SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
For the transition period from to
Commission file number 33-95298
GALAXY TELECOM, L.P.
(Exact name of Registrant as specified in its charter)
Delaware 43-1697125
(States of Other Jurisdictions of IRS Employer
Incorporation or Organization) Identification No.)
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 Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 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,
1997: 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, 1996
TABLE OF CONTENTS
Item Topic Page
PART I
1. Business...................................................... 3
2. Properties....................................................25
3. Legal Proceedings.............................................25
4. Submission of Matters to a Vote of
Security Holders..............................................25
PART II
5. Market for the Registrant's Securities
and Related Security Holder Matters...........................26
6. Selected Financial Data.......................................26
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................27
8. Financial Statements and Supplementary Data..................F-1
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 34
PART III
10. Directors and Executive Officers of the Registrant............34
11. Executive Compensation........................................36
12. Security Ownership of Certain Beneficial
Owners and Management.........................................36
13. Certain Relationships and Related Transactions................38
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................... 42
Signatures........................................................ 44
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PART I
Item 1. Business.
General
Galaxy Telecom, L.P. ("Galaxy") 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, 1996, the Systems passed
approximately 293,000 homes and served approximately 183,000 subscribers in
sixteen states, predominantly including Mississippi, Nebraska, Kansas, Missouri,
Illinois, Kentucky, Iowa, Alabama, Georgia and Florida.
Galaxy 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, Galaxy 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, Galaxy also believes that classic systems have lower labor and
marketing costs than many urban and suburban systems.
Over 95% of the plant in the Systems have a channel capacity of 30
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. Galaxy intends to continue to reduce the number of
headends in the Systems over the next two years by interconnecting adjacent
headend locations through the deployment of fiber technology. Galaxy believes
that attaching these systems onto one master headend will reduce maintenance
costs, increase system reliability and allow the redeployment of the associated
electronic equipment to remaining headends within the existing systems, thus
enabling Galaxy to expand the number of channels it can offer to its existing
customers and increase average revenue per subscriber. Galaxy reduced and
redeployed 57 of such headends in 1996.
The six key individuals who manage Galaxy's day-to-day operations (the
"Senior Managers") have developed and refined the operating strategy utilized by
Galaxy to efficiently and economically provide high quality customer service to
classic cable television systems spread over a wide geographic area. Galaxy's
existing infrastructure includes two customer service centers that 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 on-line 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
virtually all of Galaxy's service vehicles. The OmniTRACS system provides the
customer service representatives with direct, real-time, two-way interactive
communication with Galaxy's field technicians and generates comprehensive
customer service information on a timely basis. The integration of the OmniTRACS
system with the centralized computer system allows Galaxy to control costs,
better manage the customer service function and provide its customers with high
quality service, generally within a 24-hour period.
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Galaxy believes that consistently high quality performance from its local
field technicians is important in maintaining good community relations. Galaxy
has an ongoing program of training its field technicians not only in technical
areas but also in customer service and sales functions. Galaxy strives to have
its local field technicians represent Galaxy 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 approximately 100 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"), (collectively the "Initial Systems"). Each of these agreements
was later assigned to, and assumed by, Galaxy prior to the consummation of each
of the transactions. In order to facilitate Galaxy's acquisition of these
Systems, funds managed by TA Associates, Spectrum Equity Investors and Fleet
Equity Partners, (the "Equity Investors") and the Senior Managers, collectively,
invested equity capital of approximately $30 million in Galaxy. A summary of the
acquisitions of each of the Initial Systems is set forth below.
1994 Acquisitions
Galaxy Cablevision Acquisitions. On December 23, 1994, Galaxy acquired all
of the operating assets comprising 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 $18.5 million. Upon acquisition by
Galaxy, 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%.
Vantage Cable Acquisition. On December 23, 1994, Galaxy 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 Galaxy, 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, Galaxy
acquired all of the operating assets comprising the 85 cable television
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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 Galaxy, 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, Galaxy 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 $0.75 million. Upon acquisition by
Galaxy, 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%.
1995 Acquisitions
On March 31, 1995, Galaxy 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 Galaxy, 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%.
Phoenix Cable Acquisition. On November 2, 1995, Galaxy 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 Galaxy, 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%.
Douglas Communications Acquisition. On December 1, 1995, Galaxy 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
the Douglas Communications Systems was approximately $45.8 million. Upon
acquisition by Galaxy, 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, Galaxy 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 Galaxy, 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, Galaxy 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 $13.7 million. Upon acquisition by Galaxy, the
Vista-Narragansett systems passed approximately 16,155 homes, with 433 miles of
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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, Galaxy 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 $7.6 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%.
1996 Acquisitions And Trades
Galaxy acquired various assets comprising the cable television systems
through purchase and trade throughout the year. Following is a brief discussion
of each transaction.
Cablevision of Texas Systems. On March 29, 1996, Galaxy acquired certain
assets comprising 31 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 approximately $10.2 million. As of the closing
date, 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 9,100 basic subscribers and had a basic
penetration rate of approximately 77.3% as of the closing date.
High Plains Systems. On April 1, 1996, Galaxy acquired certain systems
comprising eight cable television systems of High Plains Cable (the "High Plains
Systems") for a purchase price of approximately $0.3 million. As of the closing
date, 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 270 basic subscribers and had a basic penetration rate of
approximately 46.6% as of the closing date.
Midcontinent Systems. On April 12, 1996, Galaxy acquired certain assets
comprising six cable television systems of Midcontinent Cable Systems (the
"Midcontinent Systems") for a purchase price of approximately $1.3 million. As
of the closing date, 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 1,328 basic subscribers and had a basic penetration
rate of approximately 71.7% as of the closing date.
Five Rivers Systems. On November 1, 1996, Galaxy acquired certain
assets comprising one cable television system of Five Rivers Cable Company (the
"Five Rivers System") for a purchase price of approximately $.5 million. As of
the closing date, 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 588 basic subscribers and had a basic penetration rate
of approximately 80.5% as of the closing date.
Hurst Communications Systems. On March 29, 1996, Galaxy acquired certain
assets comprising eight cable television systems of Hurst Communications (the
"Hurst Systems") for a purchase price of approximately $1.1 million. As of the
closing date, 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 1,371 basic subscribers and had a basic penetration rate of 74.9%
as of the closing date.
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TCI Systems Trade. On June 14, 1996, Galaxy traded assets located in
Shawnee County and Jefferson County, Kansas (the "Shawnee County System") for
assets comprising six cable television systems of TCI (the "TCI Systems")
located in northern Mississippi. At closing, Galaxy's Shawnee County Systems
passed approximately 9,500 homes, with approximately 315 miles of plant,
resulting in a density of 30.2 homes per mile. The Shawnee County System served
approximately 7,000 basic subscribers and had a basic penetration rate of
approximately 73.7% as of the close date. As of the closing date, the TCI
Systems passed approximately 16,900 homes, with 729 miles of plant, resulting in
a density of 23.2 homes per mile. The TCI Systems served approximately 10,363
basic subscribers and had a basic penetration rate of approximately 61.3% as of
the close date.
C-S Cable. On October 30, 1996, Galaxy acquired certain assets comprising
the cable television systems of CS Cable Services, Inc. (the "CS Cable Systems")
for a purchase price of approximately $2.3 million. As of the closing date, the
served approximately 3,500 basic equivalent subscribers.
Mexia / Ranburn Trade. On November 1, 1996, Galaxy traded assets
comprising the Ranburn cable system in Ranburn, Alabama serving approximately
110 subscribers for a similar system in Mexia, Alabama serving approximately 230
subscribers. This trade allowed Galaxy to trade a small system out of a
non-targeted service area for a similar system in proximity to our targeted
service areas.
