SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(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, 1997
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
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(States of Other Jurisdictions of IRS Employer
Incorporation or Organization) Identification No.)
1220 North Main
Sikeston, Missouri 63801
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(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.: $0
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.
FORM 10-K
Year Ended December 31, 1997
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
4a. Executive Officers............................................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
7a. Qualitative and Quantitative Disclosures about
Market Risks..................................................35
8. Financial Statements and Supplementary Data..................F-1
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 36
PART III
10. Directors and Executive Officers of the Registrant............37
11. Executive Compensation....................................... 38
12. Security Ownership of Certain Beneficial
Owners and Management.........................................39
13. Certain Relationships and Related Transactions................41
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................... 45
Signatures........................................................ 46
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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, 1997, the Systems
passed approximately 300,000 homes and served approximately 177,000
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.
Approximately 97% of the plant in the Systems has a 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 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, allow the redeployment of the
associated electronic equipment to remaining headends within the existing
systems and create additional sources of revenue. Galaxy reduced and
redeployed 34 of such headends in 1997.
The five 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 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.
Galaxy believes its real opportunity lies in the development of its
properties in Nebraska, Kansas, Illinois, Kentucky and Mississippi (the "Core
Areas"). The Core Areas are considered such due to Galaxy's opportunity to
be the dominant operator in these areas and the ability to generate
additional revenue through its fiber network (see "Technology and
Engineering" discussed below). The properties that are not in the Core Areas
are currently in the process of being sold, traded or re-evaluated as being
able to be converted to Core Areas.
Background
The Senior Managers, Tommy L. Gleason, Jr., James M. Gleason, J. Keith
Davidson, Ronald Voss, and Terry M. Cordova 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 assigned
to, and assumed by, Galaxy prior to the consummation of each of the
transactions. In order to facilitate Galaxy's acquisition of the Initial
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.
These acquisitions represented 223 cable television systems. Upon
acquisition by Galaxy, the Initial Systems passed approximately 120,500 homes
with approximately 3,038 miles of plant, resulting in a density of
approximately 39.7 homes per mile, served approximately 77,230 basic
subscribers and had a basic penetration rate of approximately 64.1%.
1995 Acquisitions
Cameron Acquisition. 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%.
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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 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 Galaxy, 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 cable television systems
through purchase and trade throughout 1996. 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 approximately
11,771 homes located in Kansas, with 347 miles of plant, for a density of
approximately 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%.
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 approximately 580
homes located in Kansas, with 20 miles of plant, for a density of
approximately 29 homes per mile. The High Plains Systems served
approximately 270 basic subscribers and had a basic penetration rate of
approximately 46.6%.
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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
$1.4 million. As of the closing date, the Midcontinent Systems passed
approximately 1,853 homes located in Nebraska, with 32 miles of plant, for
a density of approximately 57.9 homes per mile. The Midcontinent Systems
served 1,328 basic subscribers and had a basic penetration rate of
approximately 71.7%.
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 $0.5
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
approximately 30.4 homes per mile. The Five Rivers System served 588 basic
subscribers and had a basic penetration rate of approximately 80.5%.
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 approximately 36.6 homes per mile. The Hurst Systems served
1,371 basic subscribers and had a basic penetration rate of 74.9%.
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 Tele-Communications, Inc.
(the "TCI Systems") located in northern Mississippi. At closing, the 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 closing date. As of the
closing date, the TCI Systems passed approximately 16,900 homes, with 729
miles of plant, resulting in a density of approximately 23.2 homes per mile.
The TCI Systems served approximately 10,363 basic subscribers and had a basic
penetration rate of approximately 61.3%.
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 CS Cable Systems 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.
1997 Acquisitions and Dispositions
TCI Cable of the Midland - Sarpey County Systems. On September 1, 1997,
Galaxy acquired certain assets comprising the cable television systems of
TCI Cable of the Midland (the "Sarpey County Systems"), located in Sarpey and
Douglas counties, Nebraska for a purchase price of approximately $875,000. At
September 1, 1997, the Sarpey County Systems passed approximately 3,000 homes
located in Nebraska, with approximately 80 miles of plant, for a density of
39 homes per mile. The Sarpey County Systems served approximately 1,613
basic subscribers and had a basic penetration rate of approximately 52%.
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On April 7, 1997, Galaxy sold its cable television system
located in Five Points, South Carolina (the "Five Points Sale"),
representing 311 basic subscribers for $372,645, or approximately $1,200
per subscriber. Galaxy used most of the proceeds from the Five Points Sale
to pay down principal of the revolving note.
On August 1, 1997, Galaxy sold its cable television systems located
in Lake Murray, South Carolina (the "Lake Murray Sale"), representing 587
subscribers for $587,000 or $1,000 per subscriber. Galaxy retained
ownership of all related equipment located in the two head-end facilities.
Galaxy used the proceeds from the Lake Murray Sale to pay down principal of
the revolving note.
On December 31, 1997, Galaxy sold its cable television systems
located in Lauderdale County, Mississippi (the "Lauderdale County Sale"),
representing 833 subscribers for $1.12 million or $1,350 per subscriber.
Galaxy used the proceeds from the Lauderdale County Sale to pay down
principal of the revolving note.
On December 31, 1997, Galaxy sold its cable television systems
located in South Kansas (the "South Kansas Sale"), representing 1,346
subscribers for $1.25 million or $932 per subscriber. Galaxy used the
proceeds from the South Kansas Sale to pay down principal of the revolving
note.
Pending Disposition
On January 15, 1998, Galaxy sold its cable television systems located
in Wyoming and Idaho (the "Wyoming Sale"), representing 4,000 subscribers
for $4.9 million or $1225 per subscriber. Galaxy used the proceeds from the
Wyoming Sale to pay down principal of the revolving note.
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.
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 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.
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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, 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 basic and premium programming primarily
through door-to-door selling efforts and telemarketing, and, to a lesser
degree, through media advertising and direct mail. Each of 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 within 35
days of the 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.
Galaxy's current monthly rates for full basic service range from $10.75
to $30.95 and rates for traditional premium services generally range from
$6.95 to $13.00 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.
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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 billing and one-time charges, additional
potential sources of revenue for cable operators are late fee charges and the
sale of local spot advertising time on locally originated and
satellite-delivered programming. Cable systems also generate revenue through
commissions from 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 programming on its basic
service. A few systems have been acquired that offer two tiers of basic
cable television programming service: a broadcast 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, 1997. To enhance value for its customers, Galaxy 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, Galaxy's systems now 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.
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 Galaxy 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.
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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 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. There has been a significant amount of new
cable television programming becoming available and Galaxy believes this
trend will continue and will be able to identify and take advantage of
available incentives associated with the additional channels and selectively
accommodate such expanding programming. Galaxy expects it will be able to
recover programming cost increases through rate increases.
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, 1997, 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, 1997.
