SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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,
1999: 100
DOCUMENTS INCORPORATED BY REFERENCE: Not applicable.
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GALAXY TELECOM, L.P.
FORM 10-K
Year Ended December 31, 1998
TABLE OF CONTENTS
Item Topic Page
PART I
1. Business...................................................... 3
2. Properties....................................................26
3. Legal Proceedings.............................................26
4. Submission of Matters to a Vote of
Security Holders..............................................26
PART II
5. Market for the Registrant's Securities
and Related Security Holder Matters...........................27
6. Selected Financial Data.......................................27
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................29
7a. Qualitative and Quantitative Disclosures about
Market Risks..................................................42
8. Financial Statements and Supplementary Data..................F-1
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 43
PART III
10. Directors and Executive Officers of the Registrant............43
11. Executive Compensation....................................... 45
12. Security Ownership of Certain Beneficial
Owners and Management.........................................45
13. Certain Relationships and Related Transactions................48
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................................52
Signatures............................................................53
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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, 1998, the Systems passed
approximately 228,000 homes and served approximately 136,000 subscribers in
sixteen states, predominantly including Mississippi, Nebraska, Kansas, Missouri,
Illinois, Kentucky, Iowa, Alabama, Texas 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 do. 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.
The four 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.
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.
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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 for potential conversion to Core
Areas.
Background
The Senior Managers, Tommy L. Gleason, Jr., James M. Gleason, J. Keith
Davidson and Ronald Voss have been involved in the construction, acquisition,
ownership, management and operation of classic cable television systems as a
team for more than a decade. They have collective experience in the cable
television industry exceeding 85 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.
During 1995, Galaxy entered into definitive agreements to acquire selected
cable television systems representing approximately 300 cable systems and 81,700
subscribers from Galaxy Cablevision, Phoenix Cable, Douglas Communications,
Friendship Cable and Vista Communications, for approximately $92.2 million, or
approximately $1,130 per subscriber.
1996 Acquisitions and Trades
Galaxy acquired various assets comprising cable television systems during
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%.
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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 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.
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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
Galaxy acquired and disposed of various assets comprising cable television
systems during 1997. Following is a brief discussion of each transaction.
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 an initial 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
1,610 basic subscribers and had a basic penetration rate of approximately 52%.
In 1998, the purchase price was finalized and Galaxy paid an additional $853,000
in cash, in accordance with the amended asset purchase agreement.
On April 7, 1997, Galaxy sold its cable television system located in Five
Points, South Carolina, representing 311 basic subscribers for $372,645, or
approximately $1,200 per subscriber. Galaxy used most of the proceeds from this
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, 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 this sale to pay down
principal of the revolving note.
On December 31, 1997, Galaxy sold its cable television systems located in
Lauderdale County, Mississippi, representing 833 subscribers for $1.12 million
or $1,350 per subscriber. Galaxy used the proceeds from this sale to pay down
principal of the revolving note.
On December 31, 1997, Galaxy sold its cable television systems located in
South Kansas, representing 1,346 subscribers for $1.25 million or $932 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
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1998 Acquisitions, Dispositions and Trades
Galaxy acquired and disposed of various assets comprising cable television
systems during 1998. Following is a brief discussion of each transaction.
On January 15, 1998, Galaxy sold its cable television systems located in
Wyoming and Idaho, representing 4,000 subscribers for $4.9 million or $1,225 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On February 1, 1998, Galaxy sold its cable television system located in
Hooper, Nebraska, representing 242 subscribers for approximately $262,000, or
approximately $1,080 per subscriber. Galaxy used the proceeds from this sale to
pay down principal of the revolving note.
On March 31, 1998, Galaxy sold two cable television systems located in
Olathe, Kansas, and Independence, Missouri, representing 269 subscribers for
approximately $190,000, or approximately $706 per subscriber. Galaxy used the
proceeds from this sale to pay down principal of the revolving note.
On March 31, 1998, Galaxy sold six cable television systems located in and
around Ottawa County, Kansas, representing 752 subscribers for approximately
$623,000, or approximately $830 per subscriber.
On March 31, 1998, Galaxy purchased one cable television system located in
Brooks and Colquitt Counties in Georgia, representing approximately 300
subscribers for approximately $141,000, or approximately $470 per subscriber.
On March 31, 1998, Galaxy traded four cable television systems located in
and around Sheridan County, Nebraska, representing approximately 850 subscribers
for one cable television system located in Jefferson County, Colorado,
representing approximately 730 subscribers.
On April 30, 1998, Galaxy sold seven cable television systems located in
and around Lincoln County, Kansas, representing approximately 500 subscribers
for approximately $395,000, or approximately $790 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On June 30, 1998, Galaxy sold one cable television system located in
Goessel, Kansas, representing approximately 100 subscribers for approximately
$110,000, or approximately $1,100 per subscriber. Galaxy used the proceeds from
this sale to pay down principal of the revolving note.
On June 30, 1998, Galaxy sold all of its cable television systems located
in central Georgia, representing approximately 5,100 subscribers for
approximately $6,120,000, or approximately $1,200 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On July 31, 1998, Galaxy sold two cable television systems located in
Kansas, representing 201 subscribers for approximately $171,000, or
approximately $850 per subscriber.
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On August 20, 1998, Galaxy sold 25 cable television systems, 13 systems
located in Iowa and 12 systems located in Missouri, representing approximately
3,972 subscribers for approximately $3,178,000, or approximately $800 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On August 31, 1998, Galaxy sold nine cable television systems located in
Southwest Georgia, representing approximately 2,225 subscribers for
approximately $2,760,000, or approximately $1,240 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On August 31, 1998, Galaxy sold 23 cable television systems, 14 systems
located in Illinois and nine in Nebraska, representing approximately 3,210
subscribers for approximately $2,758,000, or approximately $860 per subscriber.
Galaxy used the proceeds from this sale to pay down principal of the revolving
note.
On November 30, 1998, Galaxy sold its cable television systems located in
Louisiana, representing 5,575 subscribers for approximately $9,500,000, or
approximately $1,700 per subscriber. Galaxy used the proceeds from this sale to
pay down principal of the revolving note.
On December 31, 1998, Galaxy sold one cable television system located in
Hawkins County, Tennessee, representing approximately 1,740 subscribers for
approximately $2,050,000, or approximately $1,177 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On December 31, 1998, Galaxy sold 72 cable television systems located in
Illinois, Missouri and Kansas, representing approximately 8,300 subscribers for
approximately $6,200,000, or approximately $750 per subscriber. In addition,
Galaxy realized a 40% equity position in Galaxy American Communications, LLC
("GAC"). This equity has no current market value at the present time. Galaxy
used the proceeds from this sale to pay down principal of the revolving note.
1999 Pending Transactions
On December 30, 1998, Galaxy entered into an asset exchange agreement with
Mississippi Cablevision, Inc. ("MCI"), an affiliate of Telecommunications, Inc.,
whereby Galaxy will exchange 1 cable television system plus pay $19.6 million in
cash for 8 cable television systems from MCI. The Galaxy cable television
systems are located primarily in Colorado, Iowa and South Dakota, while the MCI
cable television systems are located in Mississippi. This pending acquisition is
dependent on Galaxy obtaining various approvals and sufficient financing.