Pending Acquisitions
TCI Cable of the Midland - Sarpey County Systems. On September 1, 1996,
Galaxy entered into an agreement to purchase certain assets comprising 6 cable
television systems of TCI Cable of the Midland (The Sarpey County Systems) for a
purchase price of approximately $2.3 million. Subject to certain pro-rate
adjustments. At September 1, 1996, the Sarpey County Systems passed
approximately 3,000 homes located in Nebraska, with approximately 68 miles of
plant, for a density of 47 homes per mile. The Sarpey County Systems served
approximately 2,180 basic subscribers and had a basic penetration rate of
approximately 57% at September 1, 1996.
Service, Installation and Repair
Galaxy believes that providing exceptional customer service is a critical
element in maximizing the value of services provided to customers of the
Systems. Accordingly, Galaxy has equipped its customer service centers with
advanced computer technology and communications systems that allow Galaxy to
efficiently manage classic cable television systems over a large geographic
area. Centralizing the customer service function enables Galaxy to employ a
smaller number of highly trained customer service representatives than in a more
decentralized operational structure. Galaxy 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.
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Galaxy utilizes advanced software systems to facilitate effective
interaction with its customers. A potential or existing customer can call at any
time Galaxy's toll-free telephone number for installation, repairs or other
services. The call is automatically routed to one of Galaxy'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
have through access to an on-line 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.
Virtually all of Galaxy's service vehicles are equipped with the Qualcomm
OmniTRACS satellite-based dispatch system, and Galaxy 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 Galaxy,
enables Galaxy 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 Galaxy 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
Galaxy aggressively markets and promotes its cable television systems with
the objective of increasing penetration and average revenue per subscriber.
Galaxy 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 Galaxy'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. Each Marketing Director also insures that Galaxy is providing high
quality sales and service by supervising and training direct sales
representatives and assessing picture and service quality within Galaxy'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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Galaxy's current monthly rates for full basic service range from $8.65 to
$29.50 and rates for premium services generally range from $6.95 to $12.95 per
service. 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 Galaxy's
goal to attempt to standardize its programming, rates and premium security over
all of the Systems within the next few years.
In order to better facilitate efforts to maximize quality service to its
customers, Galaxy converted its company billing system to Cincinnati Bell
Information System's ("CBIS") Cablemaster 2000 in November 1996. This is a
system developed specifically for the cable television industry. CBIS operates
the billing system at its service center in Florida, and produces statements for
customers on a monthly basis. Billing statements are printed and mailed directly
to customers, who have 15 days from their cycle billing date to remit payment to
Galaxy's central payment processing center in Sikeston, Mo. If after the 15 days
a customer has not made a payment, the customer is charged a late payment fee.
Galaxy aggressively pursues collection of past due amounts by telephoning the
customer at approximately 35 days past the due date. If these measures fail, 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. Galaxy has contact with the CBIS center via phone and
computer interface and has immediate access to all of our billing and customer
information, as if the process was done "in-house."
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. Galaxy would need to invest in addressable converter equipment to provide
pay-per-view services on its systems. Galaxy 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
Galaxy typically carries a wide array of basic programming on its basic
service. A few systems have been acquired that 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 these systems subscribed to both
tiers of basic service as of December 31, 1996. 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. Galaxy 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, many of
Galaxy's systems carry the Disney Channel as part of the basic subscription
service without charging a separate fee. From time to time, Galaxy enhances the
value of its basic service by adding additional programming to its basic tier.
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The Systems also 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 Galaxy 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 ala 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.
Galaxy generally plans to upgrade the channel offerings of recently
acquired systems. Galaxy believes that many of the Systems present opportunities
to improve basic and premium penetration levels and average revenues per
subscriber. Galaxy 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. Galaxy intends to utilize aggressive marketing
efforts and focus on high quality customer service to enable it to increase
penetration of and overall customer satisfaction with the Systems.
Galaxy has various contracts to obtain basic and premium programming from
program suppliers whose compensation is typically based on a fixed fee per
subscriber. Galaxy has negotiated programming agreements with premium service
suppliers that offer cost incentives to Galaxy 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
Galaxy in the form of advertising funds, promotional material, rebates and other
incentives. Galaxy's programming contracts are generally for a fixed period of
time, typically three to five years, and are subject to negotiated renewal.
Galaxy 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, Galaxy is able to obtain programming and cable
system hardware discounts available to all members.
Galaxy has various retransmission consents with many commercial broadcast
stations. None of these consents require direct payment of fees for carriage;
however, in some cases Galaxy has entered into agreements with certain stations
to carry satellite-delivered cable programming which is affiliated with the
network carried by such stations. In some cases, Galaxy has agreed to advertise
with the broadcast station on over a three year period. These agreements are in
effect until December 31, 1999.
Galaxy'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. Galaxy believes that a significant amount of new cable television
programming is becoming available and that Galaxy will be able to identify and
take advantage of available incentives associated with channel position and
additional channels to selectively accommodate such expanding programming.
Galaxy expects it will be able to recover programming cost increases through
rate increases.
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Technology and Engineering
Over 95% of the plant in the Systems have a channel capacity of 30
channels or more. Substantially all of the Systems presently have the capability
to increase the number of channels offered to subscriber without having to
increase existing bandwidth. At December 31, 1996, Galaxy maintained over 7,500
miles of coaxial plant that passed more than 293,000 homes. The following table
sets forth certain information with regard to the channel capacities of the
Systems as of December 31, 1996.
Up to 29 30 to 53 54 or more
Channels Channels Channels Total
Systems:
Number of systems 22 422 26 470
Percent of total systems 4.7% 89.8% 5.5% 100.0%
Miles of plant 90 6,943 552 7,585
Percent of total plant miles 1.2% 91.5% 7.3% 100.0%
Galaxy 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.
Galaxy has budgeted the implementation of fiber optic technology and, to a
lesser degree, microwave technology to interconnect headends throughout its
Systems. By interconnecting headends of adjacent systems with one master headend
facility, Galaxy 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 in order to take advantage
of these efficiencies, including reducing the number of headends used in the
Systems by more than 75 over the next two years. Such reduction in the number of
headends is expected to increase system reliability and allow the redeployment
of the associated electronic equipment to remaining headends, thus enabling
Galaxy to expand the number of channels offered on the Systems to its customers
and increase average revenue per subscriber.
Galaxy plans to deliver distance learning and teacher in-service type
training video to Kindergarten through Grade 12 schools primarily in those areas
where Galaxy 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. Galaxy 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, Galaxy 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. Galaxy
currently is in discussions with several telephone companies concerning the use
of the redundant facilities.
Galaxy intends to explore the use of digital compression technology to
enhance the current channel capacities of its 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
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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). Galaxy believes that the use of digital technology in the
future offers the potential for Galaxy to increase channel capacity in a more
cost efficient manner than rebuilding such systems with high capacity
distribution plant. There can be no assurance as to whether or when such
technology can or will be implemented by Galaxy and, if it can be implemented,
whether such technology will result in significant cost savings over alternative
methods of expanding channel capacities of the Systems.
Community Relations
Galaxy 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 Galaxy's field management with local authorities. A
company representative is assigned to each municipality in which the Systems
operate. The same representative calls the mayor, city clerk or city manager by
telephone to determine if any problems have arisen or if any customers have
complained to municipal officials about their cable service. Galaxy immediately
addresses any problems discovered during these monthly contacts. Regional
managers also contact the state or local franchising authorities at least
quarterly, and Galaxy prepares a newsletter highlighting any changes in
operations or new programming offerings and introducing any new employees which
it sends semiannually to each of its franchising authorities.
