ ============
6. Long-Term Debt:
Outstanding long-term debt is as follows:
Available December 31, December 31,
Borrowings 1995 1994
------------- ------------- -------------
Revolving Credit Facility $ 58,500,000 $ 17,500,000 $ 55,650,000
Term Loan 8,000,000 8,000,000 8,000,000
Financeable interest 446,046
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (585,000)
Other 165,909
------------- ------------- -------------
Total $ 186,500,000 $ 145,526,955 $ 63,650,000
============= ============= =============
F-16
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
Senior Subordinated Notes
Pursuant to an indenture dated September 28, 1995 (the "Indenture") between the
Partnership and Capital Corp., (together, the "Issuers"), and the Boatmen's
Trust Company as trustee (the "Trustee"), the Partnership issued $120.0 million
aggregate principal amount of senior subordinated obligations (the "Notes")
maturing in October 2005. The Notes bear interest rate of 12.375% per annum
payable semiannually on April 1 and October 1, commencing April 1, 1996.
Pursuant to a pledge agreement, $48.2 million of the proceeds from the sale of
the Notes were deposited with the Trustee. All amounts so deposited were held by
the Trustee pursuant to the pledge agreement as collateral on the Notes until
such time as they were released concurrently with the consummation of certain
acquisitions. As of December 31, 1995, the required acquisitions were
consummated, and as such, no funds remain on deposit with the Trustee. Interest
earned on such amounts deposited totaling $438,190 is restricted for payment of
interest due on the Notes.
There are no mandatory sinking fund requirements for the Notes. However, the
Partnership may be obligated, under certain circumstances, to (a) redeem a
portion of the Notes on April 30, 1996 with funds held by the Trustee, if any,
pursuant to the pledge agreement, (b) make an offer to purchase all outstanding
Notes at a redemption price of 101% of the principal amount thereof, plus
accrued interest upon a change of control, as defined, and (c) make an offer to
purchase Notes with a portion of the net cash proceeds of assets sales, as
defined. To the extent that the principal amount is not reduced to less than $78
million, the Partnership may redeem up to a maximum of 35% of the principal
amount at redemption price of 112.375% prior to October 1998 in the event of
public equity offerings or strategic equity investments of at least $25 million,
as defined. Subsequent to September 2000, the Notes are subject to optional
redemption in whole or in part at annually decreasing redemption prices ranging
from 106.15% in 2000 to 100% in 2003 and thereafter. Subject to certain
conditions, the Partnership may at any time defease the Notes.
The payment of principal and interest on the Notes is subordinated in right
of payment to the Revolving Credit Facility and Term Loan Agreement and all
other future senior indebtedness, as defined, of the Partnership. The Notes will
rank pari passu with all other senior subordinated indebtedness of the
Partnership, if any, and is senior to all subordinated debt of the Partnership.
The Indenture contains various restrictive covenants, including limitations on
indebtedness, certain restricted payments and affiliate transactions as defined,
purchases, asset sales and capital expenditures in addition to reporting
requirements. The Indenture requires certain equity contributions ranging from
$5 million to $15 million based upon the consummation of certain cable
television system acquisitions. General partner contributions totaling $15
million in December 1995 were received accordingly.
F-17
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
Revolving Credit Facility
Effective September 28, 1995, Loan A of the Term Debt (the Loan Agreement) was
amended into a Revolving Credit Facility under which the Partnership may borrow
up to $58.5 million until December 1997 when the outstanding balance converts to
a term loan payable in quarterly installments escalating annually from 6% to 30%
of the converted balance through December 2002. The Revolving Credit Facility is
senior to all other indebtedness of the Partnership.
The Revolving Credit Facility bears interest at prime (8.5% at December 31,
1995) plus 1.75% payable quarterly, subject to reductions of up to .75% upon
achievement of certain financial tests. At the Partnership's option, all or a
specified portion of the Revolving Credit Facility may be converted to an
adjusted LIBOR rate also subject to reductions of up to .75% upon achievement of
certain financial tests. At December 31, 1995, none of the Revolving Credit
Facility had been converted to an adjusted LIBOR rate. The Partnership is
required to pay a .50% per annum commitment fee on the unfunded portion of the
Revolving Credit Facility.
Term Loan
In conjunction with the amendment of the Loan Agreement discussed above,
Term Loan B was amended into the Term Loan. Amounts outstanding under the Term
Loan are due in two installments with $4 million due in March 2003, and the
remainder due in June 2003. Voluntary or mandatory prepayment of the Term Loan
prior to December 31, 1996 is subject to liquidated damages.
The Term Loan bears interest on the same terms as the Revolving Credit Facility.
At December 31, 1995, the Term Loan had been converted to an adjusted LIBOR rate
of approximately 9.18%. In addition to the stated interest, the Term Loan bears
additional interest such that its aggregate interest rate is 15%. This
additional interest is financeable as additional principal under the Term Loan.
At December 31, 1995, approximately $446,000 of this additional financeable
interest is included in the Term Loan.
F-18
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
While the Partnership may elect to reduce amounts due under the Revolving Credit
Facility through payments of not less than $100,000, a mandatory prepayment is
required annually before each May 1 beginning in 1998, equal to 70% of the
Partnership's prior year ended December 31 excess cash flow (defined as net
income before interest, depreciation and amortization, management fees and other
non-cash expenses, if any, reduced by required and voluntary debt service
payments, capital expenditures excluding that relating to capital leases and
purchase money debt, and permitted restricted payments, including distributions
to partners, during the period). Mandatory prepayments which would reduce the
Partnership's cash balance below $250,000 may be deferred, bearing annualized
interest at 3.75% above the prime rate, payable monthly thereafter to the extent
available cash exceeds $250,000. Additionally, mandatory prepayments are
required in the event of asset sales with net proceeds exceeding $5 million,
asset sales when such net sales proceeds are less than $5 million to the extent
such proceeds are not reinvested in permitted cable systems within eight months
or are not comprised of at least 95% cash, and to the extent of insurance
proceeds if the total exceeds $500,000. All such mandatory prepayments are
applied in the inverse order of maturity, first to the Revolving Credit
Facility, permanently reducing the availability thereunder if before conversion
to term debt, with the excess, if any, to the Term Loan.
The Revolving Credit Facility and Term Loan Agreement sets forth certain
financial covenants including a maximum total leverage ratio (total debt to
operating cash flow as defined), a maximum senior debt leverage ratio, a maximum
senior debt to basic subscriber ratio, minimum interest coverage, debt service
coverage and fixed charge coverage ratios. Borrowings under the Revolving Credit
Facility to finance acquisitions are limited by the Partnership's incurrance
ratio (total debt to pro forma annualized operating cash flow, as defined).
The Revolving Credit Facility and Term Loan Agreement are collateralized by the
Partnership's assets. In the event of default, the lenders have the right to
offset deposits against the balance due.
In December 1994, the Partnership entered into an interest rate protection
agreement as required by the Loan Agreement, whereby the LIBOR base rate
applicable to a notional amount totaling $40,020,000 is capped at 7.50% for a
two year period ending December 1996. The Revolving Credit Facility and Term
Loan Agreement is subject to this rate protection agreement.
F-19
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
Five Year Maturities
The required principal payments on the Company's long-term debt at December 31,
1995, assuming no additional borrowings, is as follows:
1996 $ 129,000
1997 30,909
1998 1,056,000
1999 2,800,000
2000 3,850,000
Thereafter 138,246,046
------------
$146,111,955
============
7. Supplemental Disclosure of Cash Flow Information:
No interest payments were made in the period from inception to December 31,
1994. Interest payments for the year ended December 31, 1995 approximated $4.9
million.
Noncash transactions for the year ended December 31, 1995 were as follows:
Issuance of $200,000 Class E limited partner interest in acquisition of cable
system.
Capital expenditures of approximately $415,327 included in accounts payable.
Financeable interest payable totaling $446,046, added to the principal of the
Term Loan.
Receivable from purchaser of resold Vista Narragansett systems totaling
$594,000.
Original issue discount on Senior Subordinated Notes of $600,000.
Accrued cable systems acquisition costs $82,225.
Revolving Credit Facility issuance, and Senior Subordinated Note issuance
costs totaling $720,512.
Acquisition of vehicles through issuance of capital leases payable totaling
$160,694.
Noncash transactions for the period ended December 31, 1994 were as follows:
Cable systems acquisition price and related costs paid by a general partner
on behalf of the Partnership totaling $650,000 as a component of the general
partner's contribution.
Issuance of $6,384,000 Class D limited partner interest to seller of an
acquired cable system.
F-20
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Supplemental Disclosure of Cash Flow Information, continued:
Note payable totaling $416,000 issued by a general partner on behalf of the
Partnership in purchasing a cable system, in exchange for Class C limited
partner interests.
Accrued general partner syndication transaction fees totaling $730,171 borne
by the Partnership.
Accrued cable systems acquisition, term debt issuance and organization costs
totaling $466,865.
8. Commitments and Contingencies:
Management Fee to Affiliate
The Partnership incurs management fees and expenses pursuant to the terms of a
management agreement with Galaxy Systems Management, Inc., an affiliate of a
general partner, under which it manages the Partnership's business. In addition
to reimbursing expenses, the Partnership pays a management fee monthly, in
arrears based upon 5.5% of gross revenues as defined in the management agreement
through November 1995, whereupon systems acquisitions trigger a reduction in the
fee to 4.5% of gross revenues. Management fees and reimbursed expenses
approximated $1,888,000 and $39,000 for the year ended December 31, 1995 and for
the period from inception to December 31, 1994, respectively. The management fee
rate is subject to further pro rata reductions to a minimum of 3.5% in the event
the management company acquires or controls other entertainment or
telecommunications assets. The management agreement's initial term through
December 31, 1999 may be extended annually thereafter and is subject to early
termination upon the Partnership's sale or disposition of the acquired cable
television systems. Partnership obligations under the management agreement are
subordinate to the Partnership's long-term debt. The management fee payable at
December 31, 1995 was $116,000. The Partnership also provides and receives
certain operational services from affiliates of a general partner. Included in
prepaids and other are advances to such affiliates approximating $475,000 and
$313,000 as of December 31, 1995 and 1994, respectively, of which approximately
$216,000 and $188,000 as of December 31, 1995 and 1994, respectively represent
advances to Galaxy Systems Management, Inc.
Leases
The Partnership is obligated under certain operating leases for head-end and
transmission facility real estate as well as administrative facilities. Rent
expense incurred in conjunction with these leases approximated $100,000 and
$3,700 for the year ended December 31, 1995 and for the period from inception to
December 31, 1994, respectively.