Up to 29 30 to 53 54 or more
Channels Channels Channels Total
Systems:
Number of systems 14 420 23 457
Percent of total systems 3.1% 91.9% 5.0% 100%
Miles of plant 60 7,755 1,147 8,962
Percent of total plant miles 0.7% 86.5% 12.8% 100%
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 implemented 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. Galaxy generally plans to
continue to reduce the number of headends through consolidation in order to
take advantage of these efficiencies. 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.
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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 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.
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. Galaxy implemented its first
digital system in Booneville, Mississippi in December, 1997.
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.
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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
consolidates 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 centers 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 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, 1997, Galaxy held approximately 664 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."
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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
1998-2000 70 10.6%
2001-2003 135 20.3%
After 2003 459 69.1%
Total 664 100.0%
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, 1997, 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, Kentucky 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 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 multichannel video programming distributors
("MVPDs") that distribute the same or similar video programming offered by
cable television systems. 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, Galaxy 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.
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At the present time there are three different Direct Broadcast
Satellite ("DBS") providers offering comparable service. DBS services could
become a more 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 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.
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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.
Galaxy also competes with master antenna television ("MATV") systems
and satellite master antenna television ("SMATV") systems, which provide
multi-channel 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.
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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.
On June 28, 1996, the Supreme Court upheld cable operators' ability to
enforce prospective written policies against carrying programming that
depicts sexual or excretory activities on commercial leased access channels.
The Court also ruled that cable operators may not be required to block,
scramble and segregate indecent commercial leased access programming, finding
that this statutory provision violated cable operators' First Amendment
rights. The Court also struck down on First Amendment grounds the statutory
provision that enabled cable operators to prohibit obscene material, sexually
explicit conduct or material soliciting unlawful on Public, Educational and
Government ("PEG") channels.
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. The three-judge court
subsequently denied a request for a preliminary injunction, and the Supreme
Court affirmed this decision. The scrambling provisions became effective in
May 1997. The matter is still subject to a constitution challenge, and is
currently pending before the three-judge panel.
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Federal Regulation
The FCC is the principal federal regulatory agency with jurisdiction
over cable television. The FCC has promulgated regulations covering a broad
variety of areas, and is required to adopt additional regulations or repeal
or modify existing regulations to implement the 1996 Telecom Act. The FCC
may enforce its regulations through the imposition of fines, the issuance of
cease and desist orders and/or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate certain
transmission facilities often used in connection with cable operations. A
brief summary of certain federal regulations follows.
Rate Regulation. Prior to implementation of the 1992 Cable Act, most
cable systems were largely free to adjust cable service rates without
governmental approval. The 1992 Cable Act authorized rate regulation for
certain cable communications services and equipment in communities that are
not subject to "effective competition." The 1992 Cable Act requires the FCC
to resolve complaints about rates for non-basic cable programming services
and to reduce any such rates found to be unreasonable. It also limits the
ability of many cable systems to raise rates for basic and certain non-basic
cable programming services (collectively, the "Regulated Services"). Cable
services offered on a per channel or on a per program basis are not
subject to rate regulation by either franchising authorities or the FCC.
Notwithstanding the above, the 1996 Telecom Act immediately deregulates the
CPS rates of "small cable operators" and will deregulate the CPS rates of all
other cable operators by March 31, 1999.
The 1992 Cable Act requires communities to certify with the FCC before
regulating basic cable rates. Upon certification, the local community
obtains the right to approve basic rates. Certified franchising authorities
are also empowered to regulate rates charged for additional outlets and for
the installation, lease and sale of equipment used by customers to receive
the basic service tier, such as 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 180 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 establishing the reasonableness of
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.
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The 1992 Cable Act also requires cable systems to permit customers to
purchase video programming offered by the operator on a per channel or a
per program basis without the necessity of subscribing to any tier of
service, other than the basic service tier, unless the system's lack of
addressable converter boxes or other technological limitations does not
permit it to do so. The statutory exemption for cable systems that do
not have the technological capability to offer programming in the
manner required by the statute is available until a system obtains such
capability, but not later than December 2002. Systems facing effective
competition are not subject to the tier buy-through prohibition.
The 1996 Telecom Act deregulates immediately CPS rates for small cable
operators that have less than 50,000 subscribers in the franchise area. A
"small operator" is an operator that, with its affiliates, serves less than
1% of all subscribers in the United States (about 600,000 subscribers)
and is not affiliated with entities with annual aggregate gross revenues of
more than $250 million. Rates for basic service continue to be regulated,
however, unless the system had a single regulated tier as of December 31,
1994. For all other cable systems, the FCC's rate regulation authority
for CPS tiers expires March 31, 1999. Rates for basic tiers will continue to
be subject to regulation.
The 1996 Telecom Act allows cable operators to pass through franchise
fees and regulatory fees to subscribers without any prior notice. Notices
of other rate changes may be given by any reasonable written means, at the
cable operator's "sole discretion." Bulk discounts for multi-dwelling units
no longer must meet any uniform rate requirement. A cable operator need
not maintain uniform rates throughout a franchise area where there is
effective competition. In addition, franchising authorities may not file
complaints with the FCC unless they have actually received subscriber
complaints.
Carriage of Broadcast Television Signals. The 1992 Cable Act
established new signal carriage requirements. These requirements allow
commercial television broadcast stations which are "local" to a cable system,
to elect every three years whether to require the cable system to carry the
station, subject to certain exceptions, or whether to require the cable
system to negotiate for "retransmission consent" to carry the station. The
first 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 1992 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 WGN). 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 elections were made
for a second three-year period beginning 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.
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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.
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 jurisdictions 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 has cable franchises in all areas in which it
provides 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 MMDS or 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.
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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 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.
20
<PAGE>
The 1996 Telecom Act prohibits a LEC or its affiliate from acquiring
more than a 10 percent financial or management interest in any cable
operator providing cable service in its telephone service area. It also
prohibits a cable operator or its affiliate from acquiring more than a 10
percent financial or management interest in any LEC providing telephone
exchange service in its franchise area. A LEC and cable operator whose
telephone service area and cable franchise area are in the same market may
not enter into a joint venture to provide telecommunications services or
video programming. There are exceptions to these limitations for rural
facilities, very small cable systems, and small LECs in non-urban areas.
The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted Grade B contour covers any portion of the
community served by the cable system. The 1996 Telecom Act repeals
this statutory restriction on broadcast-cable cross-ownership, but does not
require the FCC to repeal its cross-ownership rule. 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.
21
<PAGE>
Anti-Trafficking. The 1996 Telecom Act repeals most of the
anti-trafficking restrictions imposed by the 1992 Cable Act, which
prevented a cable operator from selling or transferring ownership of a
cable system within 36 months of acquisition. However, a local franchise
may still require prior approval of a transfer or sale. The 1992 Cable
Act requires franchising authorities to act on a franchise transfer request
within 120 days after receipt of all information required by FCC
regulations and the franchising authority. Approval is deemed granted if
the franchising authority fails to act within such period.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for
making semi-annual payments to a federal copyright royalty pool and
meeting certain other obligations, cable operators obtain a statutory
license to retransmit broadcast signals. The amount of the royalty payment
varies, depending on the amount of system revenues from certain sources,
the number of distant signals 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.