On February 12, 1999, Galaxy sold one satellite master antenna television
system ("SMATV") located in Spring Creek, Georgia, representing approximately
1,000 subscribers for approximately $1,220,000, or approximately $1,220 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On March 8, 1999, Galaxy signed an asset purchase agreement to sell ten
SMATV's located around Kansas City, Missouri, representing at least 1,070
subscribers for approximately $1,350,000, or approximately $1,260 per
subscriber. Galaxy retained ownership of all related equipment located in the
head-end facilities. Galaxy will use the proceeds from this sale to pay down
principal of the revolving note.
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On March 23, 1999, Galaxy signed an asset purchase agreement to sell 21
cable television systems located in Alabama, representing approximately 5,800
subscribers for approximately $8,500,000, or approximately $1,465 per
subscriber. Galaxy will use the proceeds from this 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.
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.
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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 an 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 $15.00 to
$31.20 and rates for traditional premium services generally range from $6.95 to
$12.95 per service. Because the Systems have been owned and operated by various
other cable television operators, inconsistent 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.
To better facilitate efforts to maximize quality service to its customers,
Galaxy converted its company billing system to Convergys' (formerly Cincinnati
Bell Information System) Cablemaster 2000 in November 1996. This is a system
developed specifically for the cable television industry. Convergys 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 after 30 days the account is referred to a
collection agency. Galaxy has contact with the Convergys 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."
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In addition to monthly billing and one-time charges, additional potential
sources of revenue for cable operators are the sale of local spot advertising
time on locally originated and satellite-delivered programming. Cable systems
also generate revenue through commissions from sales of products offered through
the various home shopping programming sales in 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, 1998. 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 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.
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. These programming packages are designed to be attractive
to customers while, at the same time, enabling Galaxy to enjoy the benefits of
programming agreements that 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.
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.
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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 serves approximately 120 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 99% 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, 1998, Galaxy maintained over 6,000
miles of coaxial plant that passed more than 228,000 homes. The following table
sets forth certain information with regard to the channel capacities of the
Systems as of December 31, 1998.
Up to 29 30 to 53 54 or more
Channels Channels Channels Total
Subscribers 43,677 72,491 19,532 135,700
Franchises 189 241 86 516
% of Subscribers 32.19% 53.42% 14.39% 100.00%
Miles of Plant 2,403.79 3,043.78 619.03 6,066.60
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 delivers 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 enables 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.
Cable modem service is another new product offered by Galaxy in 1998,
which provides high speed Internet access to its residential and business
customers, as well as potential customers not serviced by our cable TV plant by
using a local access telephone number. The cable modem service can access the
Internet at speeds significantly faster than most internet service providers
("ISP's") and competitive local exchange carriers ("CLEC's").
Galaxy has deployed the use of digital compression technology to enhance
the current channel capacities of some cable systems. This technology allows up
to 12 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 also allows 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. 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.
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Galaxy also believes that consistent, high quality performance of its
local field technicians is important to maintain good community relations. Due
to Galaxy's cable television systems being spread over a large geographic area,
a local field technician in many cases may be the only company representative a
customer ever meets. To improve the effectiveness of technician interaction with
Galaxy's customers, Galaxy has an ongoing program of training its field
technicians not only in technical areas but also in customer service and sales
functions. Galaxy strives to have its local field technicians represent Galaxy
in each of their respective service areas as well-trained, responsible and
respected members of their communities. Through its community communications and
field technician training programs, Galaxy seeks to maintain good community
relations in order to position itself to address any problem in a timely manner.
Centralized Management Functions
Management functions such as payment 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 Convergys. The computer
operates with advanced software that provides on-line access to up-to-date
subscriber, marketing and accounting information. The computer system also
manages information flow to and from the field technician staff via the
OmniTRACS system. The system software also allows for many other applications
that Galaxy may implement in the future including video-on-demand, transactional
billing services and telephony.
The computer system allows both the Senior Managers and the regional
managers to access subscriber information as soon as it is entered by the
customer service centers or the field technicians. The centralized nature of the
system allows each of Galaxy's customer service centers to back up the other if
there is an interruption of telephone service to such center. The customer
service centers also can utilize the centralized computer system to communicate
with local payment offices, headquarters, the other customer service center and
the field technicians, all of which have on-line access through the central
platform. Finally, the system provides a centralized reporting location for all
subscriber billing information which enables the accounting staff to prepare
timely and accurate financial information. These features of the central
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 Cable
Act"). See "-Legislation and Regulation- General."
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As of December 31, 1998, Galaxy held approximately 516 franchises. The
existing non-exclusive franchise agreements 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 renegotiations and modification of franchise
requirements if warranted by changed circumstances. See "-Legislation and
Regulation - General."
The table below illustrates the grouping of the franchises of the Systems
as of December 31, 1998, by date of expiration.
Year of Percentages Percentage of
Franchise Number of of Total Number of Total
Expiration Franchises Franchises Subscribers Subscribers
1999-2001 49 9.5% 14,266 10.5%
2002-2004 45 8.7% 14,114 10.4%
After 2004 422 81.8% 107,320 79.1%
Total Franchises 516 100.0% 135,700 100.0%
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, 1998, 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 increase
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 (with certain regulatory safeguards).
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We believe that of the competitive threats to our cable television
business, four are the most substantial. (1) DBS, (2) wireless cable
television systems or MMDS, (3) overbuilds by municipalities or telephone
companies, and (4) SMATV systems.
There are two major DBS providers which currently serve approximately
8.7 million subscribers nationally as of December 31, 1998. We believe that
these providers are continuing to grow their subscriber base. Because of the
quality of the digitally compressed signal from these providers and their
ability to provide a wide range of video and audio offerings, they are an
effective competitor to cable television systems. We believe however, that
we can effectively compete with DBS because of our ability to offer local and
regional broadcast stations on our systems, many of which are not well
received with a home antenna, and the "whole house" nature of cable service
versus DBS. We also believe that with our intended roll out of digital cable
service over the next two years, we can match many of the current competitive
advantages of DBS in offering digital picture and audio for multichannel
pay-per-view, multiplexed premiums, digital audio service, and narrow-cast
basic services. However, DBS service currently has some unique programming
rights, and is not subject to a variety of regulatory burdens imposed on
franchise cable operators such as franchise fees. Although the effect of
competition from DBS services cannot be specifically predicted, there has
been significant growth in DBS customers nationwide and we expect that such
competition will continue.
Wireless cable television systems have been competing with cable
television systems somewhat ineffectively in urban markets, but more
effectively in rural markets where cable systems frequently carry fewer
programming choices. We operate in several areas where we compete directly
with wireless operators. We believe that our operations have not been widely
effected by this competition, primarily because the MMDS signal used by
wireless cable operates in a "line-of-sight" nature and because of the number
of large trees within the communities we serve which obscure the
line-of-sight and impede the MMDS signal. Some wireless operators have
announced plans to provide a digital video service in the near future.