F-21
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Commitments and Contingencies, continued:
Leases, continued
Future minimum lease payments under such leases are as follows:
Year Ending
December 31, Amount
------------ --------
1996 $181,609
1997 144,619
1998 93,859
1999 79,214
2000 69,530
In addition, the Partnership, as an integral part of its cable operations, has
entered into short-term lease contracts for pole use. Rent expense approximated
$433,000 and $23,000 for the year ended December 31, 1995 and for the period
from inception to December 31, 1994, respectively, under such contracts. Future
annual minimum aggregate rentals under such leases amount to approximately $1.1
million at December 31, 1995.
Employee Benefits
The Partnership sponsors a defined contribution retirement plan for eligible
employees with a minimum six-months of service with the Partnership or certain
affiliates. The Partnership's contributions are based upon employee contribution
up to 5% of gross salary. The Partnership contributed $41,000 to the plan during
1995. No such contributions were made in the period from inception to December
31, 1994.
Franchises and Programming
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities, which in
addition to imposing certain operating conditions, impose franchise fees not to
exceed 5% of gross revenues. While such franchises are not perpetual, renewal
may not be unreasonably withheld without compensation to the cable system
operator. The Partnership has not experienced nor does it anticipate nonrenewal
of existing franchise agreements.
F-22
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Commitments and Contingencies, continued:
Franchises and Programming, continued
The Partnership has various contracts to obtain basic and premium programming
from program suppliers whose compensation is typically based on a fixed fee per
subscriber. The Partnership has negotiated programming agreements with premium
service suppliers that offer cost incentives to the Partnership under which
premium unit prices decline as certain premium service growth thresholds are
met. In addition to volume pricing discounts, some program suppliers offer
marketing support to the Partnership in the form of advertising funds,
promotional materials, rebates and other incentives. The Partnership's
programming contracts are generally for a fixed period of time, typically three
to five years, and are subject to negotiated renewal.
9. Subsequent Events:
Subsequent to December 31, 1995, the Partnership entered into letters of
intent or agreements to purchase the assets of certain cable systems for
approximately $13.9 million and certain cable system assets subject to various
adjustments pursuant to the agreements.
F-23
<PAGE>
Report of Independent Accountants
To the Partners
Galaxy Telecom, L.P.
Our report on the consolidated financial statements of Galaxy Telecom, L.P.
and Subsidiary is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
Austin, Texas
March 28, 1996
S-1
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALAXY TELECOM, L.P.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- ------------------------- -------- --------
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of
Description of Period Expenses --Describe --Describe Period
----------- --------- ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Reserve and allowances deducted from asset
accounts--allowance for uncollectible accounts $ 320,605 $ 383,547 $ 359,385 (1) $ 229,112 (2) $ 834,425
Period from December 23, 1994 (inception) to
December 31, 1994:
Reserve and allowances deducted from asset
accounts--allowance for uncollectible accounts $ - $ 8,219 $ 312,386 (1) $ - $ 320,605
<FN>
(1) Allowance for uncollectible purchased accounts.
(2) Uncollectible accounts written off, net of recoveries.
</FN>
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
S-2
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrants.
The general partners of the Company, Galaxy Telecom, Inc. ("Galaxy GP")
and Galaxy Telecom Investments, L.L.C. ("Galaxy Investments") (collectively, the
"General Partners"), have designated Galaxy GP as the Managing General Partner
of the Company, and as such Galaxy GP has responsibility for the overall
management of the business and operations of the Company. Galaxy Investments
retains the right to become the Managing General Partner at any time upon
written notice to Galaxy GP. The directors of Galaxy GP are also the managers of
Galaxy Investments.
The Company is party to a Management Agreement with Galaxy Management
with respect to the day-to-day management and operation of the Company's cable
systems.
The executive officers of Galaxy Management and the directors of Galaxy
GP are:
Tommy L. Gleason, Jr....50 President, Chief Executive Officer and Director of
Galaxy Management and Galaxy GP
J. Keith Davidson.......40 Vice President - Finance, Treasurer, Secretary and
Director of Galaxy Management and Galaxy GP
James M. Gleason........32 Chief Operating Officer of Galaxy Management and
Galaxy GP
Terry M. Cordova........34 Vice President - Engineering of Galaxy Management
Thomas Morris...........51 Vice President - Operations of Galaxy Management
Ronald Voss.............52 Vice President - Corporate Development of Galaxy
Management
William P. Collatos.....41 Director of Galaxy GP
Kenneth T. Schiciano....33 Director of Galaxy GP
Richard D. Tadler.......39 Director of Galaxy GP
Tommy L. Gleason, Jr. has served as President, Chief Executive Officer and
a director of Galaxy Management and Galaxy GP, and a manager of Galaxy
Investments since December 1994. Mr. Gleason is past President of CableMaxx,
Inc., a wireless cable television company. Since 1987, he has served as
president and director of Galaxy Cablevision Management, Inc., a general partner
of the managing general partner of Galaxy Cablevision, L.P. from which the
Company acquired the Galaxy Cablevision Systems. He was formerly a director of
Capital Bancorporation, Inc. of Cape Girardeau, Missouri, and an individual
general partner of Community Investment Partners, a venture capital fund in St.
Louis, Missouri. Mr. Gleason began his cable television career in 1964, and from
then until 1971 he was a field engineer responsible for the operation of 45
headend facilities in 11 states. From 1971 through 1976, he was a product sales
manager for Essex Wire Corp. of Chicago, Illinois. From 1976 through 1982, he
was President of Galaxy Communications Systems, which operated 29 cable
television systems in four states. Prior to 1979, he engineered and built eight
cable television systems in Illinois. In 1988 and 1989, Mr. Gleason served as
Secretary and Director of the NCTC. Mr. Gleason was inducted into the Cable TV
Pioneers in 1989.
38
<PAGE>
J. Keith Davidson has served as Vice President - Finance, Treasurer and
Secretary of Galaxy Management and Galaxy GP and a manager of Galaxy Investments
since December 1994. From 1988 to 1994, Mr. Davidson was the Chief Financial
Officer and Assistant Secretary of Galaxy Cablevision Management, Inc. Mr.
Davidson has 14 years of experience in the cable television industry.
James M. Gleason has served as Chief Operating Officer and a director of
Galaxy Management since December 1994. Mr. Gleason also presently serves as
Chief Operating Officer of Galaxy GP. From 1988 to 1994, he served as Vice
President - Administrative Operations of Galaxy Cablevision Management, Inc. Mr.
Gleason is responsible for field office administration and customer service,
computer operations, and was responsible for implementing Galaxy Management's
MIS operations. He has prior experience in cable television system construction,
mapping, marketing and operations. In 1992, Mr. Gleason served as Chairman of
the Board of the NCTC. Mr. Gleason has 13 years of experience in the cable
television industry and is the brother of Tommy L. Gleason, Jr.
Terry M. Cordova has served as Vice President - Engineering of Galaxy
Management since December 1994. From 1988 to 1994, he was Vice President of
Engineering of Galaxy Cablevision Management, Inc. Prior thereto, Mr. Cordova
was a field engineer for Cable Services, Inc. in Junction City, Kansas. He is a
member of the Cable Television Interface Practices Committee of the Society of
Cable Television Engineers and a member of the Institute of Electrical and
Electronic Engineers. Mr. Cordova has 13 years of experience in the cable
television industry.
Thomas Morris has served as Vice president - Operations of Galaxy
Management since December 1994. From 1989 to 1994, he served as Vice President
of Operations of Galaxy Cablevision Management, Inc. Prior thereto, Mr. Morris
was an area manager for Simmons Communications in Maryland and a system and area
manager for Continental Cablevision in Quincy, Illinois. Mr. Morris has 17 years
of experience in the cable television industry.
Ronald Voss has served as Vice President - Corporate Development of Galaxy
Management since December 1994. From 1986 to 1994, he was Vice President of
Corporate Development of Galaxy Cablevision Management, Inc. Mr. Voss is a past
director of CableMaxx, Inc. and the Wireless Cable Association International.
Mr. Voss is responsible for initiating acquisitions and dispositions and is
involved in the franchising and licensing process. Mr. Voss has 14 years of
experience in the cable television industry.
William P. Collatos has served as a director of Galaxy GP and a manager
of Galaxy Investments since December 1994 and currently is a general partner of
Spectrum Equity Investors L.P., a private equity firm which he co-founded in May
1994. From 1990 to 1994, Mr. Collatos was a private equity investor. Mr.
Collatos was an Associate and General Partner of funds managed by Media
Communications Partners and TA Associates, Inc., a private equity capital firm
("TA Associates") from 1980 to 1990. From 1976 to 1980, Mr. Collatos worked in
and subsequently ran the media lending group at Fleet National Bank. Mr.
Collatos is a director of Saga Communications, Inc.
Kenneth T. Schiciano has served as a director of Galaxy GP and a manager of
Galaxy Investments since December 1994 and has been a Principal of TA Associates
since January 1995. Mr. Schiciano was a Vice President of TA Associates from
1989 to December 1994.
39
<PAGE>
Richard D. Tadler has served as director of Galaxy GP and a manager of
Galaxy Investments since December 1994. Mr. Tadler has been a Managing Director
of TA Associates since January 1994. From 1987 to December 1993, Mr. Tadler was
a general partner of TA Associates. Mr. Tadler is a director of Sheridan
Healthcare, Inc., and TechForce Corporation.
Item 11. Executive Compensation.
Management Agreement
Pursuant to the Management Agreement between Galaxy Management and the
Company, Galaxy Management, including Messrs. Tommy Gleason, Jr., Davidson,
James Gleason, Cordova, Morris and Voss, who are employed by Galaxy Management
and are otherwise referred to as the Senior Managers, manages all aspects of the
day-to-day business and operations of the Company and in connection therewith
undertakes those activities and services that are customary in the cable
television industry for the account and on behalf of the Company. For a more
detailed description of the Management Agreement, see Item 13 of this Part III
("Certain Relationships and Related Transactions -- Management Agreement").
Executive Compensation
None of the employees of the Company are deemed to be executive
officers of the Company. The Senior Managers are employees of Galaxy Management
and the services of such individuals are provided to the Company, for which
services the Company pays Galaxy Management a fee pursuant to the Management
Agreement. The Senior Managers are compensated in their capacity as executive
officers of Galaxy Management and therefore receive no compensation from the
Company. The general partners of the Company receive no compensation for their
services to the Company in such capacity.
Director Compensation
Galaxy GP pays an annual retainer of $15,000 to its directors, other
than those who are salaried employees or executive officers of Galaxy
Management. In addition, the Company pays to such directors the ordinary and
necessary out-of-pocket expenses incurred by them to attend meetings of the
Board of Directors of Galaxy GP and committees thereof.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of December 31,
1995, concerning the beneficial ownership of (i) the units of general
partnership interests and limited partnership interests of the Company owner by
each person known by the Company to own beneficially more than 5.0% of any class
of the Company's partnership interests, (ii) equity securities of and member
interests in Galaxy GP and Galaxy Investments, respectively, owned by all
executive officers and directors of Galaxy GP and the managers of Galaxy
Investments, respectively, owned by all executive officers and directors of
Galaxy GP and the managers of Galaxy Investments as a group, and (iii) member
interests in Galaxy Management Limited owned by the Senior Managers.