Galaxy also believes that consistent, high quality performance of its
local field technicians is important to maintain good community relations. Due
to Galaxy's cable television systems being 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
Galaxy's customers, Galaxy has an ongoing program of training its field
technicians not only in technical areas but also in customer service and sales
functions. Galaxy strives to have its local field technicians represent Galaxy
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, Galaxy seeks to maintain good community
relations in order to position itself to address any problem in a timely manner.
Centralized Management Functions
Management functions such as payments processing, accounting, engineering
and marketing are centralized at Galaxy's headquarters and regional customer
service centers. Upon acquiring a system, Galaxy will also consolidate certain
management functions at its headquarters and regional customer service centers
at minimal incremental costs.
Galaxy is able to process its service calls from customers through the use
of the IBM AS/400 computer system owned and operated by CBIS. The computer
operates with advanced software which provides on-line 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 Galaxy may implement in the future including video-on-demand, transactional
billing services and telephony.
The computer system allows both the Senior Managers and the regional
managers to access subscriber information as soon as it is entered by the
customer service centers or the field technicians. The centralized nature of the
system allows each of Galaxy'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 on-line 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
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computer system, along with the system's integration with the OmniTRACS system,
allow Galaxy 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
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 Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), and the Telecommunications Act of 1996 (the "1996 Telecom
Act"). See "--Legislation and Regulation - General."
As of December 31, 1996, Galaxy held approximately 688 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
1997-1999 193 28.0%
2000-2002 74 10.8%
After 2002 421 61.2%
Total 688 100.0%
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."
Galaxy believes that it generally has good relationships with its
franchising communities. As of December 31, 1996, no franchise of Galaxy
represented more than 5.0% of total subscribers of the Systems. Galaxy 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 Galaxy'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
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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-provided utility services. 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.
Galaxy 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 90% of total subscribership to multichannel
video programming distributors ("MVPDs"). Further, these technologies have been
encouraged by Congress and the Federal Communications Commission (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. Galaxy 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.
In 1994, two different Direct Broadcast Satellite ("DBS") providers began
offering service. At the end of 1996, it was estimated that they provided
services to approximately 6.7 million subscribers. There are now at least three
providers of DBS services. DBS services could become a substantial competitor as
developments in technology continue to increase satellite transmitter power and
decrease the cost and size of equipment needed to receive these transmissions.
A recent development, is the announced intention of one of these DBS
providers to develop the technology to transmit local channels on their services
for certain areas of the country. If this happens, assuming technology advances,
and the government allows it, this would effect approximately 15% of Galaxy's
service area.
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
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. Among
the disadvantages are: 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
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conditions and terrestrially generated radio frequency noise. The effect of
competition from these services cannot be predicted. Galaxy 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 Galaxy may face increased competition
from local telephone companies which, in most cases, have greater financial
resources than Galaxy. 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 dial-tone 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 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. 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 Galaxy.
The ability of local telephone companies to compete with Galaxy by
acquiring an existing cable system 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
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.
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Galaxy 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 multi-unit 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 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.
The Cable Television Consumer Protection and Competition Act of 1992. In
October 1992, Congress enacted 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) 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 rule-making 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
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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. The United States
Supreme Court agreed to review the District Court's decision. This review is
still pending 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.
Telecommunications Act of 1996. On February 8, 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
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 panel.
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
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"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 converters 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
Galaxy's franchising authorities may choose in the future to certify to regulate
Galaxy'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
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 MVPD 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
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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
must-carry/retransmission consent elections were made in June 1993, and the
second elections were made in October 1996. The next election, will be made in
October, 1999. 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 retransmission/must-carry consent
agreements were re-negotiated for a three-year period as of December 31, 1996.
Galaxy carries some stations pursuant to must-carry and others pursuant to
retransmission consent agreements. In some cases, Galaxy 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.
Non-duplication 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.
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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. The 1992 Cable Act requires the
FCC to update periodically its technical standards. The 1996 Telecom Act
requires 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 Galaxy 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. Galaxy'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.
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
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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
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.
21
<PAGE>
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. 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.
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
22
<PAGE>
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
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 1996, cable television systems were required to pay
regulatory fees of $0.55 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. At the present time, industry groups and
attorneys think the FCC is poised to delay this date.
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. Galaxy 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
interconnection, unbundling and resale. These standards will be developed and
23
<PAGE>
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 Galaxy's
opportunity to enter this market.
At the same time, Galaxy'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 Galaxy offers local exchange services within the meaning of the
1996 Telecom Act, other service providers may take advantage of the
interconnection duty to require Galaxy 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 1996 Telecom 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 Galaxy 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 and terms and conditions of
services, and 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 Galaxy 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 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,
24
<PAGE>
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
Galaxy increased its work force during the year to increase its presence
in the communities and to meet its customer needs more efficiently. At December
31, 1996, Galaxy had approximately 472 full-time employees and 59 part-time
employees, none of whom are subject to a collective bargaining agreement. Galaxy
considers its relations with its employees to be excellent. In addition, Galaxy
Management employs 41 people who are dedicated primarily to servicing Galaxy.
Item 2. Properties.
Galaxy 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. Galaxy believes that its properties, both
owned and leased, are in good condition and are suitable and adequate for
Galaxy's business operations.
Galaxy'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
Galaxy'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 Galaxy 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.
Item 4(a) Executive Officers.
See Part 3, Item 10.
25
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There is no established public trading market for Galaxy'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, calendar years 1995 and 1996, and the balance sheets data as
of December 31, 1995 and December 31, 1996 set forth below have been derived
from Galaxy'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
Jan. 1 Dec. 23 Year Year
1994 to 1994 to Ended Ended
Year Ended Dec. 31 Dec. 22 Dec. 31 Dec. 31 Dec. 31
1992 1993 1994 1994 1995 1996 (b)
<S> <C> <C> <C> <C> <C> <C>
---- ---- ---- -------- -------- --------
(Dollars in thousands)
Statement of Operations Data:
Revenues $ 25,919 $ 27,285 $ 27,117 $ 577 $ 29,995 $ 62,337
-------- -------- -------- -------- -------- --------
Operating Expenses:
Systems operations 9,518 9,938 10,338 260 13,219 28,353
Selling, general &
administrative 4,951 4,722 5,272 99 3,681 6,439
Management fees to affiliate 1,334 1,320 1,316 32 1,605 2,804
Depreciation &
amortization 16,232 15,681 14,541 214 10,206 21,739
-------- -------- -------- -------- -------- --------
Total operating expenses 32,035 31,661 31,467 605 28,711 59,335
Operating income (loss) (6,116) (4,376) (4,350) (28) 1,284 3,002
Interest expense (8,657) (6,229) (6,015) (153) (10,442) (20,133)
Other income (expense) (1,090) 37 (248) 6 608 219
-------- -------- -------- -------- -------- --------
Net loss $(15,863) $ 10,568) $(10,613) $ (175) $ (8,550) $(16,912)
======== ======== ======== ======== ======== ========
EBITDA (a) $ 10,116 $ 11,305 $ 10,191 $ 186 $ 11,490 24,741
</TABLE>
<TABLE>
<S> <C> <C>
Balance Sheet Data (at end of period):
Total assets $199,913 $217,498
Total long-term debt and other 145,527 169,738
Partners' capital 42,171 25,259
<FN>
26
<PAGE>
(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 Galaxy's operating performance.
(b) In December 1995, except for the Cameron systems which were acquired
in March 1995, Galaxy acquired certain cable television systems,
recorded under the purchase method of accounting. As a result, the
Consolidated Statement of Operations of Galaxy for the period
subsequent to the acquisitions are not comparative to prior periods.