Although we have no knowledge of the digital plans of wireless operators with
which we compete, we do not believe that this additional service, if offered
by such operators, will materially affect our ability to compete with such
operators.
Since the passage of the 1996 Telecom Act, and the announced
deregulation of the electric utility business, several local exchange
carriers ("CLECs") and local municipal owned power companies have built video
systems to directly compete with existing cable television systems. This
process is known as "overbuilding." We have experienced two instances of LEC
overbuilds in two small systems, one in Alabama and one in Kansas, and have
been threatened with an overbuild by one municipally owned power company in
Mississippi.
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Legislation and Regulation
The FCC, some state governments and most local governments, currently
regulate the cable television industry. 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 for the regulation of cable television systems
and identified the boundaries of permissible federal, state and local government
regulation. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions. It also
prohibited non-grandfathered cable television systems from operating without a
franchise in such jurisdictions. The 1984 Cable Act provides that in granting or
renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories.
The Cable Television Consumer Protection and Competition Act of
1992. In October 1992, Congress enacted the 1992 Cable Act. Although certain of
the 1992 Act's provisions were amended by the 1996 Telecom Act (as described in
greater detail below), many of the 1992 Cable Act's provisions remain intact and
are summarized herein. The 1992 Cable Act permitted a much 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) program
access and exclusivity arrangements; (iii) leased access terms and conditions;
(iv) customer and service requirements; and (v) television broadcast signal
carriage and retransmission consent. 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 (with certain exceptions) the common
ownership of cable systems and co-located MMDS or SMATV systems. This last
prohibition was limited by the 1996 Telecom Act to cases in which the cable
operator is not subject to effective competition. In addition, the FCC permits a
cable system to 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 legislation required the FCC to initiate a number of rule-making
proceedings to implement various provisions of the statute.
Various cable operators have challenged the constitutionality of
several sections of the 1992 Cable Act (including the must carry requirements),
although the courts have disposed of most of these challenges. The must-carry
requirements remained in effect during the judicial proceedings. After several
appeals, the United States Supreme court upheld the must-carry requirements.
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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," which as defined, encompassed most cable systems.
The 1992 Cable Act requires the FCC to resolve rate complaints for non-basic
cable 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 generally are
not subject to rate regulation by either franchising authorities or the FCC.
Notwithstanding the above, the 1996 Telecom Act deregulated the CPS rates of
"small cable operators" as of February 8, 1996, and deregulates the cable
programming service ("CPS") rates of all other cable operators by March 31,
1999. However, certain members of Congress and FCC officials have called for the
delay of this regulatory sunset and further have urged more rigorous rate
regulation until a greater degree of competition to incumbent cable operators
has developed.
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. As modified by the 1996 Telecom Act, FCC review of CPS
rates is triggered by franchising authority complaints which may be filed with
the FCC only if the local franchising authority receives multiple subscriber
complaints within 90 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 distributors offering service 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 or its affiliate provides
comparable video programming in the franchise area (except through
direct-to-home satellite services).
In implementing the 1992 Cable Act, the FCC adopted a benchmark
methodology as the principal method of regulating rates for Regulated Services.
Cable operators with rates above the allowable level under the FCC's benchmark
methodology may attempt to justify such rates using a cost-of-service
methodology. The FCC has instituted rate relief for small cable operators. Cable
operators with fewer than 400,000 nationwide subscribers are eligible to file a
streamlined cost-of service analysis to justify their per-channel rates in those
systems serving 15,000 or fewer subscribers. Per-channel rates that fall below a
prescribed benchmark are presumed reasonable.
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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 allows cable operators to pass through
franchise fees and regulatory fees to subscribers without any prior notice.
Cable operators are allowed under the 1996 Telecom Act to offer bulk discounts
for multi-dwelling units. In addition, a cable operator need not maintain
uniform rates throughout a franchise area where there is effective competition.
Franchising authorities may not file complaints with the FCC unless they have
actually received subscriber complaints, and individual subscribers may not file
complaints with the FCC.
Carriage of Broadcast Television Signals. The 1992 Cable Act
established new signal carriage requirements. These requirements allow
commercial television broadcast stations which are "local" to a cable system, to
elect every three years whether to require the cable system to carry the
station, subject to certain exceptions, or whether to require the cable system
to negotiate for "retransmission consent" to carry the station. The first
must-carry/retransmission consent elections were made in June 1993, and the
second elections were made in October 1996. The next election will be made in
October, 1999. Stations are generally considered local to a cable system where
the system is located in the station's Area of Dominant Influence ("ADI"), as
determined by Arbitron. This method for determining whether a station is local
to a cable system will change. The FCC has determined that, effective January 1,
2000, the market of a TV station will be its designated market area ("DMA"), as
determined by Nielsen. 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. Galaxy carries some stations pursuant to must-carry and
others pursuant to retransmission consent agreements. In some cases, Galaxy
agreed to carry additional services, like fX, pursuant to retransmission consent
agreements.
Local non-commercial television stations are also given mandatory
carriage rights, subject to certain exceptions, within the larger of: (i) a
50-mile radius of the station's city of license; or (ii) the station's Grade B
contour (a measure of signal strength). Non-commercial stations are not given
the option to negotiate for retransmission consent. All non-commercial stations
entitled to carriage were to have been carried by December 1992.
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Other Requirements Imposed on Cable Operators.
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 and Service 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.
The 1996 Telecom Act exempts from cable 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 under
the cable franchise.
Franchise Fees and Renewal. Although franchising authorities may
impose franchise fees under the 1984 Cable Act, as amended 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 and do not apply to
revenues that a cable operator derives from providing new telecommunication
services. Franchising authorities are permitted to charge a fee for any
telecommunications provider's use of public right-of-way.
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees 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.
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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." To date, all of the material franchises
relating to the Company's Systems eligible for renewal have been renewed or
extended at or prior to their stated expirations. At any given time, one or more
of the Company's franchises may be involved in the renewal process. There can be
no assurance that all franchise authorities will continue to consent to
franchise renewals and/or franchise transfers to the Company in the future or
that the terms and conditions or any such renewals and/or transfers will be
acceptable to the Company and will not have a material adverse effect.
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 LECs from providing video programming directly to
customers within their local exchange telephone service areas. Under the 1996
Telecom Act, LECs may provide video programming by radio-based systems, common
carrier systems, "open video" systems or cable systems. LECs that elect to
provide "open video" systems must allow others to use up to two-thirds of their
activated channel capacity. These LECs are relieved of regulation as "common
carriers," and are not required to obtain local franchises, but are still
subject to many other regulations applicable to cable systems. LECs operating as
cable systems are subject to all rules governing cable systems, including
franchising requirements.