40
<PAGE>
<TABLE>
<CAPTION>
Name and Address No. of Units/ % of
Of Beneficial Owner Type of Interest Shares(1) Class
------------------- ---------------- --------- -----
<S> <C> <C> <C>
Galaxy Telecom, Inc. .......................... Class A General Partnership Units of Company 133,333 *
1220 North Main Street ...................... Class C Limited Partnership Units of Company 416,000 100.0
Sikeston, Missouri 63801 .................... Class E Limited Partnership Units of Company 200,000 100.0
Galaxy Telecom Investments, L.L.C ............. Class A General Partnership Units of Company 44,491,667 99.7
1220 North Main Street ...................... Class B Limited Partnership Units of Company 1,000 100.0
Sikeston, Missouri 63801
Vantage Cable Associates, L.P. ................ Class D Limited Partnership Units of Company 6,384,000 100.0
c/o Farm Bureau Life Insurance Company
5400 University Avenue
W. Des Moines, Iowa 50266
Galaxy Telecom Management, L.L.C .............. Class A Voting Common Stock of Galaxy GP 20,000 16.9
1220 North Main Street ...................... Common Interests in Galaxy Investments 990 99.0
Sikeston, Missouri 63801 .................... Voting Preferred Interests in Galaxy Investments 288,549 7.3
TA Associates Group (2) ....................... Class A Voting Common Stock of Galaxy GP 63,281 53.3
c/o TA Associates, Inc. ..................... Common Interests in Galaxy Investments 6 *
125 High Street, Suite 2500 ................. Voting Preferred Interests in Galaxy Investments 3,452,523 87.8
Boston, Massachusetts 02110
Spectrum Equity Investors, L.P. ............... Class A Voting Common Stock of Galaxy GP 24,615 20.7
125 High Street, Suite 2600 ................. Common Interests in Galaxy Investments 2 *
Boston, Massachusetts 02110
Fleet Equity Partners(3) ...................... Class A Voting Common Stock of Galaxy GP 5,810 4.9
111 Westminster Street ...................... Class B Nonvoting Common Stock of Galaxy GP 14,703 100.0
Providence, Rhode Island 02903 .............. Common Interests in Galaxy Investments 2 *
Voting Preferred Interests in Galaxy Investments 192,646 4.9
Nonvoting Preferred Interests in Galaxy Investments 570,368 100.0
Tommy L. Gleason, Jr .......................... Common Interests of Galaxy Management Limited 770,000 38.5
Tommy L. Gleason, Sr .......................... Common Interests of Galaxy Management Limited 485,000 24.3
James M. Gleason .............................. Common Interests of Galaxy Management Limited 675,000 33.8
J. Keith Davidson ............................. Common Interests of Galaxy Management Limited 40,000 2.0
Terry M. Cordova .............................. Common Interests of Galaxy Management Limited 25,000 1.3
Ronald Voss ................................... Common Interests of Galaxy Management Limited 5,000 *
All executive officers and directors of
Galaxy GP as a group (6 persons) (4) ........ Class A Voting Common Stock of Galaxy GP 107,896 91.0
All managers of Galaxy Investments as
a group (5 persons) (5) ..................... Common Interests in Galaxy Investments 998 99.8
h Voting Preferred Interests in Galaxy Investments 3,740,995 95.1
<FN>
*Less than one percent.
41
<PAGE>
(1) Share and unit ownership amounts have been rounded to the nearest whole
number.
(2) Includes 19,524 shares of Class A Voting Common Stock of Galaxy GP
("Class A Stock") owned by Advent Atlantic and Pacific II L.P., 7,040 shares of
Class A Stock owned by Advent Industrial II L.P., 3,282 Class A Stock owned by
Advent New York, L.P., 32,820 shares of Class A Stock owned by Advent VII L.P.,
and 615 shares of Class A Stock owned by TA Venture Investors Limited
Partnership. Includes 6 units of Common Interests in Galaxy Investments ("Common
Interests") owned by Advent VII Investor Corp. Includes 3,452,523 units of
Voting Preferred Interests in Galaxy Investments ("Voting Preferred Interests")
owned by Advent VII Investor Corp. All of the above beneficial owners are part
of an affiliated group of investment partnerships and companies referred to,
collectively, as the TA Associates Group. Messrs. Tadler and Schiciano,
Directors of Galaxy GP and managers of Galaxy Investments, are a Managing
Director and a Principal, respectively, of TA Associates, Inc., which is the
sole general partner of TA Associates VII L.P., TA Associates VI L.P. and TA
Associates AAP II Partners L.P. TA Associates VII L.P. is the sole general
partner of Advent VII L.P. TA Associates is the sole general partner of Advent
New York L.P. and Advent Industrial II L.P. TA Associates AAP II Partners L.P.
is the sole general partner of Advent Atlantic and Pacific II L.P. TA
Associates, Inc. exercises sole voting and investment power with respect to all
of the shares or units, as the case may be, held of record by the named
investment partnerships, with the exception of those shares of Class A Stock
held by TA Venture Investors Limited Partnership. Principals and employees of TA
Associates, Inc. (including Messrs. Tadler and Schiciano) comprise the general
partners of TA Venture Investors Limited Partnership. In such capacity, each of
Messrs, Tadler and Schiciano may be deemed to share voting and investment power
with respect to 615 shares of Class A Stock held of record by TA Venture
Investors Limited Partnership. Messrs. Tadler and Schiciano each disclaim
beneficial ownership of such shares, except to the extent of their respective
pecuniary interests.
(3) Includes 581 shares of Class A Stock and 1,470 shares of Class B
Nonvoting Common Stock of Galaxy GP ("Class B Stock") owned by Chisholm Partners
II L.P., and 5,229 shares and 13,233 shares of Class A Stock and Class B Stock,
respectively, owned by Fleet Growth Resources, Inc. Also includes 0.18 units of
Common Interests, 15,460 units of Voting Preferred Interests, and 45,775 units
of Nonvoting Preferred Interests in Galaxy Investments ("Nonvoting Preferred
Interests") owned by Chisholm Partners II L.P., 1.14 units of Common Interests,
124,030 units of Voting Preferred Interests and 367,215 units of Nonvoting
Preferred Interests owned by Fleet Growth Resources, Inc., and 0.49 units of
Common Interests, 53,156 units of Voting Preferred Interests and 157,378 units
of Nonvoting Preferred Interests owned by Fleet Equity Partners VII, L.P.
(4) Includes (i) 20,000 shares owned of record by Galaxy Management Limited
as to which Tommy L Gleason, Jr. and J. Keith Davidson may be deemed to have
shared voting and investment power, (ii) 63,281 shares owned of record by TA
Associates Group as to which shares Messrs. Tadler and Schiciano may be deemed
to have shared voting and investment power and (iii) 24,615 shares owned of
record by Spectrum Equity Investors, L.P. ("Spectrum") as to which shares Mr.
Collatos may be deemed to have shared voting and investment power.
(5) Includes (i) 990 Common Interests and 288,459 Voting Preferred
Interests owned of record by Galaxy Management Limited as to which shares
Messrs. Gleason, Jr. and Davidson may be deemed to have shared voting and
investment power, (ii) 6 Common Interests and 2,494,591 Voting Preferred
Interests owned of record by TA Associates Group as to which shares Messrs.
Tadler and Schiciano may be deemed to have shared voting and investment power
and (iii) 2 Common Interests and 915,583 Voting Preferred Interests owned of
record by Spectrum as to which shares Mr. Collatos may be deemed to have shared
voting and investment power.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions.
Management Agreement
Galaxy Management, which is owned by the Senior Managers and Tommy L.
Gleason, the father of Tommy L. Gleason, Jr. and James M. Gleason, currently
manages all aspects of the day-to-day business and operations of the Company
pursuant to the Management Agreement. The term of the Management Agreement
expires December 31, 1999, but provides for automatic renewal for successive
one-year terms. The Company may terminate the Management Agreement with 90 days'
written notice prior to the expiration of the initial or any renewal term. The
Company also has the option to terminate the Management Agreement in the event
(i) of a material breach of the Management Agreement by Galaxy Management and
failure to cure same or commence cure within 30 days after receipt of notice
from the Company, (ii) of an unwaived and uncured default by the Company of any
substantive covenant contained in its financing documents, (iii) of a 10%
reduction in the Company's gross revenues or operating cash flow over the prior
fiscal year or (iv) that none of Tommy L. Gleason, Jr., Tommy L. Gleason or
James M. Gleason is involved in the management of Galaxy Management. The
Management Agreement also will terminate, with respect to any of the Company's
cable systems, upon the sale of such
42
<PAGE>
system by the Company and will terminate in its entirety upon the sale or other
distribution of all of the Company's systems or upon the dissolution or winding
up of the Company, which may be effected by the Equity Investors in certain
circumstances pursuant to the terms of the Equity Holders Agreement described
below.
The Management Agreement provides that Galaxy Management is authorized
to perform management services including, among other things: operation and
control of the physical assets of the Systems; engineering and supervision of
expansion and construction activities relating to the Systems; negotiation,
administration and extension of franchise and pole attachment agreements and
agreements with utility companies; management of programming agreements;
marketing; purchasing; budgeting; billing, record-keeping, accounting and
financial reporting; tax return preparation; and hiring, supervision and
termination of Company employees. Galaxy Management is also authorized to
establish and maintain bank accounts for the Company ("System Operating
Accounts") to deposit all funds collected by each System and to make withdrawals
therefrom for purposes of payment and reimbursement of expenses incurred by or
on behalf of the Company. Galaxy Management is entitled to reimbursement from
the System Operating Accounts on a monthly basis of various expenses allocable
to its management and operation of the Systems and the Company, including truck
and automobile expenses, travel expenses, meals and entertainment, and
third-party professional fees. For fiscal 1995, the Company paid Galaxy
Management approximately $281,600 in reimbursed expenses.
In return for its management services, Galaxy Management receives a
management fee, payable monthly, equal to a percentage of the gross revenues
derived by the Company from the Systems, excluding revenues from the sale of
Systems or franchises. The Management Agreement also provides that, prior to
January 1, 1998, the dollar amount of the management fee may not increase as a
result of revenues attributable to acquired cable television systems until such
time as the gross revenues of the Company reach a certain minimum level. The
management fee is currently 4.5% of revenues. For the year ended December 31,
1995, the Company incurred a management fee of approximately $1,605,400. There
can be no assurance that such amounts are representative of the amount of annual
fees to be paid to Galaxy Management in the future.
The management fee may be reduced (but not below 3.5%) in the event
other entities controlled by Tommy L. Gleason, Jr., James M. Gleason and/or J.