Television Violence. The Telecom Act of 1996 directed the broadcast
and cable television industries to develop and transmit an encrypted rating
in all video programming that, when used in conjunction with so-called
"V-Chip" technology, would permit the blocking of programs with a common
rating. On March 12, 1988, the FCC voted to accept an industry proposal
providing for a voluntary ratings system of "TV Parental Guidelines" under
which all video programming will be designated in one of six categories in
order to permit the electronic blocking of selected video programming. The
FCC has begun a separate proceeding to address technical issues related to
the "V-Chip". The FCC has directed that all television receiver models with
picture screens 13 inches or greater be equipped with "V-Chip" technology
under a phased implementation beginning July 1, 1999. Galaxy cannot predict
how changes in the implementation of the ratings system and "V-Chip"
technology will affect Galaxy's business.
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 1997, cable television systems were
required to pay regulatory fees of $0.59 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.
22
<PAGE>
In December 1994, the FCC adopted new cable television and broadcast
technical standards to support a new Emergency Alert System. Cable
operators were required to install and activate equipment necessary to
implement the new Emergency Broadcast System by July 1, 1997. At the present
time, the FCC has delayed this requirement for small operators.
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 substantially
revised communications regulation in the United States. The legislation
was 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 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 area immediately.
BOCs may offer interLATA services inside their local exchange service area
(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.
23
<PAGE>
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 FCC has eliminated the tariff filing
requirement for domestic nondominant carriers, but that order has been stayed
pending judicial review. 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.
Additional Requirements. The FCC imposes a number of additional
obligations on all telecommunications carriers, including the obligation to:
(1)interconnect with other carriers and not to install equipment that cannot
be connected with the facilities of other carriers; (2) ensure that their
services are accessible and usable by persons with disabilities; (3) provide
Telecommunications Relay Service ("TRS"), either directly or through
arrangements with other carriers or service providers (TRS enables hearing
impaired individuals to communicate by telephone with hearing individuals
through on operator at a relay center); (4) comply with verification
procedures in connection with changing the presubscribed interexchange
carrier of a customer so as to prevent "slamming," a practice by which a
customer's chosen long distance carrier is switched without the customer's
knowledge; (5) protect the confidentiality of proprietary information
obtained from other carriers, manufacturers and customers; (6) pay annual
regulatory fees to the FCC; and (7) contribute to the Telecommunications
Relay Services Fund
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, 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.
Proposed Changes
The Congress and the FCC have under consideration, and in the future
may consider and adopt, new laws, regulations and policies regarding a wide
variety of matters that could affect, directly or indirectly, the operation,
ownership and profitability of Galaxy's broadcast and cable programming
networks. In addition to the changes and proposed changes noted above, such
matters include, for example, spectrum use fees, political advertising rates,
potential restrictions on the advertising of certain products (beer, wine and
hard liquor, for example), proposals to change the rates and structure of the
cable compulsory copyright license, and the rules and policies to be applied
in enforcing the FCC's equal opportunity regulations. Other matters that
could affect Galaxy's regulated media businesses include technological
innovations and developments generally affecting competition in the mass
communications industry, such as direct radio and television broadcast
satellite service, the continued establishment of wireless cable systems,
digital television and radio technologies, and the advent of telephone
company participation in the provision of video programming service.
24
<PAGE>
Employees
As of December 31, 1997, Galaxy had approximately 453 full-time
employees and 82 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 to
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 III, 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, 1993 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,
1996 and 1997 and the balance sheets data as of December 31, 1996 and 1997
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
1994 to 1994 to
Dec. 22 Dec. 31
1993 1994 1994 1995 (b) 1996 (b) 1997(b)
---- ---- ---- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Statement of Operations Data:
Revenues $ 27,285 $ 27,117 $ 577 $ 29,995 $ 62,337 $ 68,808
Operating expenses:
Systems operations 9,938 10,338 260 13,219 28,353 31,503
Selling, general and administrative 4,722 5,272 99 3,681 6,439 8,130
Management fee to affiliate 1,320 1,316 32 1,605 2,804 3,092
Depreciation and amortization 15,681 14,541 214 10,206 21,739 24,673
-------- -------- -------- -------- -------- --------
Total operating expenses 31,661 31,467 605 28,711 59,335 67,398
-------- -------- -------- -------- -------- --------
Operating income (loss) (4,376) (4,350) (28) 1,284 3,002 1,410
Interest expense (6,229) (6,015) (153) (10,442) (20,133) (21,037)
Other income (expense) 37 (248) 6 608 219 (421)
-------- -------- -------- -------- -------- --------
Net loss $(10,568) $(10,613) $ (175) $ (8,550) $(16,912) $(20,048)
======== ======== ======== ======== ======== ========
EBITDA (a) $ 11,305 $ 10,191 $ 186 $ 11,490 $ 24,741 $ 26,083
Balance Sheet Data (at end of period):
Total assets $102,736 $199,913 $217,498 $207,048
Total long-term debt and other obligations 67,215 145,527 169,738 179,250
Partners' capital 35,521 42,171 25,259 5,211
</TABLE>
(a) EBITDA represents income (loss) before interest expense, income
taxes, depreciation and amortization, and other income (expense).
EBITDA is not presented in accordance with generally accepted
accounting principles 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.
26
<PAGE>
(b) In December 1995, except for the Cameron systems which were acquired
in March 1995, Galaxy acquired certain cable television systems which
were recorded under the purchase method of accounting. As a result,
the Consolidated Statement of Operations of Galaxy for the periods
subsequent to the acquisitions are not comparative to prior periods.
In addition, Galaxy acquired various cable systems during fiscal 1996
and 1997, which were insignificant in the aggregate to Galaxy's
on-going operations. (See "Business-1996 Acquisitions and Trades" and
"Business-1997 Acquisitions and Dispositions).
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 an
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 year ended December 31, 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 1995
acquisitions had been acquired as of January 1, 1995. 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. The discussion of results of operations for the
years ended December 31, 1996 and 1997 reflects the actual financial data for
the Systems for the years then ended.
Results of Operations
Overview
In each of the past three years, the Initial Systems have generated
substantially all of their revenues from fees for monthly basic and premium
subscriptions and from one-time charges such as late fees and 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 rate
increases. 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, Galaxy believes it will be able 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.