The 1996 Telecom Act prohibits a LEC or its affiliate from acquiring
more than a 10 percent financial or management interest in any cable operator
providing cable service in its telephone service area. It also prohibits a cable
operator or its affiliate from acquiring more than a 10 percent financial or
management interest in any LEC providing telephone exchange service in its
franchise area. A LEC and cable operator whose telephone service area and cable
franchise area are in the same market may not enter into a joint venture to
provide telecommunications services or video programming. There are exceptions
to these limitations for rural facilities, very small cable systems, and small
LECs in non-urban areas, and the FCC has granted temporary waivers of this ban.
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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.
To prevent large, vertically integrated cable systems from unduly
favoring their affiliated programmers, the FCC imposes a 40% limit on the number
of channels which can be occupied by video programmers affiliated with the
particular cable system.
Anti-Trafficking; Transfers. The 1996 Telecom Act repealed the 1992
Cable Act's three year holding requirement, 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 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.
Copyrighted 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.
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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 1998, cable television systems were required to
pay regulatory fees of $0.44 per subscriber and the proposed fee for 1999 is
$0.48 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 that cable operators often use,
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.
FCC regulations also address among other things, the carriage of
local sports programming; restrictions on origination and cablecasting by cable
system operators; privacy requirements; application of the rules governing
political broadcasts; non-duplication of network programming; deletion of
syndicated programming; Equal Employment Opportunity (EEO) requirements;
customer service standards; home wiring; record retention and limitations on
advertising contained in children's programming. The FCC has the authority to
enforce its regulations through the imposition of substantial fines, the
issuance of cease and desist orders and/or the imposition of other
administrative sanctions.
Telecommunications Act of 1996. On February 8, 1996, the 1996
Telecom Act was enacted. This legislation substantially altered the regulatory
environment for cable television, telecommunications and other services. 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 some of the cable rate regulation established by the 1992
Cable Act over a three-year period. The CPS rates tiers offered by certain small
cable operators in certain 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. There has been some interest on Capitol Hill to extend
CPS rate regulation beyond 1999, although no formal amendment to the 1996
Telecom Act's sunset of CPS rate regulation has occurred. Rates for basic tiers
(except for the small cable operator exception described previously) will
continue to be subject to regulation. The legislation also: (i) eliminates the
uniform rate requirements of the 1992 Cable Act where effective competition
exists; (ii) 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; (iii) adjusts the pole attachment
laws; and (iv) allows cable operators to enter telecommunications markets which
historically have been closed to them, while also allowing most
telecommunications providers to begin providing competitive cable service in
their local service areas, although buyouts of existing cable operators are
prohibited.
Cable programmers challenged the constitutionality of the provision
of the 1996 Telecom Act requiring cable operators to scramble sexually-explicit
or indecent adult programming. Following a judicial challenge, the FCC's rules
on the scrambling of such programming became effective in May 1997.
23
<PAGE>
Telecommunications Regulation. The 1996 Telecom Act has
substantially revised communications regulation in the United States. The
legislation is intended to allow providers to enter communications markets that
have historically been closed to them as a result of legal restrictions, as well
as practical and economic considerations. At the same time, implementation of
the 1996 Telecom Act may leave incumbent providers in previously closed markets
sufficiently free from regulation that they will be able to defend their markets
aggressively. Galaxy is unable to predict how the legislation will be
implemented.
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 required Bell operating
companies ("RBOCs") 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, RBOCs were generally
prohibited from offering such "interLATA" services. Under the 1996 Telecom Act
such services may be offered outside of a RBOC's local exchange service states
immediately. RBOCs may offer interLATA services inside such states (in-region)
when the FCC determines either that the RBOC 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 RBOC's general
terms for providing such access and interconnection. In either case, the FCC
also must conclude that the RBOC has satisfied a "competitive checklist" of
interconnection and other requirements specified in the 1996 Telecom Act. These
RBOC preconditions have been held unlawful by at least one federal court and are
still being litigated. If Galaxy decides to provide interLATA service, it will
likely face vigorous competition from RBOC entrants, as well as from existing
long distance carriers.
Telecommunications common carriers subject to the jurisdiction of
the FCC generally must file tariffs detailing the prices and terms and
conditions of services, and whether the terms offered by the carrier are just,
reasonable and nondiscriminatory. The 1996 Telecom Act provides that the FCC, in
response to a petition from a carrier, shall forbear from enforcing regulations,
including those requiring tariffs, under certain circumstances. Such actions
could free Galaxy from regulatory burdens, but might also increase the pricing
flexibility of its competitors.
24
<PAGE>
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. The Company holds cable franchises in all areas in
which they provide service where cable franchises are required. 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.
Employees
As of December 31, 1998, Galaxy had approximately 357 full-time employees
and 61 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 42 people who are dedicated primarily to
servicing Galaxy.
25
<PAGE>
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.
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 the
Partnership's consolidated financial position, or future results of
operations or cash flows.
Certain customers in Mississippi have filed a class action lawsuit in
the U.S. District Court for the Northern District of Mississippi alleging
that the Partnership illegally charged a late fee on monthly cable bills.
The Partnership has denied any liability with respect to this claim and is
defending this action. Similar class actions against other cable companies
have been filed in several states, some of which have been successful. At
this point, management is unable to predict the likely outcome or the
potential for an adverse judgment, if any. An adverse judgment against us
could have a material, adverse affect on the Partnership's consolidated
financial position, or future results of operations or cash flows.
Management has not recorded any liability in the consolidated financial
statements that may arise from the adjudication of this lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
26
<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 Consolidated Financial Data.
The consolidated statement of operations data for the calendar years
1998, 1997, 1996 and 1995, , and for the period from December 23, 1994 to
December 31, 1994, and the consolidated balance sheet data as of December 31,
1998, 1997, 1996, 1995 and 1994 set forth below have been derived from
Galaxy's audited consolidated financial statements. 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>
Period from
Dec. 23
For the years ended December 31, 1994 to
---------------------------------------- Dec. 31
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues $ 67,291 $ 68,808 $ 62,337 $ 29,995 $ 577
--------- --------- --------- --------- ---------
Operating expenses:
Systems operations 31,343 31,503 28,353 13,219 260
Selling, general and administrative 8,087 8,130 6,439 3,681 99
Management fee to affiliate 3,028 3,092 2,804 1,605 32
Depreciation and amortization 24,415 24,673 21,739 10,206 214
--------- --------- --------- --------- ---------
Total operating expenses 66,873 67,398 59,335 28,711 605
--------- --------- --------- --------- ---------
Operating income (loss) 418 1,410 3,002 1,284 (28)
Interest expense (20,914) (21,037) (20,133) (10,422) (153)
Other income (expense) (4,350) (421) 219 608 6
--------- --------- --------- --------- ---------
Net loss $ (24,846) $ (20,048) $ (16,912) $ (8,530) $ (175)
========= ========= ========= ========= =========
EBITDA (a) $ 24,833 $ 26,083 $ 24,741 $ 11,490 $ 186
========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Total assets $ 151,743 $ 207,048 $ 217,498 $ 199,913 $ 102,736
Total long-term debt and other obligations 152,446 179,250 169,738 145,527 67,215
Partners' capital (deficit) (19,635) 5,211 25,259 42,171 35,521
</TABLE>
27
<PAGE>
(a) EBITDA represents income (loss) before interest expense, income taxes,
depreciation and amortization, and other income (expense). Although EBITDA
is not a measure of performance calculated in accordance with generally
accepted accounting principles ("GAAP"), management believes that it is
useful to an investor in evaluating Galaxy because it is a measure widely
used in the cable industry to evaluate a cable company's performance.