Keith Davidson acquire other entertainment or telecommunications business
assets, with the calculation to determine any such reduction in the management
fee based upon the percentage of the gross revenues of such other assets
compared to the gross revenues of the Company. None of such persons presently
intends, or intends to cause any such entities, to make any such acquisitions.
The Loan Agreement limits the Company's ability to pay any accrued management
fee and Galaxy management's right to such fee and reimbursement of expenses is
restricted by the terms of the Affiliate Subordination Agreement.
The Company believes that the terms of the Management Agreement are
substantially the same terms as could be obtained in arm's length arrangements
with unaffiliated third parties.
43
<PAGE>
Affiliate Subordination Agreement
The Company, Galaxy GP, Galaxy Investments, certain investors in Galaxy
GP and Galaxy Investments, Galaxy Telecom Management, L.L.C. ("Galaxy Management
Limited"), Tommy L. Gleason, Jr., James M. Gleason, Tommy L. Gleason, J. Keith
Davidson, Ronald Voss, Terry M. Cordova, and the sellers of the Galaxy
Cablevision Systems, Vista Communications Systems and Vantage Cable Systems
(collectively, the "Subordinated Parties") are parties to an Affiliate
Subordination Agreement dated as of December 23, 1994 (the "Subordination
Agreement") with Fleet National Bank and the Lenders under the Company's Loan
Agreement (the "Senior Parties"). Under the terms of the Subordination
Agreement, all obligations and liabilities of the Company, Galaxy GP and Galaxy
Investments to make any payments of cash or other property to any of the other
Subordinated parties are subordinated in right of payment and remedies to the
prior final payment in full of the obligations and liabilities of the Company,
Galaxy GP and Galaxy Investments to the Senior Parties under the Loan Agreement
and the financing documents related thereto.
Equity Holders Agreement
The Company, Galaxy GP, Galaxy Investments, the Senior Managers, the
Equity Investors and Vantage Cable have entered into the Equity Holders
Agreement relating to the management of Galaxy GP and Galaxy Investments, the
general partners of the Company, and certain other matters. Under the Equity
Holders Agreement, each stockholder of Galaxy GP and each member of Galaxy
Investments has agreed to elect as directors or managers, as the case may be,
three designees of the Equity Investors and Tommy Gleason, Jr. and one other
designee of the Senior Managers. The current designees of the Equity Investors
are William P. Collatos, Kenneth T. Schiciano and Richard D. Tadler. J. Keith
Davidson is the current second designee of the Senior Managers. The Equity
Holders Agreement provides that James M. Gleason shall serve as a director and
manager if Tommy Gleason, Jr. is unable to serve.
The Equity Holders Agreement also restricts transfer of equity
interests in Galaxy GP and Galaxy Investments by the Senior Managers and
provides the Equity Investors with piggyback registration rights and, on or
after December 23, 1998, demand registration rights with respect to interest in
the Company, Galaxy GP and Galaxy Investments. The Equity Investors have agreed
to waive their registration rights with respect to the registration of the
Notes. On or after (i) December 23, 1998 or (ii) a default by the Company in the
payment of principal or interest on the indebtedness outstanding under the Loan
Agreement, the Equity Investors have the right to require (a) the reorganization
of the Company, Galaxy GP and Galaxy Investment to facilitate the registration
and public offering of securities of the successor entity or (b) the sale of the
Company, Galaxy GP, Galaxy Investments or the assets, stock or other securities
of any such entities.
The Equity Holders Agreement also provides that the Senior Managers and
their affiliates will first offer any opportunity to invest in a
telecommunications or entertainment business to the Company before making such
investment. If the Company elects not to make such investment, the Senior
Managers and the Equity Investors, if they so elect, may make such investments
through another entity. The decision of the Company as to whether or not to make
such investment will be made by the board of directors of the Managing General
Partner. Although the directors and executive officers of the Managing General
44
<PAGE>
Partner have certain fiduciary obligations to its shareholders under applicable
corporate law and the Managing General Partner has fiduciary duties to the other
partners of the Company, there can be no assurance that a conflict of interest
relating to any such investment will be resolved in favor of the Company. The
Company presently does not have any agreements or policies governing possible
conflicts of interest.
Promissory Notes of Galaxy Investments
Pursuant to the terms of a Securities Purchase Agreement dated December
23, 1994 and as amended as of December 1, 1995, by and among the Equity
Investors and certain other third parties (collectively, the "Purchasers"), the
Company, Galaxy GP, Galaxy Investments and the Senior Managers (the "Securities
Purchase Agreement"), Galaxy Investments issued to the purchasers promissory
notes in an aggregate principal amount of approximately $200,000 million (the
"Galaxy Investments Notes"). The Galaxy Investments Notes are unsecured and
mature December 31, 2003, provided that if any of the Notes are outstanding when
the principal of any Galaxy Investments Note becomes due, then such principal
payment shall be deferred until not earlier than the 91st day after the date
when none of the Notes are outstanding. The Galaxy Investments Notes bear
interest at the rate of 17.5% per annum payable annually in arrears beginning
December 31, 1995 in cash or, at Galaxy Investments' option, the form of
additional Galaxy Investments Notes in an original principal amount equal to
such interest then payable.
The Galaxy Investments Notes may be redeemed at any time, in whole or
in part, by Galaxy Investments. The Galaxy Investments Notes also are subject to
mandatory redemption upon the occurrence of a "change of control", which is
defined in the Securities Purchase Agreement to include (i) the sale of all or
substantially all of the assets of the Company in one or a series of
transactions, (ii) the failure of Galaxy GP and Galaxy Investments to own
collectively 100% of the issued and outstanding general partnership interests of
the Company, (iii) the cessation of Galaxy GP's service as managing general
partner of the Company (except if Galaxy Investments exercises its right to
become the managing general partner), (iv) the transfer by the Senior Managers,
Tommy L. Gleason, Galaxy Management or Galaxy Management Limited (collectively,
the "Management Parties") of Class A voting Common Stock of Galaxy GP or Common
Interests or Voting Preferred Interests of Galaxy Investments (v) the
termination of the Management Agreement or the material reduction of the
Company's rights thereunder, (vi) the failure of Tommy L. Gleason, Jr. and James
M. Gleason to be actively involved in the management of the Company, Galaxy GP
and Galaxy Investments, (vii) the failure of Tommy L. Gleason, Jr., Tommy L.
Gleason and James M. Gleason and the failure of any one such individuals and the
spouses and children of such individuals to own 51% of the equity of Galaxy
Management or a majority of the preferred and common membership interests of
Galaxy Investments, (viii) the termination of the Equity Holders Agreement or
the material violation thereof by any of the Management parties named therein,
or (ix) the liquidation or dissolution of the Company, Galaxy GP or Galaxy
Investments. In addition, distributions made by the Company to Galaxy
Investments, other than permitted tax distributions, are subject, in part, to be
applied as a mandatory prepayment of the principal of the Galaxy Investments
Notes.
45
<PAGE>
Limited Partnership Interests in the Company
Galaxy Investments owns 100% of the Class B Limited Partnership
Interests in the Company, which it received in connection with the organization
and initial capitalization of the Company in December 1994. Galaxy GP received
100% of the Class C and Class E Limited Partnership Interests in the Company in
connection with the Company's acquisitions of the Vista Communications Systems
and the Galaxy Cablevision Systems, respectively. In connection with its
acquisition of the Vantage Cable Systems, the Company issued approximately $6.4
million in the form of Class D Limited Partnership Interests in the Company, out
of the total consideration of approximately $38.4 million paid for such Systems.
The Company's ability to declare or pay any dividend or make any other
distributions to its general and limited partners is restricted by the terms of
the Indenture dated September 28, 1995.
Subject to such restrictions and at such time as the Company may make
distributions under the Loan Agreement, Galaxy GP may cause the Company to make
distributions to its Class C Limited Partners, Class D Limited Partners and
Class E Limited Partners prior to making distributions to other partners of the
Company in accordance with the Limited Partnership Agreement dated December 23,
1994, as amended, by and among Galaxy GP, Galaxy Investments and Vantage Cable
(the "Partnership Agreement"). The Company may make such distributions until the
aggregate of such distributions equals the amount of the capital contributions
of each such class of limited partners, plus certain priority rates of return.
Under the Partnership Agreement, Class C Limited Partners are entitled to a rate
of return of 9%, compounded annually on the previously unreturned capital
contribution. The Partnership Agreement provides that Class D Limited Partners
are entitled to an annually compounded rate of return of 10.0% per annum from
December 23, 1994 until December 31, 1999, which rate of return increases each
year thereafter in increments of 2.0%, up to a maximum of 18.0%. Class E Limited
Partners are entitled under the Partnership Agreement to a priority rate of
return of 9% until December 31, 1999, which then increases 2.0% each year up to
a maximum of 17%. Class B Limited Partners are entitled to up to 11.90% of any
distribution remaining after allocation of the capital contributions of and
priority rates of return to the Class C, D and E Limited Partners and to the
Class A General Partners. To date, the Company has made no distributions to any
of the general or limited partners of the Company. The interests of each of the
general and limited partners of the Company are also subject to the terms of the
Affiliate Subordination Agreement and the Equity Holders Agreement.
Relationship of Agent with Equity Investor
Fleet National Bank, the Agent under the Loan Agreement, is a wholly
owned subsidiary of Fleet Financial Group, Inc., a bank holding company ("Fleet
Financial"). Fleet Equity Partners, one of the Equity Investors, is a marketing
name for Fleet Growth Resources, Inc., a wholly owned subsidiary of Fleet
Private Equity Company, Inc., which, in turn, is a wholly owned subsidiary of
Fleet Financial.
46
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K
(a)(1) Financial Statements. Reference is made to the Index on Page F-1 for
a list of all financial statements filed as part of this Report.
(a)(2) Financial Statement Schedules. Reference is made to the Index on Page
F-1 for a list of all financial statement schedules filed as part of
this Report.
(a)(3) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Co-Registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GALAXY TELECOM, L.P.
By: Galaxy Telecom Inc.
As General Partner
March 29, 1996 _______________________________________
By: Tommy L. Gleason
President and Chief Executive Officer
GALAXY TELECOM CAPITAL CORP.
March 29, 1996 ________________________________________
By: Tommy L. Gleason, Jr
President and Chief Executive Officer
48
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial data extracted from the 1995 Form 10-k
and is qualified in its entirety by reference to such 10-K.