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:
27
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- --------
% of % of % of
Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 29,995 100.0% $ 62,337 100.0% $ 68,808 100.0%
Operating expenses:
System Operations 13,219 44.1% 28,353 45.5% 31,503 45.8%
Selling, general and administrative 3,681 12.2% 6,439 10.3% 8,130 11.8%
Management fee to affiliate 1,605 5.3% 2,804 4.5% 3,092 4.5%
Depreciation and amortization 10,206 34.0% 21,739 34.9% 24,673 35.9%
-------- ----- -------- ----- -------- -----
Total operating expenses 28,711 95.7% 59,335 95.2% 67,398 98.0%
-------- ----- -------- ----- -------- -----
Operating income (loss) 1,284 4.3% 3,002 4.8% 1,410 2.0%
Interest expense (10,442) (34.8%) (20,133) (32.3%) (21,037) (30.5%)
Other income (expense) 608 (2.0%) 219 0.4% (421) (0.6%)
-------- ----- -------- ----- -------- -----
Net loss $ (8,550) (28.5%) $(16,912) (27.1%) $(20,048) (29.1%)
======== ===== ======== ===== ======== =====
EBITDA (a) $ 22,800 39.7% 24,741 39.7% 26,083 37.9%
</TABLE>
(a) EBITDA represents income (loss) before interest expense, income taxes,
depreciation and amortization, and other income (expense). EBITDA is
not presented in accordance with generally accepted accounting
principles 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.
1997 Compared to 1996
Revenues increased 10.4%, or approximately $6.5 million, from 1996 to
1997. The increase in revenues resulted primarily from an increase in basic
rates in some Systems during the year, offset somewhat by a reduction in the
number of basic subscribers during fiscal year 1997.
Systems operations expenses increased 11.1%, or approximately $3.1
million, from 1996 to 1997. 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 slightly
from 45.5% in 1996 to 45.8% in 1997.
Selling, general and administrative expenses increased 26.3%, or
approximately $1.7 million, from 1996 to 1997. Selling, general and
administrative expenses, as a percentage of revenues, increased to 11.8% in
1997 from 10.3% in 1996. The increase was due primarily to an increase in
selling costs in an effort to spur subscriber growth in the Systems.
Management fees increased 10.3%, or approximately $0.3 million, from
1996 to 1997. The increase was directly proportionate to the increase in
revenue.
Depreciation and amortization expense increased 13.5%, or approximately
$2.9 million, from 1996 to 1997. Depreciation and amortization increased
from 34.9% of revenues in 1996 to 35.9% of revenues in 1997. This increase
is due to the increase in fixed assets during the comparable periods.
Interest expense increased 4.5%, or approximately $0.9 million, from
1996 to 1997. Interest expense, as a percentage of revenues, decreased from
32.3% in 1996 to 30.6% in 1997 because of lower interest rates for bank debt
during 1997. Interest income decreased 34.4% from 1996 to 1997 due to
lower cash balances in 1997.
28
<PAGE>
Other income (expense), net went from income of $182,711 during 1996 to
a net expense of $445,003 during 1997. This change of $0.6 million was
mainly due to a loss on sale of assets during 1997 in the amount of $0.2
million.
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
18.5%, or approximately $3.1 million, from 1996 to 1997. As a
percentage of revenues, net loss increased from 27.1% in 1996 to 29.0% in
1997.
EBITDA increased 5.4%, or approximately $1.3 million, from 1996 to
1997, due primarily to the increase in revenues. As a percentage of
revenues, EBITDA decreased from 39.7% in 1996 to 37.9% in 1996, primarily as
a result of the increases in system operation expenses and selling, general
and administrative expenses discussed above. EBITDA represents income (loss)
before interest expense, income taxes, depreciation and amortization, and
other income (expense). EBITDA is not presented in accordance with generally
accepted accounting principles 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.
1996 Compared to 1995
Revenues increased 107.8%, or approximately $32.3 million, from 1995
to 1996. This is a result of the acquisitions during 1995 discussed below.
System operations expenses increased 114.5%, or approximately $15.1
million, from 1995 to 1996. Systems operations expenses, as a percentage of
revenues, increased from 44.1% in 1995 to 45.5% in 1996. These increases
were a result of the acquisitions made during 1995.
Selling, general and administrative expenses increased 74.9%, or
approximately $2.8 million, from 1995 to 1996. The increase in expenses was a
result of the acquisitions made during 1995. Selling, general and
administrative expenses, as a percentage of revenues, decreased from 12.3%
in 1995 to 10.3% in 1996. This decrease was due primarily to Galaxy's ability
to administer to additional customers as a result of the acquisition of
systems during 1995 through the existing call centers.
Management fees to affiliate increased 74.7%, or approximately $1.2
million, from 1995 to 1996. Management fees are calculated as a percentage
of revenue. In December, 1995, such fees were adjusted from 5.5% of revenue
to 4.5% of revenue.
Depreciation and amortization expense increased 113.0%, or
approximately $11.5 million, from 1995 to 1996. As a percentage of revenues,
depreciation and amortization increased from 34.0% in 1995 to 34.9% in 1996.
The increase in expense was a result of the acquisitions made during 1995.
Interest expense increased 92.8%, or approximately $9.7 million, from
1995 to 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 34.8% in 1995 to 32.3% in 1996.
This decrease was achieved mainly due to the increase in revenues and, to a
lesser extent, by placing a greater percentage of the Revolving and Term Loan
under the LIBOR interest rate option.
Other income (expense), net went from income of $608,405 during 1995 to
income of $218,839, or 0.4% of revenues in 1996. The change of
approximately $0.4 million is primarily attributable to a decrease in
interest income of approximately $570,000 as a result of less cash on hand
during 1996.
29
<PAGE>
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
97.8%, or approximately $8.4 million, from 1995 to 1996. As a percentage
of revenues, net loss increased from 28.5% in 1995 to 27.1% in 1996.
EBITDA increased approximately $13.3 million, or 115.3%, from 1995 to
1996, and, as a percentage of revenues, EBITDA from 38.3% in 1995 to 39.7% in
1996.
1995 Acquisitions
Galaxy Cablevision Acquisition. 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 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%.
30
<PAGE>
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 Galaxy, 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 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 approximately
11,771 homes located in Kansas, with 347 miles of plant, for a density of
approximately 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%.
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 approximately 580
homes located in Kansas, with 20 miles of plant, for a density of
approximately 29 homes per mile. The High Plains Systems served
approximately 270 basic subscribers and had a basic penetration rate of
approximately 46.6%.
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
$1.4 million. As of the closing date, the Midcontinent Systems passed
approximately 1,853 homes located in Nebraska, with 32 miles of plant, for
a density of approximately 57.9 homes per mile. The Midcontinent Systems
served 1,328 basic subscribers and had a basic penetration rate of
approximately 71.7%.
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 $0.5
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
approximately 30.4 homes per mile. The Five Rivers System served 588 basic
subscribers and had a basic penetration rate of approximately 80.5%.
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 approximately 36.6 homes per mile. The Hurst Systems served
1,371 basic subscribers and had a basic penetration rate of 74.9%.