Nevertheless, it should not be considered in isolation or as a substitute
for operating income, cash flows from operating activities or any other
measure for determining Galaxy's operating performance or liquidity that
is calculated in accordance with GAAP. As EBITDA is not a measure
calculated in accordance with GAAP, this measure may not be comparable to
similarly titled measures employed by other companies.
28
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
Overview
In each of the past three years, the cable television systems (the
"Systems") have generated substantially all of their revenues from fees for
monthly basic and premium subscriptions and from one-time charges such as
installation and service charges. Minimal additional revenues were generated
from the sale of advertising and from home shopping networks.
The Systems increased revenues from 1996 to 1997, due primarily to rate
increases. Total revenues decreased from 1997 to 1998, primarily as a result of
system dispositions. Total systems operations expenses and selling, general and
administrative expenses increased from 1996 to 1997, but at a lesser amount than
revenues. These expenses decreased from 1997 to 1998, primarily as a result of
system dispositions. 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 financing activities,
have caused 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:
29
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
---------------- -------------------- ------------------
% of % of % of
Amount Revenues Amount Revenues Amount Revenues
------- ------ ------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 62,337 100.0% $ 68,808 100.0% $ 67,292 100.0%
Operating expenses:
System operations 28,353 45.5% 31,503 45.8% 31,343 46.6%
Selling, general and administrative 6,439 10.3% 8,130 11.8% 8,087 12.0%
Management fee to affiliate 2,804 4.5% 3,092 4.5% 3,028 4.5%
Depreciation and amortization 21,739 34.9% 24,673 35.9% 24,415 36.3%
-------- ----- -------- ----- -------- -----
Total operating expenses 59,335 95.2% 67,398 98.0% 66,873 99.4%
-------- ----- -------- ----- -------- -----
Operating income (loss) 3,002 4.8% 1,410 2.0% 419 0.6%
Interest expense (20,133) (32.3%) (21,037) (30.5%) (20,914) (31.1%)
Interest income 36 0.1% 24 0.0% 53 0.1%
Gain (loss) on sale of assets 176 0.0% (226) (0.3%) (4,088) (6.1%)
Other income (expense),net 7 0.3% (219) (0.3%) (316) (0.4%)
-------- ----- -------- ----- -------- -----
Net loss $(16,912) (27.1%) $(20,048) (29.1%) (24,846) (36.9%)
======== ===== ======== ===== ======== ======
EBITDA (a) 24,741 39.7% 26,083 37.9% 24,834 36.9%
</TABLE>
(a) EBITDA represents income (loss) before interest expense, income taxes,
depreciation and amortization, and other income (expense). Although EBITDA
is not a measure of performance calculated in accordance with generally
accepted accounting principles ("GAAP"), management believes that it is
useful to an investor in evaluating Galaxy because it is a measure widely
used in the cable industry to evaluate a cable company's performance.
Nevertheless, it should not be considered in isolation or as a substitute
for operating income, cash flows from operating activities or any other
measure for determining Galaxy's operating performance or liquidity that
is calculated in accordance with GAAP. As EBITDA is not a measure
calculated in accordance with GAAP, this measure may not be comparable to
similarly titled measures employed by other companies.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues decreased $1.5 million or 2.2% from $68.8 million
in 1997 to $67.3 million in 1998. The decrease in subscribers is mainly
attributable to the disposition of certain cable systems made during 1998. The
decrease in subscribers was partially offset by an increase of $1.10 or 3.0% in
revenue per subscriber from $33.60 in 1997 to $34.61 in 1998. Basic revenue as a
component of total revenue decreased by .5% from 79.6% in 1997 to 79.1% in 1998.
The decreases were also partially offset by an increase in Distance Learning
revenue of $0.3 million from $0.05 million in 1997 to $0.4 million in 1998.
Revenue from the sale of advertising and home shopping royalties increased
approximately $0.1 million or 34.2% from $0.4 million in 1997 to $0.5 million in
1998.
30
<PAGE>
Company operations expenses. Company operations expenses decreased
$0.2 million or 0.6% from $31.5 million in 1997 to $31.3 million in 1998. The
decrease is mainly attributable to the disposition of certain cable systems made
during 1998. Company operations expenses as a percent of revenues, increased
from 45.8% in 1997 to 46.6% in 1998. Programming expenses which increased $1.2
million represented the largest portion of the increase in systems operations
expenses having increased from 22.2% of revenues in 1997 to 24.4% of revenues in
1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.04 million or .5% from $8.14 million in
1997 to $8.1 million in 1998. As a percentage of revenue, selling, general and
administrative expenses increased from 11.8% in 1997 to 12.0% in 1998. The
increase as a percentage of revenue was primarily attributable to a decrease in
the amount of reimbursements from programmers of $0.8 million or 85.5% from $0.9
million in 1997 to $0.1 million in 1998.
Management fees to affiliates. Management fees to affiliates
decreased $0.06 million or 1.9% from $3.09 million in 1997 to $3.03 million in
1998. The decrease was directly proportional to the decrease in revenue, as
management fees are fixed by contract at 4.5% of revenue.
Depreciation and amortization expense. Depreciation and amortization
expense decreased $0.2 million or.8% from $24.6 million in 1997 to $24.4 million
in 1998. The decrease was mainly attributable to the disposition of certain
cable systems in 1998. As a percentage of revenue, depreciation and amortization
expenses increased from 35.9% in 1997 to3 6.3% in 1998.
Interest expense. Interest expense decreased $0.1 million or .5%
from $21.0 million in 1997 to $20.9 million in 1998. The decrease was due to the
reduction of debt associated with the sale of certain cable systems in 1998.
Interest expense as a percentage of revenue increased from 30.5% ion 1997 to
31.1% in 1998.
Other expense, net. Other expense, net, increased $4.0 million from
$0.4 million in 1997 to $4.4 million in 1998. The increase was due primarily an
increase in loss on sale of assets of $3.9 million from a loss of $0.2 million
in 1997 to a loss of $4.1 million in 1998. This decrease was offset slightly by
an increase in interest income.
Net loss. Net loss increased 24.0% or $4.8 million from $20.0
million in 1997 to $24.8 million in 1998, as a result of the factors discussed
above. As a percentage of revenue, net loss increased from 29.1% in 1997 to
36.9% in 1998.