</LEGEND>
<CIK> 0000948945
<NAME> Galaxy Telecom, L.P.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3430835
<SECURITIES> 0
<RECEIVABLES> 4346566
<ALLOWANCES> (834425)
<INVENTORY> 943825
<CURRENT-ASSETS> 1611158
<PP&E> 134235976
<DEPRECIATION> (7923921)
<TOTAL-ASSETS> 199913191
<CURRENT-LIABILITIES> 12215485
<BONDS> 120000000
0
0
<COMMON> 1000
<OTHER-SE> 42169751
<TOTAL-LIABILITY-AND-EQUITY> 199913191
<SALES> 29995187
<TOTAL-REVENUES> 30603592
<CGS> 0
<TOTAL-COSTS> 28711154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10442205
<INCOME-PRETAX> (8549767)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
INDEX TO EXHIBITS
2.1 - Asset purchase agreement by and between Douglas Cable
Communications, Limited Partnership and the Company,
dated as of July 19, 1995, incorporated herein by
reference to Exhibit 2.1 to the Registration Statement
on Form S-1 (Reg. No. 37-95278) (the "Form S-1").
2.2 - Asset Purchase Agreement by and between Friendship Cable
of Florida, Friendship Cable of Georgia,Friendship Cable
of South Carolina, Buford Group, Inc. and the Company,
dated as of July 19, 1995, incorporated herein by
reference to Exhibit 2.2 to the Form S-1.
2.3 - Asset Purchase Agreement by and between Vista
Communications Limited Partnership I and the Company,
dated as of August 31, 1995, incorporated herein by
reference to Exhibit 2.3 to the Form S-1.
2.4 - Asset Purchase Agreement by and between
Vista/Narragansett Cable, L.P. and the Company, dated as
of August 8, 1995, incorporated herein by reference to
Exhibit 2.4 to the Form S-1.
2.5 - Asset Purchase Agreement by and between Phoenix Country
Cable Joint Venture and the Company, dated as of July 19,
1995, incorporated herein by reference to Exhibit 2.5 to
the Form S-1.
2.6 - Agreement by and between the Company and Anderson Pacific
Corporation, dated as of August 4, 1995, incorporated
herein by reference to Exhibit 2.6 to the Form S-1.
3.1 - Limited Partnership Agreement (the "Partnership
Agreement") of the Company, dated as of December 23,
1994, incorporated herein by reference to Exhibit 3.1 to
the Form S-1.
3.2 - Certificate of Limited Partnership of the Company, dated
December 23, 1994, incorporated herein by reference to Exhibit 3.2
to the Form S-1.
3.3 - Certificate of Incorporation of Galaxy Telecom Capital
Corp. ("Capital Corp."), incorporated herein by
reference to Exhibit 3.3 to the Form S-1.
3.4 - Bylaws of Capital Corp., incorporated herein by
reference to Exhibit 3.4 to the Form S-1.
3.5 - Amendment No.1 to the Limited Partnership Agreement,
dated as of December 1, 1995.
3.6 - Amendment No.2 to the Limited Partnership Agreement,
dated as of December 29, 1995.
4.1 - Indenture by and among the Company, Capital Corp. and
Boatman's Trust Company, as Trustee, relating to the 12
3/8% Senior Subordinated Notes due 2005, incorporated
herein by reference to Exhibit 4.1 to the Form S-1.
4.2 - Form of Note (included in Exhibit 4.1).
10.1 - Management Agreement by and between Galaxy Systems
Management, Inc. and the Company, dated as of December
23, 1994, incorporated herein by reference to Exhibit
10.1 to the Form S-1.
10.2 - Securities Purchase Agreement by and among the Company,
Galaxy Telecom, Inc. and Galaxy Telecom Investments,
L.L.C. and the Purchasers and other parties named
therein, dated as of December 23, 1994 (the "Securities
Purchase Agreement"), incorporated herein by reference
to Exhibit 10.2 to the Form S-1.
10.3 - Equity Holders Agreement by and among the Company, Galaxy
Telecom, Inc., Vantage Cable Associates, L.P. and the
Management Stockholders and Purchasers named in the
Securities Purchase Agreement, dated as of December 23,
1994, incorporated herein by reference to Exhibit 10.3
to the Form S-1.
10.4 - Contract by and between the Company and QUALCOMM
Incorporated, dated as of November 18, 1993, as amended,
incorporated herein by reference to Exhibit 10.5 to the
Form S-1.
10.5 - Asset Purchase Agreement by and between the Company (as
assignee of Galaxy Management, Inc.) and Galaxy
Cablevision, L.P., dated as of May 16, 1994,
incorporated herein by reference to Exhibit 10.6 to the
Form S-1.
10.6 - Asset Purchase Agreement by and between the Company (as
assignee of Galaxy Management, Inc.) and Vantage Cable
Associaties, L.P., dated as of June 8, 1994, as amended
as of December 23, 1994, incorporated herein by
reference to Exhibit 10.7 to the Form S-1.
10.7 - Asset Purchase Agreement by and between the Company (as
assignee of Galaxy Management, Inc.) and Chartwell Cable
of Colorado, Inc., dated November 11, 1994, incorporated
herein by reference to Exhibit 10.8 to the Form S-1.
10.8 - Asset Purchase Agreement by and between the Company and
Galaxy Cablevision, L.P., dated as of December 23, 1994,
incorporated herein by reference to Exhibit 10.9 to the
Form S-1.
10.9 - Agreement of Purchase and Sale by and between the Company
(as assignee of Galaxy Management, Inc.) and Vista
Communications Limited Partnership III, dated as of June
13, 1994, incorporated herein by reference to Exhibit
10.10 to the Form S-1.
10.10 - Affiliate Subordination Agreement by and among the
Company and the other parties named therein, dated as of
December 23, 1994, incorporated herein by reference to
Exhibit 10.11 the Form S-1.
10.11 - First Amendment to Securities Purchase Agreement, dated as of
December 1, 1995.
10.12 - Amended and Restated Loan Agreement dated as of September 28, 1995
by and among the Company and Fleet National Bank, as Agent, Lender
and Co-Arranger, and Internationale Nederlanden (U.S.) Capital
Corporation, as Lender and Co-Arranger, and the other Financial
Institutions party thereto.
12.1 - Computation of Ratio of Earnings to Fixed Charges.
21.1 - Subsidiaries of the Company incorporated herein by
reference to Exhibit 21.1 to the Form S-1.
27.1 - Financial Data Schedule.
The Issuers agree to furnish supplementally a copy of any omitted schedules to
such agreement upon request of the Commission.
<PAGE>
AMENDMENT NO. 1
TO THE
LIMITED PARTNERSHIP AGREEMENT
OF
GALAXY TELECOM, L.P.
AMENDMENT dated as of December 1, 1995 by and between Galaxy Telecom,
Inc., a Delaware corporation, the managing general partner and a limited partner
of the Partnership ("Galaxy GP"), and Galaxy Telecom Investments, L.L.C., a
Delaware limited liability company and a general and limited partner of the
Partnership ("Galaxy LLC") (together, the "General Partners").
WHEREAS, the General Partners and limited partners named therein are
parties to the Limited Partnership Agreement of Galaxy Telecom, L.P. dated as of
December 23, 1994 (the "Partnership Agreement");
WHEREAS, the Partnership desires to consummate the Additional
Adquisitions contemplated by that certain Securities Purchase Agreement dated as
of December 23, 1994, by and among the Partnership, Galaxy GP, Galaxy LLC, and
the Purchasers and other parties named therein, as amended by the First
Amendment to Securities Purchase Agreement dated as of December 1, 1995 (the
"Securities Purchase Agreement");
WHEREAS, Galaxy LLC desires to make additional Class A capital
contributions to the Partnership in order to fund a portion of the purchase
prices for the Additional Acquisitions contemplated by the Securities Purchase
Agreement; and
WHEREAS, the General Partners desire that Exhibit A to the Partnership
Agreement be amended to reflect such additional Class A Capital Contributions by
Galaxy LLC.
NOW, THEREFORE, for good and valuable consideration, the General
Partners agree as follows:
1. Exhibit A to the Partnership Agreement is hereby amended and restated,
as of the effective date of this Amendment, to read in its entirety as Exhibit A
attached hereto.
2. Unless otherwise defined in this Amendment, each capitalized term used
herein shall have the meaning set forth in the Securities Purchase Agreement.
3. The effective date of this Amendment shall be the date first set forth
above.
4. As amended by this Amendment, the Partnership Agreement is in all
respects ratified and confirmed, and as so amended by this Amendment the
Partnership Agreement shall be read, taken and construed as one and the same
instrument.
<PAGE>
5. This Amendment may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which so executed shall be
deemed to be an original, but all of such counterparts shall together constitute
but one and the same instrument.
6. This Amendment shall be governed in accordance with the laws of the
State of Delaware, as applied to contracts made and performed within the State
of Delaware, without regard to principles of conflicts of law.
IN WITNESS WHEREOF, this Amendment has been executed by the General
Partners as of the date first set forth above.
GALAXY TELECOM, INC.
By: \s\ Tommy Gleason, Jr.
-------------------------------------
Tommy Gleason, Jr.
President
GALAXY TELECOM INVESTMENTS, L.L.C.
By: \s\ Tommy Gleason, Jr.
-------------------------------------
Tommy Gleason, Jr.
Manager
<PAGE>
As Amended at December 1, 1995
EXHIBIT A
General Partners
Class A Limited Partner
Capital Percentage
Name Address Contribution Interests
- - - -------------------------- ---------------------- ----------- -----------
Galaxy Telecom, Inc. 1220 North Main Street $ 133,333 1%
Sikeston, MO 63801
Galaxy Telecom 1220 North Main Street $40,691,667 99%
Investments, L.L.C Sikeston, MO 63801
Class B Limited Partner
Capital Percentage
Name Address Contribution Interest
- - - ------------------------- ---------------------- ------------- ----------
Galaxy Telecom 1220 North Main Street $ 1,000 100%
Investments, L.L.C Sikeston, MO 63801
Class C Limited Partner
Capital Percentage
Name Address Contribution Interests
Galaxy Telecom, Inc. 1220 North Main Street $ 416,000 100%
Sikeston, MO 63801
Class D Limited Partner
Capital Percentage
Name Address Contribution Interests
- - - ---------------------- ------------------------- ------------- ----------
Vantage Cable 5400 University Avenue $ 6,384,000 100%
Associates, L.P. West Des Moines, IA 50266
Class E Limited Partner
Capital Percentage
Name Address Contribution Interests
- - - ------------------------- ---------------------- ------------- ----------
Galaxy Telecom, Inc. 1220 North Main Street $ 200,000 100%
Sikeston, MO 63801
<PAGE>
AMENDMENT NO. 2
TO THE
LIMITED PARTNERSHIP AGREEMENT
OF
GALAXY TELECOM, L.P.
AMENDMENT dated as of December 29, 1995 by and between Galaxy Telecom,
Inc., a Delaware corporation, the managing general partner and a limited partner
of the Partnership ("Galaxy GP"), and Galaxy Telecom Investments, L.L.C., a
Delaware limited liability company and a general and limited partner of the
Partnership ("Galaxy LLC") (together, the "General Partners").