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 closing date. As of the closing date, the
TCI Systems passed approximately 16,900 homes, with 729 miles of plant,
resulting in a density of approximately 23.2 homes per mile. The TCI Systems
served approximately 10,363 basic subscribers and had a basic penetration
rate of approximately 61.3%.
31
<PAGE>
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 CS Cable Systems 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.
1997 Acquisitions and Dispositions
TCI Cable of the Midland - Sarpey County Systems. On September 1, 1997,
Galaxy acquired certain assets comprising the cable television systems of
TCI Cable of the Midland (the "Sarpey County Systems"), located in Sarpey and
Douglas counties, for a purchase price of approximately $875,000. At
September 1, 1997, the Sarpey County Systems passed approximately 3,000 homes
located in Nebraska, with approximately 80 miles of plant, for a density of
39 homes per mile. The Sarpey County Systems served approximately 1,613
basic subscribers and had a basic penetration rate of approximately 52%.
On April 7, 1997, Galaxy sold its cable television system
located in Five Points, South Carolina (the "Five Points Sale"),
representing 311 basic subscribers for $372,645, or approximately $1,200
per subscriber. Galaxy used most of the proceeds from the Five Points Sale
to pay down principal of the revolving note.
On August 1, 1997, Galaxy sold its cable television systems located
in Lake Murray, South Carolina (the "Lake Murray Sale"), representing 587
subscribers for $587,000 or $1,000 per subscriber. Galaxy retained
ownership of all related equipment located in the two head-end facilities.
Galaxy used the proceeds from the Lake Murray Sale to pay down principal of
the revolving note.
On December 31, 1997, Galaxy sold its cable television systems
located in Lauderdale County, Mississippi (the "Lauderdale County Sale"),
representing 833 subscribers for $1.12 million or $1,350 per subscriber.
Galaxy used the proceeds from the Lauderdale County Sale to pay down
principal of the revolving note.
On December 31, 1997, Galaxy sold its cable television systems
located in South Kansas (the "South Kansas Sale"), representing 1,346
subscribers for $1.25 million or $932 per subscriber. Galaxy used the
proceeds from the South Kansas Sale to pay down principal of the revolving
note.
Pending Disposition
On January 15, 1998, Galaxy sold its cable television systems located
in Wyoming and Idaho (the "Wyoming Sale"), representing 4,000 subscribers
for $4.9 million or $1225 per subscriber. Galaxy used the proceeds from the
Wyoming Sale to pay down principal of the revolving note.
32
<PAGE>
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 selective 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
received equity from Vantage Cable totaling approximately $6.4 million.
Galaxy had an aggregate of $179.2 million of indebtedness as of December 31,
1997, representing $119.5 million of senior subordinated notes, $59.2 million
drawn under Galaxy's revolving line of credit (See "The Revolving Credit
Facility and Term Loan"), and $0.5 million in various other obligations. Net
borrowings were made under Galaxy's revolving line of credit of approximately
$23 million during fiscal 1997. Galaxy anticipates that operating cash
flows, borrowings under its revolving line of credit and sales proceeds of
assets sold outside its Core Areas will provide sufficient funds necessary to
meet debt service, working capital and capital expenditure needs.
Capital Expenditures
During 1997, Galaxy's capital expenditures (exclusive of system
acquisitions) were approximately $16.4 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 will 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. 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, proceeds from system sales
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 $63.0 million
until December 31, 1998, subject to compliance with certain conditions,
including certain financial covenants. 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 Bank of New York 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.
33
<PAGE>
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.
Outlook
Galaxy's computer software programs utilize four digits to define the
applicable year and therefore Galaxy believes it has no internal risk
concerning the Year 2000 issue. Any problems Galaxy's suppliers and
customers may have related to this issue are not expected to affect Galaxy.
Galaxy has not incurred any costs related to this issue and is not expecting
to incur any such costs in the future.
Inflation
Galaxy does not believe that inflation in the United States in recent
years has had a significant effect on results on operations.
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 of 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
1998; 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.
34
<PAGE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997.
Management does not believe the implementation of these recent
accounting pronouncements will have a material effect on its consolidated
financial statements.
Item 7a. Qualitative and Quantitative Disclosures about Market Risks.
Not applicable.
35
<PAGE>
Item 8. Financial Statement and Supplementary Data.
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, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Partners' Capital for the
Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-23
</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 orfinancial statement schedule.
F-1
<PAGE>
Report of Independent Accountants
To the Partners
Galaxy Telecom, L.P.
We have audited the consolidated financial statements and the financial
statement schedule of Galaxy Telecom, L.P. and Subsidiary (the
"Partnership") listed in the index on page F-1 of this Form 10-K. These
consolidated financial statements and financial statement schedule are
the responsibility of the Partnership's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Galaxy Telecom, L.P. and Subsidiary as of December 31, 1997
and 1996 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 3, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 2,403,098 $ 2,338,345
Subscriber receivables, net of allowance for doubtful accounts
$154,692 and $411,950, respectively 5,424,260 5,998,127
Systems and equipment, net 138,729,592 144,822,616
Intangible assets, net 57,193,102 62,330,152
Prepaids and other 3,297,573 2,008,768
------------- -------------
Total assets $ 207,047,625 $ 217,498,008
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 17,152,286 $ 17,738,261
Subscriber deposits and deferred revenue 5,434,097 4,763,327
Long-term debt and other obligations 179,250,312 169,737,608
------------- -------------
Total liabilities 201,836,695 192,239,196
Commitments and contingencies
Partners' capital:
General partners (1,790,070) 18,257,812
Limited partners 7,001,000 7,001,000
------------- -------------
Total partners' capital 5,210,930 25,258,812
------------- -------------
Total liabilities and partners' capital $ 207,047,625 $ 217,498,008
============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 68,807,763 $ 62,337,218 $ 29,995,187
Operating expenses:
Systems operations 31,502,762 28,353,154 13,219,170
Selling, general and administrative 8,129,733 6,439,308 3,680,945
Management fee to affiliate 3,092,354 2,804,374 1,605,404
Depreciation and amortization 24,672,569 21,738,425 10,205,635
------------ ------------ ------------
Total operating expenses 67,397,418 59,335,261 28,711,154
------------ ------------ ------------
Operating income 1,410,345 3,001,957 1,284,033
Interest expense (21,036,934) (20,132,735) (10,442,205)
Interest income 23,710 36,128 680,992
Other income (expense), net (445,003) 182,711 (72,587)
------------ ------------ ------------
Net loss $(20,047,882) $(16,911,939) $ (8,549,767)
============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Limited Partners
General ----------------------------------------------------------------------
Partners Class B Class C Class D Class E Total Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995 $ 28,719,518 $ 1,000 $ 416,000 $ 6,384,000 $ -- $ 6,801,000 $ 35,520,518
Contributions 15,000,000 -- -- -- 200,000 200,000 15,200,000
Net loss (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 (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
Net loss (20,047,882) -- -- -- -- -- (20,047,882)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1997 $ (1,790,070) $ 1,000 $ 416,000 $ 6,384,000 $ 200,000 $ 7,001,000 $ 5,210,930
============ ============ ============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (20,047,882) $(16,911,939) $(8,549,767)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 20,554,588 17,646,096 7,020,550
Amortization expense 4,117,981 4,092,330 3,185,085
Amortization included in interest expense 934,770 1,294,650 801,058
Financeable interest -- 597,849 446,046
Provision for doubtful accounts receivable 1,992,318 1,229,536 383,547