EBITDA. EBITDA decreased $1.2 million or 4.6% from $26.0 million
in 1997 to $24.8 million in 1998. As a percent of revenue, EBITDA decreased
from 37.9% in 1997 to3 6.9% in 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues increased $6.5 million or 10.4%, from $62.3
million in 1996 to $68.8 million in 1997. The increase in revenues reflected an
increase of $1.99 or 8.5% in basic revenue per subscriber from $23.41 in 1996 to
$25.40 in 1997, partially offset by a 5,256 or 2.9% decrease in the number of
subscribers from 182,552 in 1996 to 177,296 in 1997 as the Company began
adjusting its portfolio of Systems. As a result, revenues from basic cable
services as a component of total revenues increased by 11.5% or $5.6 million
from 1996 to 1997. Revenues from distance learning began in the fall of 1997.
For the four months for which such services were offered in 1997, the Company
generated revenues totaling approximately $50,000. Revenues from the sale of
advertising and home shopping royalties increased $140,432 or 47.8% from
$293,501 in 1996 to $433,933 in 1997.
31
<PAGE>
Company operations expenses. Company operations expenses increased
$3.2 million or 11.1%, from $28.3 million in 1996 to $31.5 million in 1997. The
growth in expenses was due primarily to increases in programming and other
subscriber related expenses which generally vary with the number of systems and
subscribers and the increased number of channels that the Company added to a
number of systems. Company operations expenses, as a percentage of revenues,
increased slightly from 45.5% in 1996 to 45.8% in 1997. Programming expenses,
which increased $2 million, represented the largest portion of the increase in
systems operations expenses, having increased as a percentage of revenues from
21.5% in 1996 to 22.4% in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.7 million or 26.3%, from $6.4 million in
1996 to $8.1 million in 1997. As a percentage of revenues, selling, general and
administrative expenses increased to 11.8% in 1997 from 10.3% in 1996. The
increase in such expenses was primarily attributable to a decrease in
cooperative marketing support from programmers. Such support partially offset
marketing expenses and decreased from $1.4 million in 1996 to $0.7 million in
1997.
Management fees. Management fees to affiliates increased $0.3
million or 10.3%, from $2.8 million in 1996 to $3.1 million in 1997. The
increase was directly proportionate to the increase in revenue as management
fees were fixed at 5.0% of revenue.
Depreciation and amortization expense. Depreciation and amortization
expense increased approximately $2.9 million or 13.5%, from $21.7 million in
1996 to $24.7 million in 1997. Depreciation and amortization increased from
34.9% of revenues in 1996 to 35.9% of revenues in 1997. This increase was due to
the increase in fixed assets during 1997, primarily due to increased deployment
of fiber optic cable and ongoing upgrades of certain acquired cable systems.
Interest expense. Interest expense increased approximately $0.9
million, or 4.5%, from $20.1 million in 1996 to $21.0 million in 1997. Interest
expense, as a percentage of revenues, decreased from 32.3% in 1996 to 30.5% in
1997. The average interest rate on indebtedness declined from 12.4% in 1996 to
11.4% in 1997 as a result of lower borrowing costs under the Revolving Credit
Facility due to lower rates, partially offset by increased average debt amounts
outstanding.
Other income (expense), net. Other income (expense), net decreased
from income of $0.2 million during 1996 to a net expense of $0.4 million during
1997. This change of $0.6 million was mainly due to a loss on the sale of assets
during 1997 in the amount of $0.2 million.
Net loss. Net loss increased 18.5%, or approximately $3.1 million,
from $16.9 million in 1996 to $20.0 million in 1997, as a result of the factors
discussed above. As a percentage of revenues, net loss increased from 27.1% in
1996 to 29.1% in 1997.
32
<PAGE>
EBITDA increased $1.3 million or 5.4%, from $24.7 million in 1996 to
$26.1 million in 1997, due primarily to the increase in revenues partly offset
by an increase in systems operations and selling, general and administrative
expenses. As a percentage of revenues, EBITDA decreased from 39.7% in 1996 to
37.9% in 1997, primarily as a result of the increases in systems operations and
selling, general and administrative expenses discussed above.
1996 Acquisitions and Trades
Galaxy acquired various assets comprising cable television systems during
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%.
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%.
33
<PAGE>
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
Galaxy acquired and disposed of various assets comprising cable television
systems during 1997. Following is a brief discussion of each transaction.
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%.
On April 7, 1997, Galaxy sold its cable television system located in
Five Points, South Carolina, representing 311 basic subscribers for $372,645, or
approximately $1,200 per subscriber. Galaxy used most of the proceeds from this
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, 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 this sale to pay down
principal of the revolving note.
34
<PAGE>
On December 31, 1997, Galaxy sold its cable television systems located in
Lauderdale County, Mississippi, representing 833 subscribers for $1.12 million
or $1,350 per subscriber. Galaxy used the proceeds from this sale to pay down
principal of the revolving note.
On December 31, 1997, Galaxy sold its cable television systems located in
South Kansas, representing 1,346 subscribers for $1.25 million or $932 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
1998 Acquisitions, Dispositions and Trades
Galaxy acquired and disposed of various assets comprising cable television
systems during 1998. Following is a brief discussion of each transaction.
On January 15, 1998, Galaxy sold its cable television systems located in
Wyoming and Idaho, representing 4,000 subscribers for $4.9 million or $1,225 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On February 1, 1998, Galaxy sold its cable television system located in
Hooper, Nebraska, representing 242 subscribers for approximately $262,000, or
approximately $1,080 per subscriber. Galaxy used the proceeds from this sale to
pay down principal of the revolving note.
On March 31, 1998, Galaxy sold two cable television systems located in
Olathe, Kansas, and Independence, Missouri, representing 269 subscribers for
approximately $190,000, or approximately $706 per subscriber. Galaxy used the
proceeds from this sale to pay down principal of the revolving note.
On March 31, 1998, Galaxy sold six cable television systems located in and
around Ottawa County, Kansas, representing 752 subscribers for approximately
$623,000, or approximately $830 per subscriber.
On March 31, 1998, Galaxy purchased one cable television system located in
Brooks and Colquitt Counties in Georgia, representing approximately 300
subscribers for approximately $141,000, or approximately $470 per subscriber.
On March 31, 1998, Galaxy traded four cable television systems located in
and around Sheridan County, Nebraska, representing approximately 850 subscribers
for one cable television system located in Jefferson County, Colorado,
representing approximately 730 subscribers.
On April 30, 1998, Galaxy sold seven cable television systems located in
and around Lincoln County, Kansas, representing approximately 500 subscribers
for approximately $395,000, or approximately $790 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On June 30, 1998, Galaxy sold one cable television system located in
Goessel, Kansas, representing approximately 100 subscribers for approximately
$110,000, or approximately $1,100 per subscriber. Galaxy used the proceeds from
this sale to pay down principal of the revolving note.
35
<PAGE>
On June 30, 1998, Galaxy sold all of its cable television systems located
in central Georgia, representing approximately 5,100 subscribers for
approximately $6,120,000, or approximately $1,200 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On July 31, 1998, Galaxy sold two cable television systems located in
Kansas, representing 201 subscribers for approximately $171,000, or
approximately $850 per subscriber.