WHEREAS, the General Partners and limited partners named therein are
parties to the Limited Partnership Agreement of Galaxy Telecom, L.P. dated as of
December 23, 1994, as amended by Amendment No. 1 to the Limited Partnership
Agreement of Galaxy Telecom, L.P.(dated as of December 1, 1995 the "Partnership
Agreement");
WHEREAS, the Partnership desires to consummate certain of the
Additional Adquisitions contemplated by that certain Securities Purchase
Agreement dated as of December 23, 1994, by and among the Partnership, Galaxy
GP, Galaxy LLC, and the Purchasers and other parties named therein, as amended
by the First Amendment to Securities Purchase Agreement dated as of December 1,
1995 (the "Securities Purchase Agreement");
WHEREAS, Galaxy LLC desires to make additional Class A capital
contributions to the Partnership in order to fund a portion of the purchase
prices for certain of the Additional Acquisitions contemplated by the Securities
Purchase Agreement; and
WHEREAS, the General Partners desire that Exhibit A to the Partnership
Agreement be amended to reflect such additional Class A Capital Contributions by
Galaxy LLC.
NOW, THEREFORE, for good and valuable consideration, the General
Partners agree as follows:
1. Exhibit A to the Partnership Agreement is hereby amended and restated,
as of the effective date of this Amendment, to read in its entirety as Exhibit A
attached hereto.
2. The effective date of this Amendment shall be the date first set forth
above.
3. As amended by this Amendment, the Partnership Agreement is in all
respects ratified and confirmed, and as so amended by this Amendment the
Partnership Agreement shall be read, taken and construed as one and the same
instrument.
4. This Amendment may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which so executed shall be
deemed to be an original, but all of such counterparts shall together constitute
but one and the same instrument.
5. This Amendment shall be governed in accordance with the laws of the
State of Delaware, as applied to contracts made and performed within the State
of Delaware, without regard to principles of conflicts of law.
IN WITNESS WHEREOF, this Amendment has been executed by the General
Partners as of the date first set forth above.
GALAXY TELECOM, INC.
By: \s\ Tommy Gleason, Jr.
-------------------------------------
Tommy Gleason, Jr.
President
GALAXY TELECOM INVESTMENTS, L.L.C.
By: \s\ Tommy Gleason, Jr.
-------------------------------------
Tommy Gleason, Jr.
Manager
<PAGE>
As Amended at December 29, 1995
EXHIBIT A
General Partners
Class A Limited Partner
Capital Percentage
Name Address Contribution Interests
- - - -------------------------- ---------------------- ----------- -----------
Galaxy Telecom, Inc. 1220 North Main Street $ 133,333 1%
Sikeston, MO 63801
Galaxy Telecom 1220 North Main Street $44,491,667 99%
Investments, L.L.C Sikeston, MO 63801
Class B Limited Partner
Capital Percentage
Name Address Contribution Interest
- - - ------------------------- ---------------------- ------------- ----------
Galaxy Telecom 1220 North Main Street $ 1,000 100%
Investments, L.L.C Sikeston, MO 63801
Class C Limited Partner
Capital Percentage
Name Address Contribution Interests
Galaxy Telecom, Inc. 1220 North Main Street $ 416,000 100%
Sikeston, MO 63801
Class D Limited Partner
Capital Percentage
Name Address Contribution Interests
- - - ---------------------- ------------------------- ------------- ----------
Vantage Cable 5400 University Avenue $ 6,384,000 100%
Associates, L.P. West Des Moines, IA 50266
Class E Limited Partner
Capital Percentage
Name Address Contribution Interests
- - - ------------------------- ---------------------- ------------- ----------
Galaxy Telecom, Inc. 1220 North Main Street $ 200,000 100%
Sikeston, MO 63801
FIRST AMENDMENT
TO
SECURITIES PURCHASE AGREEMENT
This FIRST AMENDMENT dated as of December 1, 1995 by and among Galaxy
Telecom, L.P., a Delaware limited partnership (the "Partnership"), Galaxy
Telecom, Inc., a Delaware corporation and the managing general partner and a
limited partner of the Partnership ("Galaxy GP"), Galaxy Telecom Investments,
L.L.C., a Delaware limited liability company and a general partner and a limited
partner of the Partnership ("Galaxy LLC"), Tommy Gleason, Jr., James Gleason, J.
Keith Davidson, Tommy Gleason, Ronald Voss and Terry M. Cordova (collectively,
the "Managers", and each individually, a "Manager"), Galaxy Telecom Management,
L.L.C., a Texas limited liability company wholly owned by the Managers (the
"Management Investor"), Galaxy Systems Management, Inc., a Missouri corporation
wholly owned by the Managers (the "Management Corp" and together with the
managers and the Management Investor, collectively, the "Management Parties"),
and the investor purchasers named in Schedule 1.4 hereto (the "Investor
Purchasers").
WHEREAS, the Partnership, Galaxy CP, Galaxy LLC, the Management
Parties, the Investor Purchasers and certain other persons are parties to a
Securities Purchase Agreement dated as of December 23, 1994 (the "Agreement");
and
WHEREAS, the parties to the Agreement desire to amend the Agreement to
provide for the issuance and sale by Galaxy LLC to the Investor Purchasers of
certain additional securities of Galaxy LLC.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties hereto agree as follows:
1. Section 8.1 of the Agreement is hereby amended, as of the effective
date of this First Amendment, by adding thereto the following new defined terms,
each such term to be inserted in the appropriate alphabetical order:
"'Additional Acquisitions' has the meaning specified in Section 1.4 of this
Agreement."
"'Additional Closing' has the meaning specified in Section 1.4 of this
Agreement."
"'Additional Closing Date' has the meaning specified in Section 1.4.1 of
this Agreement."
"'Additional Note Interest Payment Date' has the meaning specified in
Section 1.4.1 of this Agreement."
"'Additional Notes' has the meaning specified in Section 1.4.1 of this
Agreement."
1
<PAGE>
"'Additional Preferred Interests of Galaxy LLC' shall mean the additional
Preferred Membership Interests of Galaxy LLC (as described in the LLC Agreement)
issued pursuant to Section 1.4.2 of this Agreement."
"'Additional Securities' shall mean the Additional Notes and the Additional
Preferred Interests of Galaxy LLC."
2. Section 8.1 of the Agreement is hereby further amended, as of the
effective date of this First Amendment, by adding the following subsection to
the definition of "Acquisition Contracts":
"(e) Any agreement entered into by the Partnership
necessary to effect the Additional Acquisitions (each an 'Additional
Acquisition Contract' and, collectively, the 'Additional Acquisition
Contracts')."
3. Section 8.1 of this Agreement is hereby further amended, as of the
effective date of this First Amendment, by deleting in their entirety the
definitions "Obligations" and "Transaction Documents" appearing therein and
substituting therefor, respectively, the following:
"'Obligations' shall mean any and all indebtedness and any liabilities of
Galaxy GP, Galaxy LLC, Management Corp, Management Investor or any of the
Managers to any of the Purchasers, direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred, which may arise
under, out of, or in connection with this Agreement or any First Amendment
hereto, the Notes, the Additional Notes and any other Transaction Documents or
any First Amendments thereto."
"'Transaction Documents' shall mean collectively, this Agreement, the
Securities, the Additional Securities, the Acquisition Documents, the Equity
Holders Agreement, the Option/Put Agreement, the Private Placement Memorandum,
the Senior Loan Documents, the Management Agreement, the Partnership Agreement
and the LLC Agreement, each as amended from time to time in Accordance with the
provisions of this Agreement."
4. Section 1 of the Agreement is hereby amended, as of the effective
date of this First Amendment, by deleting in its entirety subsection 1.1.1
appearing therein and substituting therefor the following:
"1.1.1 Notes of Galaxy LLC. Galaxy LLC shall issue and sell, and the
Purchasers shall buy, notes in the form of Exhibit B hereto (the 'Notes'). The
Notes shall be issued in an aggregate face amount of $26,395,875 and shall bear
interest at the rate of 17.5% per annum. Interest on the Notes shall be payable
annually in arrears on each December 31, commencing December 31, 1995 (each, an
'Interest Payment Date'), in immediately available funds or, at the option of
Galaxy LLC, by the issuance by Galaxy LLC to each
2
<PAGE>
holder of a Note, of addition Notes in an original principal amount
equal to the interest payable on such holder's Notes on such Interest
Payment Date. The issue price of the Notes shall be $25,395,875,
allocated among the Purchasers in accordance with Exhibit A."
5. Section 1 of the Agreement is hereby further amended, as of the
effective date of this First Amendment, by adding the following Sections:
"1.4 Issuance and Delivery of Additional Securities. In consideration of
and in reliance upon the representations, warranties and covenants contained
herein and subject to the terms and conditions of this Agreement, at the closing
(each, an "Additional Closing") of each of the five acquisitions listed in
Schedule 1.4 hereto (each, an "Additional Acquisition" and, collectively, the
"Additional Acquisitions") Galaxy LLC shall issue and deliver to each Investor
Purchaser and the Management Investor and each Investor Purchaser and the
Management Investor shall purchase from Galaxy LLC the Additional Securities set
forth opposite such Investor Purchaser's or the Management Investor's name, as
applicable, on Schedule 1.4 hereto with respect to such Additional Acquisition,
in the amounts and for the purchase prices set forth on such Schedule:
1.4.1 Additional Notes of Galaxy LLC. On the date of each Additional
Closing (each an "Additional Closing Date"), Galaxy LLC shall issue and sell to
each Investor Purchaser, and each Investor Purchaser shall purchase from Galaxy
LLC, a note substantially in the form of Exhibit B hereto (collectively, the
"Additional Notes") in the original principal amount and for the purchase price
set forth opposite such Investor Purchaser's name on Schedule 1.4 hereto for the
Additional Acquisition(s) closing on such Additional Closing Date. Interest on
the Additional Notes shall be payable annually in arrears on each December 31,
commencing December 31, 1995 (each, an "Additional Note Interest Payment Date")
in immediately available funds, or at the option of Galaxy LLC, by the issuance
by Galaxy LLC to each holder of an Additional Note, of further Additional Notes
in an original principal amount equal to the interest payable on such holder's
Additional Notes on such Additional Note Interest Payment Date.
1.4.2 Additional Preferred Interests of Galaxy LLC. On each Additional
Closing Date, Galaxy LLC shall issue and sell to each Investor Purchaser and the
Management Investor, and each Investor Purchaser and the Management Investor
shall purchase from Galaxy LLC, Additional Preferred Interests of Galaxy LLC
(having the rights, privileges and obligations ascribed thereto in the LLC
Agreement, as amended) in the amount and for the purchase price set forth
opposite such Investor Purchaser's or the Management Investor's name, as
applicable, on Schedule 1.4 hereto for the Additional Acquisition(s) closing on
such Additional Closing Date. the purchase price payable by the Management
Investor for the Additional Preferred Interests of Galaxy LLC to be purchased at
each Additional Closing shall be paid by the Management Investor by
3
<PAGE>
delivery of notes in the form of a having the same payment, interest and
other terms as the Notes, equal in aggregate principal amount, plus accrued
interest thereon to the Additional Closing Date, to such purchase price."