(Gain)/loss on disposal of equipment 226,185 (183,095) 72,587
Changes in assets and liabilities:
Subscriber receivables (1,418,451) (3,715,522) (2,023,046)
Prepaids and other (1,288,805) (397,610) (258,916)
Accounts payable and accrued expenses (1,637,383) 7,751,279 5,241,429
Subscriber deposits and deferred revenue 670,770 2,116,914 1,328,391
------------- ------------- -------------
Net cash provided by operating activities 4,104,091 13,520,488 7,646,964
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of cable systems - net of trades (825,000) (16,009,136) (95,614,673)
Proceeds from sale of capital assets 3,304,334 683,171 2,101,345
Acquisition of capital assets (15,222,381) (21,397,549) (4,815,014)
Other intangible assets (536,197) (873,882) (164,248)
------------- ------------- -------------
Net cash used in investing activities (13,279,244) (37,597,396) (98,492,590)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings under term debt and revolver 12,400,000 38,226,377 20,850,000
Payments under term debt and revolver (3,051,377) (14,893,894) (59,000,000)
Net (payments) borrowings on other debt (108,717) 60,738 5,215
Proceeds from bond issue -- -- 119,400,000
Payment of debt issue costs -- (408,803) (4,869,164)
Partners' contributions -- -- 15,000,000
Net cash provided by financing activities 9,239,906 22,984,418 91,386,051
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 64,753 (1,092,490) 540,425
Cash and cash equivalents, beginning of period 2,338,345 3,430,835 2,890,410
------------- ------------- -------------
Cash and cash equivalents, end of period $ 2,403,098 $ 2,338,345 $ 3,430,835
============= ============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO 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 in sixteen states, predominantly including
Mississippi, Nebraska, Kansas, Missouri, Illinois, Kentucky, Iowa,
Alabama, Georgia and Florida.
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 (see Note 6).
Capital Corp. does not and is not expected to have operations other than
its related purpose as co-issuer.
Partners
The general partners include Galaxy Telecom Investments, L.L.C. and
Galaxy Telecom, Inc. with 99% and 1% interests, respectively. The
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
partners' unreturned contributions. Limited partner priority returns
range from 9 percent to 10 percent through 1999 with general partner
priority returns of up to 35 percent. The cumulative priority return
totaled approximately $57,552,882, $31,290,847 and $11,696,000 at
December 31, 1997, 1996 and 1995, 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.
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 percent to general partners in proportion to their
percentage interest and 5.95 percent to Class B limited partner to the
extent all distributions to the general partners equal to the second
priority return.
F-7
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Organization, continued:
Distributions, continued
Thereafter, 88.10 percent to the general partners in proportion to their
percentage interest and 11.90 percent 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. There were no cash
equivalents at December 31, 1997 and 1996.
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 the federally insured limit
totaled approximately $2.0 million and $3.5 million at December 31, 1997
and 1996, respectively. Though limited primarily to cable television
subscribers, the concentration of credit risk with respect to
receivables is minimized by geographical dispersion through
approximately 457 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.
F-8
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") 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 (see Note 6) are valued using the closing bid
price market quotes, and as a result, the fair value of the Notes at
December 31, 1997 and 1996 was $133,200,000 and $129,588,000,
respectively. Based on borrowing rates currently available to Galaxy for
similar debt, the fair value of the revolver debt closely approximates
its carrying value at December 31, 1997 and 1996.
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 $1,515,686, $243,000 and $569,000 for the years
ended December 31, 1997, 1996 and 1995.
Federal Income Taxes
The Partnership as an entity pays no income taxes, although it is
required to file federal and state income tax returns for informational
purposes only. All income or loss "flows through" to the individual
partners as specified in the Partnership agreement.
The differences between the results of operations presented in these
consolidated 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
operations 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 operations.
F-9
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
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 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.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year's presentation.
F-10
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December
15, 1997.
Management does not believe the implementation of these recent
accounting pronouncements will have a material effect on its
consolidated financial statements.
3. Acquisition of Cable Television Systems:
1997 Acquisitions and Trades
During 1997, the Partnership did not acquire or trade any significant
cable television systems.
F-11
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Acquisition of Cable Television Systems, continued:
1996 Acquisitions and Trades
During 1996, the Partnership acquired certain cable television systems
recorded under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16 as follows:
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
acquisition
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-12
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The operating results for each acquired cable television system are
included in the Partnership's results of operations from the date of
acquisition. The acquisitions are not presented in a pro forma format as
the acquisitions, individually and in the aggregate, are immaterial to
the consolidated financial statements taken as whole.
4. Systems and Equipment:
Systems and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
Depreciation Estimated usage -------------------------
Method and life term 1997 1996
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cable television distribution
systems:
Head-end Straight-line 7 years $ 36,996,781 $ 34,398,590
Distribution plant Straight-line 12 years 106,353,799 99,852,377
Subscriber drops Straight-line 5 years 27,184,290 24,282,076
Other distribution -- -- 1,023,188 889,917
------------- -------------
171,558,058 159,422,960
Other:
Vehicles Straight-line 5 years 4,924,324 4,684,292
Buildings Straight-line 5 years 1,808,057 1,754,979
Furniture, fixtures and equipment Straight-line 5 years 5,127,605 4,084,463
Land -- -- 94,000 95,000
------------- -------------
183,512,044 170,041,694
Accumulated depreciation (45,072,932) (25,219,078)
------------- -------------
Systems and equipment, net $ 138,439,112 $ 144,822,616
============= =============
</TABLE>
5. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
Amortization Amortization -----------------------
Method Period 1997 1996
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Goodwill, franchise costs and
subscriber lists Straight-line 15 years $ 60,848,942 $ 61,532,820
Debt issuance costs:
Senior Subordinated Notes Level yield 10 years 5,402,197 5,399,954
Revolver and Term Loan Level yield 8 years 2,778,347 2,678,212
Organization costs and other Straight-line 5 years 812,858 476,271
------------ ------------
69,842,344 70,087,257
Accumulated amortization 12,649,243) (7,757,105)
------------ ------------
Intangible assets, net $ 57,193,102 $ 62,330,152
============ ============
</TABLE>
F-13
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt:
Outstanding long-term debt is as follows:
December 31,
-----------------------------
1997 1996
------------- -------------
Revolving Credit Facility $59,225,000 $ 49,876,377
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (465,000) (525,000)
Other 490,312 386,231
------------- -------------
Total $ 179,250,312 $ 169,737,608
============= =============
Senior Subordinated Notes
Pursuant to an indenture dated September 28, 1995 (the "Indenture")
between the Partnership and Capital Corp., (together, the "Issuers"),
and the Bank of New York, which acquired Boatmen's Trust Company, as
trustee (the "Trustee"), the Partnership issued $120 million aggregate
principal amount of senior subordinated obligations (the "Notes")
maturing in October 2005. The Notes bear interest at a 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 percent 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 percent of the
principal amount at a redemption price of 112.375 percent 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 percent in
2000 to 100 percent in 2003 and thereafter. Subject to certain
conditions, the Partnership may at any time defease the Notes.