In addition, Galaxy acquired various cable systems during fiscal 1996,
which were insignificant in the aggregate to Galaxy's on-going
operations. (See "Business-1996 Acquisitions and Trades".
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Introduction
On December 23, 1994, Galaxy commenced operations. Galaxy 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, 1994 and 1995 is based on the combined historical
financial data for the 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 discussion of results of operations for the year ended
December 31, 1996 reflects the actual financial data for the Systems for the
year then ended. The combined results of operations of the Systems and the
historical pro-forma results of operations of Galaxy do not reflect any changes
in the operation or management of the Systems that Galaxy has made or intends to
make and are not necessarily indicative of the results of operations that would
have been achieved had the Systems been owned and operated by Galaxy 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 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 1994, total systems operations expenses and
selling, general and administrative expenses have increased, but at a lesser
amount than revenues. Although Galaxy 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 Systems,
together with interest costs related to Galaxy's and the prior owners' financing
activities, have caused the prior owners of the Systems and Galaxy to report net
losses. Galaxy believes that such net losses are common for cable television
companies.
27
<PAGE>
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.
<TABLE>
<CAPTION>
1994(a) 1995(a) 1996 (b)
------------------ ------------------ ------------------
% of % of % of
Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 55,438 100.0% $ 57,459 100.0% 62,337 100.0%
Operating Expenses:
System Operations 21,791 39.3% 24,531 42.7% 28,353 45.5%
Selling, general and administrative 9,283 16.7% 7,546 13.1% 6,439 10.3%
Management fees to affiliate 2,492 4.5% 2,582 4.5% 2,804 4.5%
Depreciation and amortization 18,702 33.7% 19,105 33.3% 21,739 34.9%
-------- ------- -------- ------- -------- -------
Total operating expenses 52,268 94.2% 53,764 93.6% 59,335 95.2%
-------- ------- -------- ------- -------- -------
Operating income (loss) 3,170 5.8% 3,695 6.4% 3,002 4.8%
Interest expense (18,718) (33.8%) (18,813) (32.7%) (20,133) (32.3%)
Other income (expense) (263) (0.5%) (10) (0.0%) 219 0.4%
-------- ------- -------- ------- -------- -------
Net loss $(15,811) (28.5%) $(15,128) (26.3%) $(16,912) (27.1%)
======== ======= ======== ======= ======== =======
EBITDA $ 21,872 39.5% $ 22,800 39.7% 24,741 39.7%
<FN>
(a) Reflects the combined historical financial data for the 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 during the fiscal years ended 1994 and 1995
had occurred as of January 1, 1994.
(b) Reflects the actual financial data for the Systems
for the year ended December 31, 1996.
Fiscal 1996 Compared to Pro-Forma Fiscal 1995
</FN>
</TABLE>
Revenues increased 8.5%, or approximately $4.9 million, from fiscal 1995
to fiscal 1996. This is a result of: (1) basic subscribers increasing from
162,412 to 182,552 at December 31, 1995 and 1996, respectively, and (2) an
increase in basic rates of some Systems during the year.
System operations expenses increased 15.6%, or approximately $3.8 million,
from fiscal 1995 to fiscal 1996. Systems operations expenses, as a percentage of
revenues, increased from 42.7% in 1995 to 45.5% in 1996. These increases were
due primarily to an increase in programming fees from 1995 to 1996.
Selling, general and administrative expenses decreased 14.7%, or
approximately $1.1 million, from fiscal 1995 to fiscal 1996. Selling, general
and administrative expenses, as a percentage of revenues, decreased from 13.1%
in 1995 to 10.3% in 1996. These decreases were due primarily to Galaxy's ability
to streamline administrative operations through its call centers.
28
<PAGE>
Management fees to affiliate increased 8.6%, or approximately $0.2
million, from fiscal 1995 to fiscal 1996. Management fees were 4.5% of revenues
in 1995 and 1996. The increase is a direct result of the increase in revenue
during the year.
Depreciation and amortization expense increased 13.8%, or approximately
$2.6 million, from fiscal 1995 to fiscal 1996. As a percentage of revenues,
depreciation and amortization increased from 33.3% in 1995 to 34.9% in 1996.
These increases were a result of capital expenditures during the year in the
amount of $21.9 million, along with $16.1 million of additions to cable systems,
net of trades, through acquisitions during the year.
Interest expense increased 7.0%, or approximately $1.3 million, from
fiscal 1995 to fiscal 1996. This increase was a result of additional borrowings
under Galaxy's Revolving and Term Loan during the year. As a percentage of
revenues, interest expense decreased from 32.7% in 1995 to 32.3% in 1996. This
decrease was achieved by placing a greater percentage of the Revolving and Term
Loan under LIBOR.
Other income (expense) increased by approximately $0.2 million, from a net
expense of approximately $10,000, or less than 0.1% of revenues in fiscal 1995,
to other income of approximately $219,000, or 0.4% of revenues in fiscal 1996.
This increase is primarily attributable to a gain on sale of assets in the
amount of $183,095.
The prior owners of the Systems and Galaxy 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.
As a combined result of the items discussed above, net loss increased
11.8%, or approximately $1.8 million, from fiscal 1995 to fiscal 1996. As a
percentage of revenues, net loss increased from 26.3% in 1995 to 27.1% in 1996.
EBITDA increased approximately $1.8 million, or 8.5%, from fiscal 1995 to
fiscal 1996, and, as a percentage of revenues, EBITDA remained constant at 39.7%
over such periods. 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 Galaxy's operating performance.
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 of acquired systems and the
economies of scale that resulted from folding the acquisitions into existing
operating management and facilities.
29
<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 1995 to 39.7% in 1996, 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.
1996 Acquisitions and Trades
Cablevision of Texas Systems. On March 29, 1996, Galaxy acquired certain
assets comprising 31 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 approximately $10.2 million. As of the closing
date, 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 9,100 basic subscribers and had a basic
penetration rate of approximately 77.3% as of the closing date.
High Plains Systems. On April 1, 1996, Galaxy acquired certain systems
comprising eight cable television systems of High Plains Cable (the "High Plains
Systems") for a purchase price of approximately $0.3 million. As of the closing
date, 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 270 basic subscribers and had a basic penetration rate of
approximately 46.6% as of the closing date.
Midcontinent Systems. On April 12, 1996, Galaxy acquired certain assets
comprising six cable television systems of Midcontinent Cable Systems (the
"Midcontinent Systems") for a purchase price of approximately $1.3 million. As
of the closing date, 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 1,328 basic subscribers and had a basic penetration
rate of approximately 71.7% as of the closing date.
30
<PAGE>
Five Rivers Systems. On November 1, 1996, Galaxy acquired certain
assets comprising one cable television system of Five Rivers Cable Company (the
"Five Rivers System") for a purchase price of approximately $.5 million. As of
the closing date, 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 588 basic subscribers and had a basic penetration rate
of approximately 80.5% as of the closing date.
Hurst Communications Systems. On March 29, 1996, Galaxy acquired certain
assets comprising eight cable television systems of Hurst Communications (the
"Hurst Systems") for a purchase price of approximately $1.1 million. As of the
closing date, 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 1,371 basic subscribers and had a basic penetration rate of 74.9%
as of the closing date.
TCI Systems Trade. On June 14, 1996, Galaxy traded assets located in
Shawnee County and Jefferson County, Kansas (the "Shawnee County System") for
assets comprising six cable television systems of TCI (the "TCI Systems")
located in northern Mississippi. At closing, Galaxy's Shawnee County Systems
passed approximately 9,500 homes, with approximately 315 miles of plant,
resulting in a density of 30.2 homes per mile. The Shawnee County System served
approximately 7,000 basic subscribers and had a basic penetration rate of
approximately 73.7% as of the close date. As of the closing date, the TCI
Systems passed approximately 16,900 homes, with 729 miles of plant, resulting in
a density of 23.2 homes per mile. The TCI Systems served approximately 10,363
basic subscribers and had a basic penetration rate of approximately 61.3% as of
the close date.