6. Sections 2.2, 2.3, 2.5, 2.6, 2.9, 2.11, 2.15.1, 2.17 and 2.20 of the
Agreement are hereby amended and restated, as of the effective date of this
First Amendment, to read in their entirety as follows:
2.2 Partnership Agreement. A true and correct copy of the Partnership
Agreement of the Partnership, including all amendments thereto, has been
furnished to the Purchasers. The Partnership Agreement and each amendment
thereto has been duly authorized, executed and delivered by Galaxy GP and Galaxy
LLC and constitutes the legal, valid and binding obligation of Galaxy GP and
Galaxy LLC, enforceable against each of them in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium, reorganization and
other laws affecting the enforcement of creditors' right generally, and to legal
and equitable limitations on the availability of specific performance as a
remedy. None of the Partnership, Galaxy GP or Galaxy LLC is (i) in material
violation of the Partnership Agreement, as amended to date, or (ii) in default
in the performance of any material obligation, agreement or condition contained
in any bond, indenture or note or any other evidence of indebtedness or in any
indenture or loan agreement or in any contract.
Upon the exercise of the Option and the execution of the LLC Agreement by
the Investor Purchasers or other holder thereof in compliance with the other
provisions of the LLC Agreement, (x) such holder will be a holder of Common
Membership Interests of Galaxy LLC entitled to all the benefits of the Delaware
Limited Liability Company Act, as form time to time in effect (the "LLC Act")
and the LLC Agreement, and (y) the Common Membership Interests of such holder
will have the rights set forth in the LLC Act and the LLC Agreement and will be
duly and validly authorized and issued."
"2.3 Authorization. Each of the Partnership, Galaxy GP, Galaxy LLC and
Management Corp has all requisite partnership, corporate or other power and
authority (as applicable) to execute and deliver this Agreement, to issue and
deliver the Securities and Additional Securities as contemplated by Section 1
(to the extent applicable) and to carry out the provisions of this Agreement,
and all action on its part required for the execution, delivery and performance
of this Agreement and the issuance and delivery of the Securities and the
Additional Securities (to the extent applicable) has been duly taken. This
Agreement is a legal, valid and binding obligation of each of the Partnership,
Galaxy GP, Galaxy LLC and Management Corp, enforceable in accordance with its
terms. The Securities and the Additional Securities, when issued and delivered
in accordance with Section 1 and the terms of the instruments evidencing the
Securities and the Additional Securities, as applicable, will be the legal,
valid and binding obligations of each issuer
4
<PAGE>
thereof, enforceable in accordance with the respective terms, subject to
applicable bankruptcy, insolvency, moratorium, reorganization and other laws
affecting the enforcement of creditors' rights generally, and to legal and
equitable limitations on the availability of specif performance as a remedy."
"2.5 Subsidiaries. As of the date of the Closing and each Additional
Closing, none of the Partnership, Galaxy GP, Galaxy LLC or Management Corp has
any Subsidiaries or other equity investments in any Person, other than (i) in
the case of the Partnership, Galaxy Telecom Capital Corp., a Delaware
corporation and a wholly owned Subsidiary of the partnership ("Galaxy Capital"),
(ii) in the case of Galaxy GP and Galaxy LLC, the Partnership Interests, and
(iii) in the case of Management Corp, the securities purchased by it hereunder.
None of the Partnership, Galaxy GP or Galaxy LLC will form or acquire any
Subsidiary without the written consent of the Required Purchasers."
"2.6 Absence of Undisclosed Liabilities. Except for (i) liabilities or
obligations specifically contemplated by and set forth in the Transaction
Documents and (ii) $120,000,000 in aggregate principal amount of 12 3/8% Senior
Subordinated Notes Due 1005 (the "Senior Subordinated Notes") issued by the
Partnership and Galaxy Capital pursuant to the Indenture dated as of September
28, 1995 by and among the Partnership, Galaxy Capital and Boatmen's Trust
Company, as trustee (the "Indenture"), none of the Partnership, Galaxy GP,
Galaxy LLC or Management Corp has any material accrued or contingent liability
arising out of any transaction or state of facts existing prior to the date
hereof."
"2.9 Effective of Transactions. The execution, delivery and performance of
the Transaction Documents by the Partnership, Galaxy GP, Galaxy LLC and
Management Corp did not and will not conflict with or result in any default
under any contract, obligation or commitment of the Partnership, Galaxy GP,
Galaxy LLC or Management Corp, or the creation of any Lien upon any of the
respective properties or assets the Partnership, Galaxy GP, Galaxy LLC or
Management Corp, other than Liens contemplated under the Transaction Documents.
The transactions contemplated by the Transaction Documents do not violate any
statute or regulation of any federal, state or local government or agency. No
authorization, consent, approval, license, exemption of or filing or
registration with any court or Governmental Body, other than those which have
been or as the Closing or an Additional Closing, as the case may be, will be
obtained, is or will be necessary to the valid execution, delivery or
performance by the Partnership, Galaxy GP, Galaxy LLC or Management Corp of this
Agreement or any of the other Transaction Documents, except for any such
authorizations, consents, approvals, licenses, exemptions, filings or
registrations the absence of which could note singly or in the aggregate have a
Material Adverse Effect."
5
<PAGE>
"2.11 Offerees. Other than the Senior Subordinated Notes, none of the
Partnership, Galaxy GP or Galaxy LLC nor anyone acting on their behalf (other
than the Investor Purchasers and their affiliates) has ever offered any
promissory notes, partnership interests, common stock or other securities of any
of them, or rights to acquire such securities for sale to, or solicited any
offers to buy the same from, any person or organization, other than Galaxy GP,
Galaxy LLC, Management Corp, Vantage Cable Associates, L.P., Galaxy Cablevision,
L.P., Vista Communications Limited Partnership III, the Purchasers and the
Senior Lender. None of the partnership, Galaxy GP or Galaxy LLC, nor anyone
acting on their behalf, has sold, offered for sale or solicited offers to buy
any of said securities or rights so as to bring the offer, issuance or sale of
the Securities hereunder or any other securities of the Partnership, Galaxy GP
or Galaxy LLC within the registration requirements of Section 5 of the
Securities ct of 1933, as amended (the "Securities Act"). The Partnership,
Galaxy GP and Galaxy LLC have complied with all applicable state "blue sky" or
securities laws in connection with the issuance and sale of the Securities
hereunder and their other securities."
"2.15.1 Financial Statements. The Management Parties have delivered to the
Purchasers the financial statements described in Schedule 2.15.1 pertaining to
the operation of the Systems acquired on or before December 31, 1994 (the
"Original Systems"). Such financial statements present fairly in all material
respects the results of operations of the Original Systems for the periods
covered thereby and the financial condition of the Original Systems as of the
dates indicated therein. All of such financial statements have been prepared in
conformity with GAAP consistently applied, except for the absence of footnotes
and subject to year-end adjustments. Each of the financial statements described
in Schedule 2.15.1 fairly presents the financial position and results of
operations of the Person being reported on at such dates, and for such periods,
and are complete and correct in all material respects. Since the dates of the
respective financial statements described on Schedule 2.15.1, there have been no
changes in the results of operations or financial condition of the Original
Systems which have a Material Adverse Effect. The Management Parties have also
delivered to the Purchasers a pro-forma balance sheet as of December 23, 1994.
Such pro-forma balance sheet, which assumes the consummation of the transactions
contemplated by the Transaction Documents relating to the Original Systems,
presents fairly in all material respects the anticipated financial condition of
the Partnership as of December 23, 1994."
"2.17 Trademarks, Franchises, Agreements. Immediately upon the consummation
of the acquisitions pursuant to the Acquisition Contracts, except as described
on Schedule 2.14.1 attached hereto, the Partnership and Galaxy GP will own,
possess or have the right to use all trademarks, service marks, trade names,
copyrights, franchises and rights with respect thereto, which are necessary for
the conduct of the Systems and the CATV Business proposed to be conducted by the
Partnership after the Closing or the Additional Closing, as the case may be,
without any known conflict with the rights of others and free of any Liens other
than Permitted Liens."
6
<PAGE>
"2.20Other Indebtedness. There is no Indebtedness for Borrowed Money owed
by the Partnership, Galaxy GP, Galaxy LLC or Management Corp to any Person,
except as expressly disclosed in the Transaction Documents and, in the case of
the Partnership, the Senior Subordinated Notes."
7. Section 3 of the Agreement is hereby amended, as of the effective
date of this First Amendment, by deleting the first paragraph of such Section
and substitution therefor the following:
"So long as any of the Obligations are outstanding or any of the purchasers
holds any of the Securities or the Additional Securities, the Partnership,
Galaxy GP, Galaxy LLC and, to the extent applicable, the Management Parties,
will do or cause to be done the following on and after the date hereof:"
8. Section 3.7 of the Agreement is hereby amended, as of the effective date
of this First Amendment, by adding the following sentence to the end of such
Section:
"The proceeds of the sale of the Additional Securities hereunder shall be
contributed by Galaxy LLC to the Partnership as capital pursuant to the
Partnership Agreement, as amended, which shall be used by the Partnership to pay
a portion of the purchase price for the Additional Acquisitions."
9. Section 4.3 of the Agreement is hereby amended and restated, as of the
effective date of this First Amendment, to read in its entirety as follows:
"4.3 Restrictions in Other Agreements. None of the Partnership, Galaxy GP
or Galaxy LLC shall enter into any agreement with any Person that would restrict
the payments due the holders of Securities or Partnership Interests, other than
pursuant to the Senior Loan Documents and the Indenture (in each case as
originally executed and delivered, without amendment or waiver), the Equity
Holders AGREEMENT, or this Agreement and the Exhibits hereto. No Management
Party shall enter into any agreement with any Person that would restrict in any
manner the ability of such Management Party to comply with the requirements of
Section 9.9(b) hereof."
10. Sections 5.1.1, 5.1.3, 5.1.4 and 5.1.5 of the Agreement are hereby
amended and restated, as of the effective date of this First Amendment, to read
in their entirety as follows:
"5.5.1 Investment Purpose. Each Purchaser, severally, but not jointly, by
acceptance of the Securities or the Additional Securities purchased by it at the
Closing or at an Additional Closing, as the case may be, represents that it has
purchased such Securities or Additional Securities, as applicable, not with a
view to, or for sale in connection with, any distribution thereof in violation
of the Securities Act or any rule or
7
<PAGE>
regulation thereunder, as amended from time to time."