F-14
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
Senior Subordinated Notes, continued
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 1996 or
1997.
Revolving Credit Facility and Term Loan
Effective September 28, 1995, Loan A of the Term Debt (the Loan
Agreement) was amended into a Revolving Credit Facility. The Revolving
Credit Facility has been periodically amended with the latest amendment
occurring in December 1997 which allows the Partnership to borrow up to
$68 million until December 1997 when the outstanding balance converts
to a term loan payable in quarterly installments escalating annually
from 6 percent to 30 percent 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 plus 1.75% (10.25%
and 10% at December 31, 1997 and 1996, respectively), payable quarterly,
subject to reductions of up to 0.75% 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 (LIBOR plus 3.25%) which is also subject to reductions of up to
0.75% upon achievement of certain financial tests. At December 31, 1997
and 1996, $59,225,000 and $38,685,000, respectively, of the Revolving
Credit Facility had been converted to an adjusted LIBOR rate at 8.875%
and 8.750%, respectively. The Partnership is required to pay a 0.50% per
annum commitment fee on the unfunded portion of the Revolving Credit
Facility.
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-15
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
Term Loan, 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 March 1 beginning
in 1999, 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, or asset sales with net
proceeds of 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 percent cash, or to the extent of total
insurance proceeds exceeding $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-16
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt, continued:
Five Year Maturities
The required principal payments on the Company's long-term debt and
obligations under capital leases at December 31, 1997, assuming no
additional borrowings, is as follows:
1998 $ 3,645,189
1999 9,765,086
2000 13,075,045
2001 15,449,065
2002 17,780,927
Thereafter 120,000,000
--------------
$ 179,715,312
==============
7. Supplemental Disclosure of Cash Flow Information:
Interest payments during 1997, 1996 and 1995 were approximately $20.8
million, $20.0 million, and $4.9 million, respectively.
Noncash transactions for the year ended December 31, 1997 were as
follows:
Capital expenditures of approximately $1,346,000 included in accounts
payable.
Acquisition of equipment through issuance of capital leases payable
totaling $212,800.
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 $5,993,605 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 of $82,225.
F-17
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO 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.
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.
("GSMI"), 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
percent of gross revenues as defined in the management agreement through
November 1995, whereupon systems acquisitions trigger a reduction in the
fee to 4.5 percent of gross revenues. Management fees and reimbursed
expenses approximated $3,409,000, $3,071,000 and $1,888,000 for the
years ended December 31, 1997, 1996 and 1995. The management fee rate is
subject to further pro rata reductions to a minimum of 3.5 percent 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. There was no management fee payable
at December 31, 1997 and 1996. 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 $287,000 and $265,000 as of December 31, 1997 and 1996,
respectively, of which approximately $118,000 and $265,000 as of
December 31, 1997 and 1996, respectively, represent receivables from
GSMI.
F-18
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO 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 2002. The lease agreements
generally provide purchase options at the end of the original lease
terms. Future minimum lease payments under non-cancelable capital leases
consist of the following:
Year Ending
December 31,
1998 $ 119,455
1999 86,474
2000 54,896
2001 54,896
2002 13,724
Total minimum lease payments 329,445
Less amounts representing interest (53,495)
----------
Obligations under capital leases $ 275,950
==========
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 $346,343, $298,000 and $100,000 during 1997, 1996 and 1995,
respectively.
Future minimum lease payments under operating leases with initial or
remaining lease terms of more than one year are as follows:
Year Ending
December 31,
1998 $ 335,513
1999 286,730
2000 251,273
2001 235,678
2002 205,108
Thereafter -
-----------
$ 1,314,302
===========
In addition, the Partnership, as an integral part of its cable
operations, has entered into short-term lease contracts for pole usage.
Rent expense approximated $1,143,000, $1,177,000 and $433,000 for the
years ended December 31, 1997, 1996 and 1995, respectively, under such
contracts.
F-19
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO 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 $197,506, $150,480 and $41,000 to the plan during 1997, 1996
and 1995, respectively.
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 offer marketing support to the
Partnership in the form of advertising funds, promotional materials,
rebates and other incentives. The Partnership's programming contracts
are generally for a fixed period of time, typically three to five years,
and are subject to negotiated renewal.
Cable Service Rate Regulation
In October 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act 1992 (the "1992 Cable Act"). In 1993 and
1994, the Federal Communications Commission ("FCC") adopted certain rate
increases. As a result of such actions, the Partnership'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-20
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO 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.
Year 2000 Compliance
Galaxy's computer software programs utilize four digits to define the
applicable year and therefore Galaxy believes it has no internal risk
concerning the Year 2000 issue. Any problems Galaxy's suppliers and
customers may have related to this issue are not expected to affect the
Company. Galaxy has not incurred any costs related to this issue and is
not expecting to incur any such costs in the future.
Litigation
Galaxy is subject to various legal and administrative proceedings in the
ordinary course of business. Management believes the outcome of any such
proceedings will not have a material adverse effect on Galaxy's
consolidated financial position, results of operations and cash flows.
9. Quarterly Data, Unaudited:
The results of operations for each quarter in 1997 were as follows
(thousands of dollars):
First Second Third Fourth
Quarter Quarter Quarter Quarter
Revenue $ 16,666 $ 17,305 $ 17,363 $ 17,474
Operating income 493 586 124 207
Net loss (4,631) (4,856) (5,291) (5,270)
F-21
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Quarterly Data, Unaudited, continued:
The results of operations for each quarter in 1996 were as follows
(thousands of dollars):
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) (4,834) (4,009) (4,636)
The results of operations for the quarters in 1996 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.
10. Subsequent Event:
F-22
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALAXY TELECOM, L.P. AND SUBSIDIARY
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, 1997:
Reserve and allowance deducted
from asset accounts-allowance
for uncollectible accounts $ 411,950 $ 1,992,318 $ - $2,249,576 (2) $ 154,692
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
(1) Allowance for uncollectible purchased accounts.
(2) Uncollectible accounts written off, net of recoveries.