C-S Cable. On October 30, 1996, Galaxy acquired certain assets comprising
the cable television systems of CS Cable Services, Inc. (the "CS Cable Systems")
for a purchase price of approximately $2.3 million. As of the closing date, the
served approximately 3,500 basic equivalent subscribers.
Mexia / Ranburn Trade. On November 1, 1996, Galaxy traded assets
comprising the Ranburn cable system in Ranburn, Alabama serving approximately
110 subscribers for a similar system in Mexia, Alabama serving approximately 230
subscribers. This trade allowed Galaxy to trade a small system out of a
non-targeted service area for a similar system in proximity to our targeted
service areas.
Pending Acquisitions
TCI Cable of the Midland - Sarpey County Systems. On September 1, 1996,
Galaxy entered into an agreement to purchase certain assets comprising 6 cable
television systems of TCI Cable of the Midland (The Sarpey County Systems) for a
purchase price of approximately $2.3 million. Subject to certain pro-rate
adjustments. At September 1, 1996, the Sarpey County Systems passed
approximately 3,000 homes located in Nebraska, with approximately 68 miles of
plant, for a density of 47 homes per mile. The Sarpey County Systems served
approximately 2,180 basic subscribers and had a basic penetration rate of
approximately 57% at September 1, 1996.
Liquidity and Capital Resources
The cable television business requires substantial financing for
construction, expansion and maintenance of plant. Galaxy intends to continue
pursuit of a business strategy which includes elective acquisitions. Since
December of 1994 Galaxy received cash equity contributions of approximately
$44.6 million from the Equity Investors and the Senior Managers. Galaxy also
31
<PAGE>
received equity from Vantage Cable totaling approximately $6.4 million. Galaxy
had an aggregate of $169.7 million of indebtedness as of December 31, 1996,
representing $119.5 million of senior subordinated notes, $49.9 million drawn
under Galaxy's revolving line of credit (See "The Revolving Credit Facility and
Term Loan"), and $.3 million in various other obligations. Net borrowings were
made under Galaxy's revolving line of credit of approximately $23 million during
fiscal 1996. Galaxy anticipates that operating cash flows, along with its
ability to borrow under its revolving line of credit, will provide sufficient
funds necessary to meet debt service, working capital and capital expenditure
needs.
Capital Expenditures
During 1996, Galaxy's capital expenditures (exclusive of system
acquisitions) were approximately $22 million. These capital expenditures were
used to upgrade existing systems through channel additions and interconnect
traditional copper cable systems with new fiber optic cable, and purchasing new
computer equipment and software to enhance communications and data traffic
between employees and Galaxy subscribers. Galaxy anticipates capital
expenditures over the next two years to total approximately $27 million. These
capital expenditures will be used primarily to continue the installation of
fiber optic cable and to allow for the reduction in the number of headends by
more than 75 through headend consolidation. These expenditures also include
expansion and replacement of headend buildings, rewires of associated electronic
equipment and for the purchase of new vehicles, test equipment and computer
equipment. 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. Galaxy expects to finance the anticipated
capital expenditures described above with cash flows generated from operations,
borrowings under the Revolving Credit Facility, and other debt as necessary.
The Revolving Credit Facility and Term Loan
The Term Loan Agreement was amended in September 1995 to a Revolving
Credit Facility under which Galaxy 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 Galaxy to maintain
compliance with certain financial ratios and other covenants. The financial
covenants in the Revolving Credit Facility may significantly limit Galaxy's
ability to borrow under the Revolving Credit Facility.
Senior Subordinated Notes
Pursuant to an indenture dated September 28, 1995 (the "Indenture")
between Galaxy and Capital Corp., and the Boatmen's Trust Company as trustee,
Galaxy 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.
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
Galaxy, if any, and is senior to all subordinated debt of Galaxy.
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.
32
<PAGE>
Safe Harbor Under The Private Securities Litigation Reform Act Of 1995
The statements contained in the Form 10-K relating to Galaxy's operating
results, and plans and objectives of management for future operations, including
plans or objectives relating to Galaxy's products and services, constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results of Galaxy may differ materially
from those in the forward looking statements and may be affected by a number of
factors including the receipt of regulatory approvals, the success Galaxy's
implementation of digital technology, subscriber equipment availability, tower
space availability, and the absence of interference, as well as other factors
contained herein and in Galaxy's securities filings.
Galaxy's future revenues and profitability are difficult to predict due to
a variety of risks and uncertainties, including (i) business conditions and
growth in Galaxy's existing markets, (ii) the successful launch of systems and
technologies in new and existing markets, (iii) Galaxy's existing indebtedness
and the need for additional financing to fund subscriber growth and system and
technological development, (iv) government regulation, including FCC
regulations, (v) Galaxy's dependence on channel leases, (vi) the successful
integration of future acquisitions and (vii) numerous competitive factors,
including alternative methods of distributing and receiving video transmissions.
Galaxy expects to continue its subscriber growth and launch additional
systems. Moderate increases in revenues and subscribers are anticipated in 1997;
however, the rate of increase cannot be estimated with precision or certainty.
Galaxy believes that general and administrative expenses and depreciation and
amortization expense will continue to increase to support overall growth.
Because of the foregoing uncertainties affecting Galaxy's future operating
results, past performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical results or trends as
determinative of Galaxy's future performance. In addition, Galaxy's
participation in a developing industry employing rapidly changing technology
will result in significant volatility in the market value of the Notes.
In addition to the matters noted above, certain other statements made in
this Form 10-K are forward looking. Such statements are based on an assessment
of a variety of factors, contingencies and uncertainties deemed relevant by
management, including technological changes, competitive products and services
and management issues. As a result, the actual results realized by Galaxy could
differ materially from the statements made herein. Readers of this Form 10-K are
cautioned not to place undue reliance on the forward looking statements made in
this Form 10-K or in Galaxy's other securities filings.
Inflation
The Company does not believe that inflation in the United States in recent
years has had a significant effect on results on operations.
33
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996
and 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 Years Ended
December 31, 1996 and 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, 1996
and 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
</TABLE>
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 schedule.