"5.1.3 Securities Act Representations. Each Purchaser severally, but not
jointly represents that (a) it has requested and received such information as it
has deemed relevant regarding the Partnership, Galaxy GP and Galaxy LLC for
purposes of evaluating its investment in the Securities or Additional
Securities, as the case may be; and (b) it is an "accredited investor" as such
term is defined in Section 2(15) of the Securities Act and Rule 501(a)
promulgated by the Securities and Exchange Commission thereunder."
"5.1.4 Risk of Investment. Each Purchaser severally, but not jointly
recognizes and acknowledged (a) that investment in the Securities and/or the
Additional Securities, as the case may be, involves a high degree of risk and
that no person should invest in the Securities or Additional Securities who is
not in a position to lose its entire investment, and (b) that it must bear the
economic risk of investment in the Securities and/or the Additional Securities,
as the case may be, for an indefinite period of time, because neither the
Securities nor the Additional Securities have been registered under the
Securities Act of 1933 or under state securities laws and there is not, and will
not be, an established market for the Securities of the Additional Securities."
"5.1.5 Sophisticated Investor. Each Purchaser severally, but not jointly
represents that it is a sophisticated investor who has the necessary knowledge
and experience in financial and business matters so as to be able to evaluate
the merits and risks of an investment in the Securities and/or the Additional
Securities as the case may be."
11. The introductory paragraph to Section 6 and Sections 6.1, 6.2, 6.3,
6.11, 6.12, of the Agreement are hereby amended and restated, as of the
effective date of this First Amendment, to read as follows:
"Each Purchaser's obligation to purchase and pay for the Securities to be
purchased by it at the Closing, and each Investor Purchaser's obligation to
purchase and pay for the Additional Securities at any Additional Closing, shall
be subject to the satisfaction, at or prior to the Closing or any Additional
Closing, as the case may be, of each of the conditions stated in the following
paragraphs of this Section 6, unless the failure of any of the conditions is
expressly waived in writing by such Purchaser or Investor Purchaser, as
applicable."
"6.1 Delivery of the Securities. The Partnership, Galaxy GP or Galaxy LLC,
as the case may be, shall have issued and delivered to each Purchaser the
Securities of Additional Securities, as the case may be, to be purchased by it
in accordance with Section 1.1 or Section 1.4, as applicable."
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"6.2 Truth and Accuracy of Representations and Warranties: No Default. Each
of the representations and warranties of the Partnership, Galaxy GP, Galaxy LLC,
Management Corp, Management Investor and the Managers (as applicable) shall be
true and correct in all material respects as of the date of the Closing or each
Additional Closing, as applicable, and no Event of Default or event which with
the giving of note, the passage of time, or both would constitute than an Event
of Default shall have occurred."
"6.3 Acquisitions; Additional Acquisitions; Transfer of Operating
Agreement. With respect to the purchase of the Securities, the Partnership shall
have completed the Acquisitions on the terms and conditions set forth in the
Acquisition Contracts with respect thereto, with such changes therein as may be
satisfactory to the Investor Purchasers; and the Partnership shall have
delivered to the Purchasers copies of all material agreements, instruments and
other documents executed or delivered in connection with the Acquisitions. With
respect to each purchase of Additional Securities on any Additional Closing
Date, the Partnership shall have completed the Additional Acquisition(s) on such
Additional Closing Date on the terms and conditions set forth in the Additional
Acquisition Contract with respect thereto, with such changes therein as may be
satisfactory to the Investor Purchasers; and the Partnership shall have
delivered to the Investor Purchasers copies of all material agreements,
instruments and other documents executed or delivered in connection with such
Additional Acquisition(s). Galaxy GP, Management Corp, Management Investor and
the Managers shall have assigned to the Partnership, on terms satisfactory to
the Investor Purchasers, all Operating Agreement which are held by, or grant
rights to, any of them, except to the extent that any such assignment shall be
prohibited by applicable law or shall cause the termination of any Operating
Agreement."
"6.11 Opinions of Counsel to the Partnership. The Purchasers shall have
received favorable opinions of Thompson & Mitchell and Dement, Vandivort and
Dement, counsel to the Partnership, Galaxy GP and Galaxy LLC, dated as of the
Closing or the Additional Closing, as the case may be, in the forms of Exhibits
I-1 and 1-2 hereto."
"6.12 Opinion of FCC Counsel to the Partnership. The Purchasers shall
receive a favorable opinion regarding FCC matters from Hogan & Hartson, special
FCC counsel to the Partnership and Galaxy GP, dated as of the Closing or the
Additional Closing, as the case may be, in the form of Exhibit J hereto."
12. Section 6 of the Agreement is hereby amended, as of the
effective date of this First Amendment, by adding the following Sections:
"6.20 Amendments to Partnership Agreement. With respect to each Additional
Closing, an amendment to the Partnership Agreement, amending Exhibit A thereto
to reflect the additional contribution of capital to the Partnership by Galaxy
LLC in
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connection with the Additional Acquisition(s) closing at such Additional
Closing, shall have been duly executed and delivered by Galaxy GP and Galaxy
LLC."
"6.21 Amendments to Limited Liability Company Agreement. With respect to
each Additional Closing, an amendment to the Limited Liability Company Agreement
(the "LLC Agreement"), amending Schedule A thereto to reflect the issuance and
sale and the purchase of Additional Preferred Interests in connection with the
Additional Acquisition(s) closing at such Additional Closing, shall have been
duly executed and delivered by each of the parties thereto."
13. Section 9.1 of the Agreement is hereby amended and restated,
as of the effective date of this First Amendment, to read in its entirety as
follows:
"9.1 Exchange or Replacement of Securities. Each of Galaxy GP, Galaxy LLC
and the partnership will at any time at its expense upon the request of a holder
of any of the Securities or the Additional Securities and (a) upon surrender of
the certificate(s) or other instrument(s) representing such Securities or
Additional Securities, as the case may be, for the purpose of (b) upon the loss,
theft or destruction and delivery of a bond of indemnity of (c) in case of
mutilation, issue new certificate(s) or other instrument(s) representing such
Securities or Additional SECURITIES, as the case may be, payable to the order of
such holder or such person or persons as may be designated by such holder."
14. Schedules 2.4, 2.14.2 and 2.14.3 to the Agreement are hereby
amended and restated, as of the effective date of this First Amendment, to read
in their entirety as Schedules 2.4, 2.14.2 and 2.14.3, respectively, which are
to be attached hereto by the parties within fifteen (15) days of the effective
date of this First Amendment.
15. The effective date of this First Amendment shall be that date
on which it is executed and delivered by all parties hereto.
16. As amended by this First Amendment, the Agreement is in all
respects ratified and confirmed, and as so amended by this First Amendment the
Agreement shall be read, taken and construed as one and the same instrument.
17. This First Amendment may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which so executed
shall be deemed to be an original, but all of such counterparts shall together
constitute but one and the same instrument.
18. This First Amendment shall be governed in accordance with the laws
of the Commonwealth of Massachusetts, as applied to contracts made and performed
within the Commonwealth of Massachusetts, without regard to principles of
conflicts of law.
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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed by their respective officers hereunto duly authorized, as of the
date first above written.
GALAXY TELECOM, L.P.
By: Galaxy Telecom, Inc., a General Partner
By:/s/ Tommy L. Gleason, Jr.
Tommy L. Gleason, Jr.
President
GALAXY TELECOM, INC.
By:/s/ Tommy L. Gleason, Jr.
Tommy Gleason, Jr.
President
GALAXY TELECOM INVESTMENTS, L.L.C.
By:/s/ Tommy L. Gleason, Jr.
Tommy Gleason, Jr.
Manager
/s/Tommy L. Gleason, Jr.
Tommy Gleason, Jr.
/s/ James M. Gleason
James Gleason
/s/ J. Keith Davidson
J. Keith Davidson
/s/Tommy L. Gleason
Tommy Gleason
/s/Ronald Voss
Ronald Voss
/s/ Terry M. Cordova
Terry M. Cordova
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GALAXY TELECOM MANAGEMENT, L.L.C.
By:/s/ Tommy L. Gleason, Jr.
Tommy Gleason, Jr.
Manager
GALAXY SYSTEMS MANAGEMENT, INC.
By:/s/ Tommy L. Gleason, Jr.
Tommy Gleason, Jr.
President
TA INVESTORS
ADVENT ATLANTIC AND PACIFIC II L.P.
By: TA Associates AAP II Partners, its General
Partner
By: TA Associates, Inc., its General Partner
By:/s/ Richard D. Tadler
Richard D. Tadler
Managing Director
ADVENT INDUSTRIAL II L.P.
By: TA Associates VI L.P., its General Partner
By: TA Associates, Inc., its General Partner
By:/s/ Richard D. Tadler
Richard D. Tadler
Managing Director
ADVENT NEW YORK L.P.
By: TA Associates, Inc., its General Partner
By:/s/ Richard D. Tadler
Richard D. Tadler
Managing Director
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ADVENT VII L.P.
By: TA Associates VII L.P., it General Partner
By: TA Associates, Inc., its General Partner
By:/s/Richard D. Tadler
Richard D. Tadler
Managing Director
CHESTNUT CAPITAL INTERNATIONAL III
LIMITED PARTNERSHIP
By: TA Associates VI L.P., its Attorney-in-Fact
By: TA Associates, Inc., its General Partner
By:/s/ Richard D. Tadler
Richard D. Tadler
Managing Director
SOFILEC S.A.
By:/s/ Richard D. Tadler
Richard D. Tadler
Attorney-in-Fact
TA VENTURE INVESTORS LIMITED
PARTNERSHIP
By:/s/ Richard D. Tadler
Richard D. Tadler
General Partner
ADVENT VII INVESTOR CORP.
By:/s/ Richard D. Tadler
Richard D. Tadler
President
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SPECTRUM INVESTORS
SPECTRUM EQUITY INVESTORS, L.P.
\ By: Spectrum Equity Associates, L.P., its
General Partner
By:/s/William P. Collatos
William P. Collatos
General Partner
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FLEET EQUITY FUND INVESTORS
FLEET GROWTH RESOURCES, INC.
By:/s/ Habib Y. Gorgi
Habib Y. Gorgi
Executive Vice President
CHISHOLM PARTNERS II, L.P.
By: Silverado II, L.P., its General Partner
By: Silverado II Corp., its General Partner
By:/s/Habib Y. Gorgi
Habib Y. Gorgi
Vice President
FLEET EQUITY PARTNERS VII, L.P.
By: Fleet Growth Resources, Inc., a General
Partner
By:/s/Habib Y. Gorgi
Habib Y. Gorgi
Executive Vice President
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COUNTERPART TO SECURITIES PURCHASE AGREEMENT DATED
DECEMBER 23, 1994
EXECUTED with the intention of become a party hereto, this 1st day of
December, 1995.
FLEET EQUITY PARTNERS VII, L.P.
By: Fleet Growth Resources, Inc., a
General partner
By:/s/ Thadeus J. Morcarski
Thadeus J. Mocarski
Vice President
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