</TABLE>
F-23
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
36
<PAGE>
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.....52 President, Chief Executive Officer and
Director of Galaxy Management and Galaxy GP
J. Keith Davidson........42 Executive Vice President, Treasurer,
Secretary and Director of Galaxy
Management and Galaxy GP
James M. Gleason.........34 Chief Operating Officer of Galaxy
Management and Galaxy GP
Terry M. Cordova.........36 Vice President - Engineering of Galaxy
Management
Ronald Voss..............54 Vice President - Corporate Development of
Galaxy Management
William P. Collatos......43 Director of Galaxy GP
Kenneth T. Schiciano.....35 Director of Galaxy GP
Richard D. Tadler........41 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 Galaxy 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.
J. Keith Davidson has served as Executive Vice President, Chief
Financial Officer, Treasurer, Secretary of Galaxy Management and Galaxy GP,
director of Galaxy Management 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 17 years of experience in the cable television industry.
37
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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
16 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 16 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 17 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.
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 1993, Mr.
Tadler was a general partner of TA Associates. Mr. Tadler is a director of
TechForce Corporation.
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, 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").
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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 Galaxy. 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,
1997, 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
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.
39
<PAGE>
(1) Share and unit ownership amounts have been rounded to the nearest
whole number.
(2) Includes 19,524 shares of Class A Voting Common Stock of Galaxy GP
("Class A Stock") owned by Advent Atlantic and Pacific II L.P., 7,040 shares
of Class A Stock owned by Advent Industrial II L.P., 3,282 Class A Stock
owned by Advent New York, L.P., 32,820 shares of Class A Stock owned by
Advent VII L.P., and 615 shares of Class A Stock owned by TA Venture
Investors Limited Partnership. Includes 6 units of Common Interests in
Galaxy Investments ("Common Interests") owned by Advent VII Investor Corp.
Includes 3,452,523 units of Voting Preferred Interests in Galaxy Investments
("Voting Preferred Interests") owned by Advent VII Investor Corp. All of the
above beneficial owners are part of an affiliated group of investment
partnerships and companies referred to, collectively, as the TA
Associates Group. Messrs. Tadler and Schiciano, Directors of Galaxy GP
and managers of Galaxy Investments, are a Managing Director and a
Principal, respectively, of TA Associates, Inc., which is the sole
general partner of TA Associates VII L.P., TA Associates VI L.P. and TA
Associates AAP II Partners L.P. TA Associates VII L.P. is the sole
general partner of Advent VII L.P. TA Associates is the sole general partner
of Advent New York L.P. and Advent Industrial II L.P. TA Associates AAP II
Partners L.P. is the sole general partner of Advent Atlantic and Pacific II
L.P. TA Associates, Inc. exercises sole voting and investment power with
respect to all of the shares or units, as the case may be, held of
record by the named investment partnerships, with the exception of those
shares of Class A Stock held by TA Venture Investors Limited Partnership.
Principals and employees of TA Associates, Inc. (including Messrs. Tadler and
Schiciano) comprise the general partners of TA Venture Investors Limited
Partnership. In such capacity, each of Messrs. Tadler and Schiciano may be
deemed to share voting and investment power with respect to 615 shares of
Class A Stock held of record by TA Venture Investors Limited Partnership.
Messrs. Tadler and Schiciano each disclaim beneficial ownership of such
shares, except to the extent of their respective pecuniary interests.
(3) Includes 581 shares of Class A Stock and 1,470 shares of Class B
Nonvoting Common Stock of Galaxy GP ("Class B Stock") owned by Chisholm
Partners II L.P., and 5,229 shares and 13,233 shares of Class A Stock and
Class B Stock, respectively, owned by Fleet Growth Resources, Inc. Also
includes 0.18 units of Common Interests, 15,460 units of Voting Preferred
Interests, and 45,775 units of Nonvoting Preferred Interests in Galaxy
Investments ("Nonvoting Preferred Interests") owned by Chisholm Partners
II L.P., 1.14 units of Common Interests, 124,030 units of Voting Preferred
Interests and 367,215 units of Nonvoting Preferred Interests owned by
Fleet Growth Resources, Inc., and 0.49 units of Common Interests, 53,156
units of Voting Preferred Interests and 157,378 units of Nonvoting Preferred
Interests owned by Fleet Equity Partners VII, L.P.
40
<PAGE>
(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.
Galaxy 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.
41
<PAGE>
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 employees of Galaxy. 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 1997, Galaxy
paid Galaxy Management approximately $317,000 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, 1997, Galaxy incurred a management fee of $3,092,354. 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
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.
42
<PAGE>
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 Galaxy, 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. Galaxy 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 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.
43
<PAGE>
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 Galaxy 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.
44
<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.
45
<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, 1998 /s/ Tommy L. Gleason, Jr.
By: Tommy L. Gleason, Jr.
President and Chief Executive Officer
March 31, 1998 /s/ J. Keith Davidson
By: J. Keith Davidson
Vice President-Finance (Principle
Financial Officer)
46
<PAGE>
<PAGE>
INDEX TO EXHIBITS
2.1 - Asset purchase agreement by and between Douglas Cable
Communications, Limited Partnership and Galaxy, 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 Galaxy, 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 Galaxy, 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 Galaxy, 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 Galaxy, 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 Galaxy 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
Galaxy, 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, filed as Exhibit 3.5 to Galaxy's Annual
Report on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
3.6 - Amendment No.2 to the Limited Partnership Agreement, dated as
of December 29, 1995, filed as Exhibit 3.6 to Galaxy's Annual
Report on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
4.1 - Indenture by and among Galaxy, Capital Corp. and Boatman's
Trust Company, as Trustee, relating to the 12 3/8% Senior
Subordinated Notes due 2005, incorporated herein by reference
to Exhibit 4.1 to the Form S-1.
4.2 - Form of Note (included in Exhibit 4.1).
10.1 - Management Agreement by and between Galaxy Systems Management,
Inc. and Galaxy, 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 Galaxy, 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 Galaxy, 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 Galaxy 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 Galaxy (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 Galaxy (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 Galaxy (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 Galaxy 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 Galaxy (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 Galaxy and the
other parties named therein, dated as of December 23, 1994,
incorporated herein by reference to Exhibit 10.11 the Form S-1.
10.11 - First Amendment to Securities Purchase Agreement, dated as of
December 1, 1995, filed as Exhibit 10.11 to Galaxy's Annual
Report on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
10.12 - Amended and Restated Loan Agreement dated as of September 28,
1995 by and among Galaxy 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, filed as Exhibit 10.12 to
Galaxy's Annual Report on Form 10-K for the year ended December
31, 1996, is incorporated herein by reference.
10.13 - Amendment No. 1 the Amended and Restated Loan Agreement dated
October 21, 1996 by and among Galaxy, Galaxy Telecom Capital
Corp. and Fleet National Bank, filed as Exhibit 10 to Galaxy's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, is incorporated herein by reference.
12.1 - Computation of Ratio of Earnings to Fixed Charges.
21.1 - Subsidiaries of Galaxy 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.
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