On August 20, 1998, Galaxy sold 25 cable television systems, 13 systems
located in Iowa and 12 systems located in Missouri, representing approximately
3,972 subscribers for approximately $3,178,000, or approximately $800 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On August 31, 1998, Galaxy sold nine cable television systems located in
Southwest Georgia, representing approximately 2,225 subscribers for
approximately $2,760,000, or approximately $1,240 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On August 31, 1998, Galaxy sold 23 cable television systems, 14 systems
located in Illinois and nine in Nebraska, representing approximately 3,210
subscribers for approximately $2,758,000, or approximately $860 per subscriber.
Galaxy used the proceeds from this sale to pay down principal of the revolving
note.
On November 30, 1998, Galaxy sold its cable television systems located in
Louisiana, representing 5,575 subscribers for approximately $9,500,000, or
approximately $1,700 per subscriber. Galaxy used the proceeds from this sale to
pay down principal of the revolving note.
On December 31, 1998, Galaxy sold one cable television system located in
Hawkins County, Tennessee, representing approximately 1,740 subscribers for
approximately $2,050,000, or approximately $1,177 per subscriber. Galaxy used
the proceeds from this sale to pay down principal of the revolving note.
On December 31, 1998, Galaxy sold 72 cable television systems located in
Illinois, Missouri and Kansas, representing approximately 8,300 subscribers for
approximately $6,200,000, or approximately $750 per subscriber. In addition,
Galaxy realized a 40% equity position in Galaxy American Communications, LLC
("GAC"). Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
Pending Transactions
On December 30, 1998, Galaxy entered into an asset exchange agreement with
Mississippi Cablevision, Inc. ("MCI"), an affiliate of Telecommunications, Inc.,
whereby Galaxy will exchange 1 cable television system plus pay $19.6 million in
cash for 8 cable television systems from MCI. The Galaxy cable television
systems are located primarily in Colorado, Iowa and South Dakota, while the MCI
cable television systems are located in Mississippi. This pending acquisition is
dependent on Galaxy obtaining various approvals and sufficient financing.
36
<PAGE>
On February 12, 1999, Galaxy sold one satellite master antenna television
system ("SMATV") located in Spring Creek, Georgia, representing approximately
1,000 subscribers for approximately $1,220,000, or approximately $1,220 per
subscriber. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On March 8, 1999, Galaxy signed an asset purchase agreement to sell ten
SMATV's located around Kansas City, Missouri, representing at least 1,070
subscribers for approximately $1,350,000, or approximately $1,260 per
subscriber. Galaxy retained ownership of all related equipment located in the
head-end facilities. Galaxy will use the proceeds from this sale to pay down
principal of the revolving note.
On March 23, 1999, Galaxy signed an asset purchase agreement to sell 21
cable television systems located in Alabama, representing approximately 5,800
subscribers for approximately $8,500,000, or approximately $1,465 per
subscriber. Galaxy will use the proceeds from this sale to pay down principal of
the revolving note.
Liquidity and Capital Resources
The Partnership has incurred losses each year since its inception and has a
partnership deficit of $19.6 million at December 31, 1998. During 1998, the
Partnership began implementation of a strategy whereby it would sell its cable
television systems in its non-core regions and focus on improving and acquiring
cable television systems in its core regions, which are primarily located in
Illinois, Kansas, Kentucky, Mississippi and Nebraska. In 1998, the Partnership
received net proceeds from sales of its non-core cable television systems of
$38.6 million, which was used to pay down the balance on its revolving line of
credit. Management intends to seek new debt and/or equity financing and reduce
its borrowings under its revolving line of credit through the sales of non-core
systems in order for the Partnership to meet its business plan and sustain
operations. However, there is no assurance that the Partnership will be able to
implement its strategy and raise new capital.
The cable television business requires substantial financing for
construction, expansion and maintenance of plant. Galaxy intends to continue
pursuit of a business strategy that 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 $152.4 million of indebtedness as of December 31, 1998,
representing $119.6 million of senior subordinated notes (net of unamortized
discount of $0.4 million), $30.5 million drawn under Galaxy's revolving line of
credit (See "The Revolving Credit Facility and Term Loan"), and $2.3 million in
various other obligations. Net payments were made under Galaxy's revolving line
of credit of approximately $29 million during 1998. 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.
Galaxy provided net cash by operating activities of $4,104,091 in 1997 and
$1,384,698 in 1998, respectively, a decrease in net cash provided by operating
activities of $2,719,393. This reduction is mainly due to an increase in the
cash used to reduce accounts payable and accrued expenses from $1,637,383 in
1997 to $3,837,431 in 1998.
Galaxy used net cash in investing activities of $13,279,244 in 1997, and
provided net cash by investing activities of $26,197,766 in 1998, an increase in
net cash provided by investing activities of $39,477,010. This increase is
mainly due to an increase in proceeds from sales of cable television systems,
and a reduction in capital expenditures.
37
<PAGE>
Galaxy provided net cash by financing activities of $9,239,906 in 1997,
and used net cash in financing activities of $27,771,785 in 1998, an increase in
net cash used in financing activities of $37,011,691, mainly due to the payment
of principal on the revolving line of credit.
Capital Expenditures
During 1998, Galaxy's capital expenditures (exclusive of system
acquisitions) were approximately $12.9 million. These capital expenditures
were used to add channels, construct wide-area networks for distance learning
and data services and purchase new computer equipment and software to enhance
communications and data traffic between employees and Galaxy subscribers.
Based on its present liquidity and capital resources, Galaxy currently
anticipates capital expenditures over the next two years will total
approximately $20.0 million. Galaxy is considering additional financing
alternatives. To the extent any such financing is successful, the company
will use proceeds for additional capital expenditures and, accordingly, its
capital expense budget will be increased. These capital expenditures will be
used primarily to continue the installation of fiber optic cable, purchase
digital equipment 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 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 ("the Revolver"). The Revolver, which has been periodically
amended, with the latest amendment occurring in March 1999, allows the
Partnership to borrow up to $55.9 million until June 1999 when the
outstanding balance converts to a term loan. The first principal payment is
due on December 31, 1999, in an amount equal to 22% of the converted balance,
and in subsequent quarterly installments escalating annually from 22 percent
to 30 percent of the converted balance through December 2002. Net proceeds
from any system sale will be used to reduce the commitment available under
the Revolver. The Revolver will require Galaxy to maintain compliance with
certain financial ratios and other covenants, such as total debt to
annualized cash flow, cash flow to interest expense, capital expense limits
and basic subscribers to total long term debt. The financial covenants in
the Revolving Credit Facility may significantly limit Galaxy's ability to
borrow under the Revolver.
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 Revolver. The Notes will rank pari passu with all other
senior subordinated indebtedness of Galaxy, if any, and is senior to all
subordinated debt of Galaxy.
The Indenture contains various restrictive covenants, including
limitations on indebtedness, certain restricted payments and affiliate
transactions as defined, purchases, asset sales and capital expenditures in
addition to reporting requirements.