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, 1996 and 1995, and the related
consolidated statements of operations, changes in partners' capital, and cash
flows for the years then ended, 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, 1996 and 1995 and the consolidated
results of their operations and their cash flows for the years then ended, 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 14, 1997
F-2
<PAGE>
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 2,338,345 $ 3,430,835
Subscriber receivables, net of allowance for doubtful accounts of
$411,950 and $834,425, respectively 5,998,127 3,512,141
Systems and equipment, net 144,822,616 126,312,055
Intangible assets, net 62,330,153 65,047,002
Prepaids and other 2,008,767 1,611,158
------------ ------------
Total assets $217,498,008 $199,913,191
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 17,738,261 $ 9,569,072
Subscriber deposits and deferred revenue 4,763,327 2,646,413
Long-term debt and other obligations 169,737,608 145,526,955
------------ ------------
Total liabilities 192,239,196 157,742,440
Commitments and contingencies
Partners' Capital:
General partners 18,257,812 35,169,751
Limited partners 7,001,000 7,001,000
------------ ------------
Total partners' capital 25,258,812 42,170,751
Total liabilities and partners' capital $217,498,008 $199,913,191
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
F-3
<PAGE>
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 23,
Year Year 1994 (Inception)
Ended Ended To
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 62,337,218 $ 29,995,187 $ 576,922
Operating expenses:
Systems operations 28,353,154 13,219,170 260,352
Selling, general and administrative expenses 6,439,308 3,680,945 98,517
Management fee to affiliate 2,804,374 1,605,404 31,731
Depreciation and amortization 21,738,425 10,205,635 214,139
------------ ------------ ------------
Total operating expenses 59,335,261 28,711,154 604,739
------------ ------------ ------------
Operating income 3,001,957 1,284,033 (27,817)
Interest expense (20,132,735) (10,442,205) (153,425)
Interest income and other 218,839 608,405 5,931
------------ ------------ ------------
Net loss $(16,911,939) $ (8,549,767) $ (175,311)
============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
F-4
<PAGE>
GALAXY TELECOM, L.P. AND SUDSIDIARY
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 28,894,829 1,000 416,000 6,384,000 -- 6,801,000 35,695,829
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1994
28,719,518 1,000 416,000 -- 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
Net loss for year (16,911,939) -- -- -- -- -- (16,911,939)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1996 $ 18,257,812 $ 1,000 $ 416,000 $ 6,384,000 $ 200,000 $ 7,001,000 $ 25,258,812
============ ============ ============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
F-5
<PAGE>
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Year 1994 (Inception)
Ended Ended To
December 31, December 31, December 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (16,911,939) $ (8,549,767) $ (175,311)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 17,646,095 7,020,550 147,000
Amortization expense 4,092,330 3,185,085 53,000
Amortization included in interest expense 1,294,650 801,058 14,139
Financeable interest 597,849 446,046 --
Provision for doubtful accounts receivable 1,229,536 383,547 8,219
(Gain)/loss on sale of assets (183,095) 72,587 --
Changes in assets and liabilities:
Subscriber receivables (3,715,522) (2,023,046) (499,816)
Prepaids and other (397,609) (258,916) (236,482)
Accounts payable and accrued expenses 7,751,279 5,241,429 553,509
Subscriber deposits and deferred revenue 2,116,914 1,328,391 211,478
------------- ------------- -------------
Net cash provided by operating activities 13,520,488 7,646,964 75,736
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of cable systems-net of trades (16,009,136) (95,614,673) (86,980,136)
Proceeds from sale of assets 683,171 2,101,345 --
Capital expenditures (21,397,549) (4,815,014) --
Other intangible assets (873,882) (164,248) --
------------- ------------- -------------
Net cash used in investing activities (37,597,396) (98,492,590) (86,980,136)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings under term debt and revolver 38,226,377 20,850,000 63,650,000
Payments under term debt and revolver (14,893,894) (59,000,000) --
Net borrowings on other debt 60,738 5,215 --
Proceeds from bond issue -- 119,400,000 --
Payment of debt issue costs (408,803) (4,869,164) (2,831,314)
Partners' contributions -- 15,000,000 28,976,124
------------- ------------- -------------
Net cash provided by financing activities: 22,984,418 91,386,051 89,794,810
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (1,092,490) 540,425 2,890,410
Cash and cash equivalents, beginning of period 3,430,835 2,890,410 --
------------- ------------- -------------
Cash and cash equivalents, end of period $ 2,338,345 $ 3,430,835 $ 2,890,410
============= ============= =============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
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 cumulative priority return totaled approximately
$31,290,847, $11,696,000 and $235,000 at December 31, 1996, 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. Profits are 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 and Cash Equivalents
Cash equivalents include highly liquid investments purchased with an
original maturity of three months or less. At December 31, 1995, cash
equivalents totaled $1,038,000 and consisted primarily of money market
funds, reported at cost which approximates fair market value. There were
no cash equivalents at December 31, 1996.
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
concentrations of credit risk are cash and cash equivalents and
subscriber and other receivables. The Partnership invests excess cash in
short-term liquid money instruments issued by significant financial
institutions. Cash balances in excess of FDIC coverage totaled $3.5
million at December 31, 1996. Though limited primarily to cable
television subscribers, the concentration of credit risk with respect to
receivables is minimized by geographical dispersion through approximately
407 individual cable television systems ranging in size from
approximately 10 subscribers to approximately 3,400 subscribers located
in small communities in the Midwest and Southeast United States, and the
large number of customers with individually small balances on short
payment terms.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires certain disclosures
regarding the fair value of financial instruments. Cash and cash
equivalents, subscriber receivables, accounts payable and accrued
expenses are reflected in the financial statements at fair value because
of the short-term maturity of these instruments. The fixed rate Senior
Subordinated Notes (Note 6) are valued using the closing bid price market
quotes, as a result, the fair value of the Notes were $129,588,000. Based
on borrowing rates currently available to Galaxy for similar debt, the
fair value of the revolver debt closely approximates its carrying value.
Revenue Recognition
Revenues from subscribers are recognized in the month that service is
provided. Installation revenues are recognized upon completion of the
service provided to the subscriber.
Marketing Costs
Marketing costs are charged to operations in the period incurred totaling
approximately $569,000 and $243,000 for the years ended December 31, 1995
and 1996. No marketing costs were incurred for the period from inception
to December 31, 1994.
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.
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, continued
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 are 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.
Intangible Assets
Goodwill related to the acquisition of cable television systems
represents the excess of purchase price plus related direct costs over
the fair value of the net assets acquired. Other intangible assets
consist primarily of debt issuance costs. Debt issuance costs and
original issue discounts are amortized to interest expense using the
interest method.
The Partnership reviews goodwill for impairment from time to time,
measuring impairment based upon expected future undiscounted cash flows
from operations.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments may be impaired, an
evaluation of recoverability would be performed. If an evaluation of
impairment is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
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.
F-10
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year's presentation.
3. Acquisition of Cable Television Systems:
1995 Acquisitions
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:
Purchase consideration consisted of the following:
<TABLE>
Douglas Vista
Cameron Communications Narragansett Vista I Friendship Phoenix Total
------------ ------------ ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash to seller 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-11
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
1995 Acquisitions, 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,
1995
Revenues $ 57,459,000
Net loss 15,128,000
The above pro forma financial statements do not purport to be indicative
of the financial results which actually would have occurred had the
acquisitions been made on January 1, 1995 or subsequent to that date.
F-12
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
During 1996, the Partnership acquired certain cable television systems
recorded under the purchase method of accounting in accordance with ABP
Opinion 16 as follows:
1996 Acquisitions and Trades
Purchase consideration consisted of the following:
<TABLE>
Cablevision
of
Texas High Mid
III Plains Continent Hurst TCI 5 Rivers C-S Cable Mexia Purchases
--- ------ --------- ----- --- -------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash to
seller
paid by
the
Partnership $9,663,590 $ 271,553 $1,271,856 $1,034,594 $ -- $ 440,900 $2,197,482 $ 107,500 $14,987,475
Cash to
escrow 500,000 25,000 75,000 21,080 -- -- 75,000 -- 696,080
Cable
systems
traded:
Shawnee
County -- -- -- -- 5,713,903 -- -- -- 5,713,903
Ranburne
-- -- -- -- -- -- -- 279,702 279,702
Cash for
acqui-
sition
expenses
paid or
accrued
by the
Partnership
76,542 3,489 12,385 -- 112,309 2,875 52,180 -- 259,780
Net (assets)
liabilities
assumed
1,766 1,047 3,144 (1,674) -- 59,100 2,417 -- 65,800
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 10,241,898 301,089 1,362,385 1,054,000 5,826,212 502,875 2,327,079 387,202 22,002,740
========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The aggregate purchase price is allocated as follows:
Systems and equipment $ 18,682,694
Intangible assets 3,320,046
-------------
$ 22,002,740
F-13
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
1996 Acquisitions and Trades, continued
The operating results for each acquired cable television system are
included in net loss from the date of acquisition. The current fiscal
year 1996 acquisitions are not presented in a proforma format as the
acquisitions, individually and in the aggregate, are immaterial to the
financial statements taken as whole.
Pending Acquisitions
On September 1, 1996, Galaxy entered into an agreement to purchase
certain assets comprising six cable television systems of TCI Cable of
the Midland (the "Sarpey County Systems") for a purchase price of
approximately $2.3 million, subject to certain pro-rata adjustments.
4. Systems and Equipment:
Systems and equipment consist of the following:
<TABLE>
December 31, December 31,
Term Method 1996 1995
------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Cable television distribution
systems:
Head-end Straight-Line 7 years $ 34,398,590 $ 28,212,203
Distribution plant Straight-Line 12 years 99,852,377 81,553,565
Subscriber drops Straight-Line 5 years 24,282,076 19,172,625
Inventories -- -- 889,917 943,825
------------- -------------
159,422,960 129,882,218
Other
Vehicles Straight-Line 5 years 4,684,292 1,956,175
Buildings Straight-Line 5 years 1,538,367 954,282
Furniture, fixture and equipment Straight-Line 5 years 4,301,075 1,348,301
Land -- --
95,000 95,000
------------- -------------
170,041,694 134,235,976
Accumulated depreciation (25,219,078) (7,923,921)
------------- -------------
Systems and equipment, net $ 144,822,616 $ 126,312,055
============= =============
</TABLE>
F-14
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
December 31, December 31,
Method Term 1996 1995
<S> <C> <C> <C> <C>
------------------ -------- ------------ ------------
Goodwill, franchise costs and
subscriber lists Straight-Line 15 years $ 61,532,820 $ 59,814,225
Debt issued costs:
Senior Subordinated Notes Effective interest 10 years 5,399,954 5,150,409
Revolver and Term Loan Effective interest 8 years 2,678,212 2,518,955
Interest rate-cap Effective interest 2 years -- 746,814
Organization costs and other Straight-Line 15 years 476,271 98,510
------------ ------------
70,087,257 68,328,913
Accumulated amortization (7,757,105) (3,281,911)
------------ ------------
Intangible assets, net $ 62,330,152 $ 65,047,002
============ ============
</TABLE>
6. Long-Term Debt:
Outstanding long-term debt is as follows:
December 31, December 31,
1996 1995
---- ----
Revolving Credit Facility $ 49,876,377 $17,500,000
Term Loan - 8,000,000
Financeable interest - 446,046
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized Discount (525,000) (585,000)
Other 386,231 165,909
------------- ---------------
Total $169,737,608 $145,526,955
============= ===============
F-15
<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 remained on deposit with the Trustee. Interest earned on
such amounts deposited totaling $438,190 was 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)
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 (b) 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. 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. No such contributions were required in December 1996.
F-16
<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 (8.25% at December
31, 1996) 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,
1996, $38,685,000 of the Revolving Credit Facility had been converted to
an adjusted LIBOR rate at 8.75%. The Partnership is required to pay a
.50% per annum commitment fee on the unfunded portion of the Revolving
Credit Facility.
Term Loan
The Term Loan bears interest on the same terms as the Revolving Credit
Facility. 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, 1996, both the Term Loan and financeable interest
balance were paid in full.
F-17
<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.
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 were subject to this rate protection
agreement.
F-18
<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, 1996, assuming no additional borrowings, is as follows:
1997 $ 156,175
1998 3,116,216
1999 8,086,643
2000 10,972,803
2001 12,967,858
Thereafter 134,962,913
-----------
$170,262,608
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 years ended December 31, 1996 and
1995 were approximated $20 million, and $4.9 million respectively.
Noncash transactions for the year ended December 31, 1996 were as
follows:
Capital expenditures of approximately $417,910 included in accounts
payable.
Acquisition of equipment through issuance of capital leases payable
totaling $159,585.
Acquisition of cable systems totaling $5,993,604 through trades of
current systems.
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.
F-19
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Supplemental Disclosure of Cash Flow Information, continued:
Revolving Credit Facility issuance, and Senior Subordinated Note
issuance costs totaling $720,512.
Acquisition of equipment 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 $6,834,000 Class D limited partner interest to seller of
an acquired cable system.
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
$3,071,000, $1,888,000 and $39,000 for the years ended December 31, 1996,
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, 1996 was $291,000. 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 $265,542, $475,000 and $313,000 as of December 31, 1996,
1995 and 1994, respectively, of which approximately $265,542, $216,000
and $188,000 as of December 31, 1996, 1995 and 1994, respectively
represent receivables from Galaxy Systems Management, Inc.
F-20
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Commitments and Contingencies, continued:
Capital Leases
The Partnership leases certain assets under capital lease agreements
which expire at various dates through 1999. The lease agreements
generally provide purchase options at the end of the original lease.
Future minimum lease payments under noncancelable leases consist of the
following:
Year Ending
December 31, Amount
1997 $ 81,960
1998 54,175
1999 25,368
-------------
Total minimum lease payment 161,503
Less amounts representing interest (17,062)
Obligations under capital leases $ 144,441
==========
Operating 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 $298,000, $100,000 and $3,700 for the years ended December
31, 1996, 1995 and for the period from inception to December 31, 1994,
respectively.
Future minimum lease payments under such leases are as follows:
Year Ending
December 31, Amount
------------ ------
1997 $ 337,175
1998 290,970
1999 240,290
2000 209,571
2001 199,187
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 $1,177,000, $433,000 and $23,000 for the years
ended December 31, 1996, 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
$1,161,000 at December 31, 1996.
F-21
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Commitments and Contingencies, continued:
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 makes contributions on
behalf of each employee of a matching amount not to exceed the employee's
contribution or 8% of such employee's salary. The Partnership contributed
$150,480 and $41,000 to the plan during 1996 and 1995, respectively. 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.
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 offering 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.
Cable Service Rate Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act 1992 (the "1992 Cable Act"). In 1993 and
1994, the FCC adopted certain rate increases. As a result of such
actions, Galaxy's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and tier
service rates are evaluated against competitive benchmark rates as
published by FCC, and equipment and installation charges are based on
actual costs. The rate regulations do not apply to the relatively few
systems which are subject to "effective competition" or to services
offered on an individual service basis, such as premium movie and
pay-per-view services.
F-22
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Commitments and Contingencies, continued:
Cable Service Rate Regulation, continued
The Partnership believes that it has complied in all material respects
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Partnership's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed, or review by
the appropriate franchise authority, if such authority has been
certified. If, as a result of the review process, a system cannot
substantiate its rates, it could be required to retroactively reduce its
rates to the appropriate benchmark and refund the excess portion of rates
received. Any refunds of the excess portion of tier service rates would
be retroactive to the date of complaint. Any refunds of the excess
portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions.
In February 1996, a telecommunications bill was signed into federal law
which significantly impacts the cable industry. Most notably, the bill
allows cable system operators to provide telephony services, allows
telephone companies to offer video services, and provides for
deregulation of cable programming service rates by 1999. The impact of
the new bill cannot be determined at this time, but it is not expected to
have a significant adverse impact on the financial position or results of
operations of the Partnership.
9. Quarterly Data, Unaudited:
The results of operations for each quarter in 1996 were as follows
(dollars in thousands):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 14,475 $ 15,545 $ 15,889 $ 16,428
Operating income 1,374 760 503 365
Net loss (3,433) (4,009) (4,834) (4,636)
The results of operations for the quarters include certain adjustments
primarily related to depreciation and amortization on current year
acquisitions. The adjustments to net loss, in thousands, are $209, $257
and $454, for the first, second and third quarter, respectively.
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 on this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic 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 14, 1997
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 Cost and Other Accounts Deductions End of
Description of Period Expenses -Describe -Describe Period
----------- --------- -------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Reserve and allowance deducted
from asset accounts-allowance
for uncollectible accounts $ 834,425 $ 1,229,536 $ 186,791 (1) $1,838,802 (2) $ 411,950
Year ended December 31, 1995:
Reserve and allowance deducted
from asset accounts-allowance
for uncollectible accounts 320,605 383,547 359,385 (1) 229,112 (2) 834,425
Period from December 24, 1994
(inception) to December 31, 1994
Reserve and allowance deducted
from asset accounts-allowance
for uncollectible accounts -- 8,219 312,386 (1) -- 320,605
</TABLE>
(1) Allowance for uncollectible purchased accounts (2) Uncollectible accounts
written off.
S-2
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 10. Directors and Executive Officers of the Registrants.
The general partners of Galaxy, 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 Galaxy, and as such Galaxy GP has responsibility for the overall management
of the business and operations of Galaxy. 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.
Galaxy is party to a Management Agreement with Galaxy Management Limited
("Galaxy Management") with respect to the day-to-day management and operation of
Galaxy's cable systems.
The executive officers of Galaxy Management and the directors of Galaxy
GP are:
Tommy L. Gleason, Jr.....51 President, Chief Executive Officer and
Director of Galaxy Management and Galaxy GP
J. Keith Davidson........41 Vice President - Finance, Treasurer,
Secretary and Director of Galaxy
Management and Galaxy GP
James M. Gleason.........33 Chief Operating Officer of Galaxy
Management and Galaxy GP
Terry M. Cordova.........35 Vice President - Engineering of Galaxy
Management
Thomas Morris............52 Vice President - Operations of Galaxy
Management
Ronald Voss..............53 Vice President - Corporate Development of
Galaxy Management
William P. Collatos......42 Director of Galaxy GP
Kenneth T. Schiciano.....34 Director of Galaxy GP
Richard D. Tadler........40 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.
34
<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 managing 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 August, 1989 to December 1994.
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 1995, Mr.
Tadler was a general partner of TA Associates. Mr. Tadler is a director of
TechForce Corporation.
35
<PAGE>
Item 11. Executive Compensation.
Management Agreement
Pursuant to the Management Agreement between Galaxy Management and Galaxy,
Galaxy Management, including Messrs. Tommy L. 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 Galaxy and in connection therewith
undertakes those activities and services that are customary in the cable
television industry for the account and on behalf of Galaxy. 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 Galaxy are deemed to be executive officers of
Galaxy. The Senior Managers are employees of Galaxy Management and the services
of such individuals are provided to Galaxy, for which services Galaxy 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 Galaxy receive no compensation for their services to Galaxy 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, Galaxy 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,
1996, concerning the beneficial ownership of (i) the units of general
partnership interests and limited partnership interests of Galaxy owned by each
person known by Galaxy to own beneficially more than 5.0% of any class of
Galaxy'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 owned by the Senior Managers.
<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
36
<PAGE>
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 Class A Voting Common Stock of Galaxy GP
Galaxy GP as a group (6 persons) (4) 107,896 91.0
All managers of Galaxy Investments as Common Interests in Galaxy Investments 998 99.8
a group (5 persons) (5) Voting Preferred Interests in Galaxy Investments 3,740,995 95.1
</TABLE>
* Less than one percent.
(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
37
<PAGE>
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.
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 Galaxy 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. Galaxy may terminate the Management Agreement with 90 days' written
notice prior to the expiration of the initial or any renewal term. The Company
38
<PAGE>
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 Galaxy,
(ii) of an unwaived and uncured default by Galaxy of any substantive covenant
contained in its financing documents, (iii) of a 10% reduction in Galaxy'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 Galaxy's cable systems, upon the sale of such system by
Galaxy and will terminate in its entirety upon the sale or other distribution of
all of Galaxy's systems or upon the dissolution or winding up of Galaxy, 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 Galaxy ("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 Galaxy. 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 Galaxy, including truck and automobile expenses, travel expenses,
meals and entertainment, and third-party professional fees. For fiscal 1996,
Galaxy paid Galaxy Management approximately $266,669 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 Galaxy 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 Galaxy reach a certain minimum level. The management fee
is currently 4.5% of revenues. For the year ended December 31, 1996, Galaxy
incurred a management fee of approximately $2,804,374. 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 Galaxy. None of such persons presently intends, or intends to cause
any such entities, to make any such acquisitions. The Loan Agreement limits
Galaxy'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 as defined below.
Galaxy 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.
Affiliate Subordination Agreement
Galaxy, 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
39
<PAGE>
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 Galaxy's Loan
Agreement (the "Senior Parties"). Under the terms of the Subordination
Agreement, all obligations and liabilities of Galaxy, 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 Galaxy, Galaxy
GP and Galaxy Investments to the Senior Parties under the Loan Agreement and the
financing documents related thereto.
Equity Holders Agreement
Galaxy, 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 Galaxy, 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 Galaxy, 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 Galaxy 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 Galaxy, 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 Galaxy before making such
investment. If Galaxy 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 Galaxy 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
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 Galaxy, there can be no assurance that a conflict of interest
relating to any such investment will be resolved in favor of Galaxy. The Company
presently does not have any agreements or policies governing possible conflicts
of interest.
Limited Partnership Interests in Galaxy
Galaxy Investments owns 100% of the Class B Limited Partnership Interests
in Galaxy, which it received in connection with the organization and initial
capitalization of Galaxy in December 1994. Galaxy GP received 100% of the Class
C and Class E Limited Partnership Interests in Galaxy in connection with
Galaxy's acquisitions of the Vista Communications Systems and the Galaxy
Cablevision Systems, respectively. In connection with its acquisition of the
Vantage Cable Systems, Galaxy issued approximately $6.4 million in the form of
40
<PAGE>
Class D Limited Partnership Interests in Galaxy, out of the total consideration
of approximately $38.4 million paid for such Systems. Galaxy'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 Galaxy may make
distributions under the Loan Agreement, Galaxy GP may cause Galaxy 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"). Galaxy 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, Galaxy has made no distributions to any of
the general or limited partners of Galaxy. The interests of each of the general
and limited partners of Galaxy 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 Revolving Credit Facility, 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.
41
<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.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GALAXY TELECOM, L.P.
By: Galaxy Telecom Inc.
As General Partner
March 31, 1997 /s/ Tommy L. Gleason, Jr.
By: Tommy L. Gleason, Jr.
President and Chief Executive Officer
March 31, 1997 /s/ J. Keith Davidson
By: J. Keith Davidson
Vice President-Finance (Principle
Financial Officer)
43
<PAGE>
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).
44
<PAGE>
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
Associates, 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 to 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.
45
<PAGE>
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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000948945
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2338345
<SECURITIES> 0
<RECEIVABLES> 5998127
<ALLOWANCES> (411950)
<INVENTORY> 889917
<CURRENT-ASSETS> 2008767
<PP&E> 170041694
<DEPRECIATION> (25219078)
<TOTAL-ASSETS> 217498008
<CURRENT-LIABILITIES> 22501588
<BONDS> 169737608
0
0
<COMMON> 0
<OTHER-SE> 25258812
<TOTAL-LIABILITY-AND-EQUITY> 25258812
<SALES> 62337218
<TOTAL-REVENUES> 62337218
<CGS> 0
<TOTAL-COSTS> 59335261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20132735
<INCOME-PRETAX> (16911939)
<INCOME-TAX> (16911939)
<INCOME-CONTINUING> (16911939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16911939)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