38
<PAGE>
Year 2000
The year 2000 ("Y2K") issue concerns the inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000. This section is a Year 2000 Readiness Disclosure.
During 1998, Galaxy has put a program in place designed to bring
information systems and software into Y2K compliance in time to minimize any
significant detrimental effects on operations. The program covers information
systems infrastructure, financial and administrative systems, process control
and cable television systems. Galaxy's program recognizes that date sensitive
systems may fail at different points in time depending on their function. Galaxy
is utilizing internal personnel, contract programmers and vendors to identify
Y2K issues, modify code and test the modifications. In most cases, these third
party programmers and vendors have verified their Y2K compliance with Galaxy. In
some cases, non-compliant software and hardware will be replaced. The steps
Galaxy has taken in this program include (1) planning and awareness, (2)
identification of where failures may occur, (3) resolution including repair,
upgrade, etc. and (4) deployment of compliant systems. The first two steps,
planning and awareness and identification are largely completed.
The following table illustrates Galaxy's present status of completion of
each step of its Y2K program.
Percentage Expected
completed Completion
Phase within each step Date
----------------------- ---------------- ---------------
Planning and awareness 95% June 1999
Identification 95% September 1999
Resolution 80% September 1999
Deployment 70% September 1999
The completion dates set forth above are based on Galaxy's current
expectations. However, due to the uncertainties inherent in the Y2K issue, no
assurances can be given as to whether such projects will be completed on such
dates. Galaxy expects the total incremental cost of the Y2K issue to be
approximately $100,000. This estimated cost does not include any normal ongoing
costs for computer hardware or software that would be replaced even without the
presence of the Y2K issue. The occurrence of these costs is expected during
1999, and the majority of these costs have been and will be provided from
operations.
Galaxy has been focusing its efforts on identification, resolution and
deployment of its Y2K exposures and has not yet developed significant
contingency plans in the event it encounters unknown events. Galaxy intends to
examine its status periodically to determine whether such plans are necessary.
39
<PAGE>
The failure to correct a material Y2K problem could result in an
interruption or failure of certain important business operations. Management
believes that its Y2K program will significantly reduce Galaxy's risks
associated with the changeover to the Y2K and has implemented certain
contingency plans to minimize the effect of any potential Y2K related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that
Galaxy has deemed critical in regard to customer service, business operations,
financial impact or safety.
Customer service networks and/or automated voice response systems failure
could prevent access to customer account information, hamper installation
scheduling and disable the processing of pay-per-view requests. Galaxy plans to
have its customer service representatives answer telephone calls from customers
in the event of outages and expects to retrieve needed customer information
manually from the billing service provider.
Galaxy is dependent in some way on third-party vendors. For example, if a
cable programmer encounters Y2K problems that impede its ability to deliver its
programming, Galaxy will be unable to provide that programming to its cable
customers. Galaxy has attempted to ascertain their state of Y2K readiness
through questionnaires, interviews, industry group participation and other
available means. Galaxy has not received any response from third-party vendors
that indicate a problem with the Y2K issue. There can be no assurance, however,
that such a problem may occur.
A failure of the services provided by Convergys could result in a loss of
customer records which could disrupt the ability to bill customers for a
protracted period. Galaxy plans to prepare electronic backup records of its
customer billing information prior to the Y2K to allow for data recovery. In
addition, Galaxy continues to monitor the Y2K readiness of Convergys.
Advertising revenue could be adversely affected by the failure of certain
equipment which could impede or prevent the insertion of advertising spots in
Galaxy's programming. Galaxy anticipates that it can minimize such effect by
manually resetting the dates each day until the equipment is repaired.
In the event that the local public utility cannot supply power, Galaxy
will not be able to supply power to most of its cable headends and office sites.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by Galaxy due to the numerous uncertainties and
variables associated with such scenarios.
Despite Galaxy's efforts in solving the Y2K issue, there can be no
assurance that partial or total systems interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon
Galaxy's business, financial condition, and results of operations and business
prospects.
Inflation
Galaxy does not believe that inflation in the United States in recent
years has had a significant effect on results on operations.
40
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 (January 1, 2000, for the Partnership). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and, if it is, the type
of hedge transaction.
Management of the Partnership anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a significant
effect on the Partnership's results of operations or its financial position.
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. These factors include 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 1999;
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.
41
<PAGE>
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.
Item 7a. Qualitative and Quantitative Disclosures about Market Risks.
Galaxy is not directly exposed to any foreign exchange rates or commodity
price fluctuations.
Galaxy is exposed to changes in interest rates due to its variable rate of
interest (LIBOR plus 3.25%) on its revolving line of credit.
Based on Galaxy's variable debt at December 31, 1998, a 1% increase in
market interest rates would increase yearly interest expense and decrease income
by approximately $328,000. This amount was calculated using the variable
interest rate in effect at December 31, 1998, assuming a constant level of
variable-rate debt. This amount does not include the effects of other events
that could affect interest rates, such as a downturn in overall economic
activity, or actions management could take to lessen risk. This also does not
take into account any changes in Galaxy's financial structure that may result
from higher interest rates.
42
<PAGE>
Item 8. Financial Statement and Supplementary Data.
GALAXY TELECOM, L.P. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the Years Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
Report of Independent Accountants on Financial Statement Schedule F-24
Schedule II - Valuation and Qualifying Accounts F-25
All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements, related
notes or financial statement schedule.
F-1
<PAGE>
Report of Independent Accountants
To the Partners
Galaxy Telecom, L.P.
In our opinion, the consolidated financial statements listed in the accompanying
index on page F-1 present fairly, in all material respects, the consolidated
financial position of Galaxy Telecom, L.P. and subsidiary (the "Partnership") at
December 31, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
consolidated financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
February 19, 1999,
except for Notes 7 and 12, as to
which the date is March 31, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
1998 1997
------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,213,777 $ 2,403,098
Subscriber receivables, net of allowance for doubtful accounts of
$116,572 and $154,692, respectively 4,334,563 5,424,260
Systems and equipment, net 104,197,674 138,729,592
Intangible assets, net 38,260,678 57,193,102
Prepaids and other 2,735,940 3,297,573
------------ -------------
Total assets $ 151,742,632 $ 207,047,625
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued expenses $ 14,854,052 $ 17,152,286
Subscriber deposits and deferred revenue 4,078,407 5,434,097
Long-term debt and other obligations 152,445,620 179,250,312
------------ -------------
Total liabilities 171,378,079 201,836,695
------------ -------------
Commitments and contingencies
Partners' capital (deficit):
General partners (19,635,447) -
Limited partners - 5,210,930
------------ -------------
Total partners' capital (deficit) (19,635,447) 5,210,930
------------ -------------
Total liabilities and partners' capital (deficit) $ 151,742,632 $ 207,047,625
=============== ===============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 67,291,506 $ 68,807,763 $ 62,337,218
------------ ------------ ------------
Operating expenses:
Systems operations 31,343,006 31,502,762 28,353,154
Selling, general and administrative 8,086,624 8,129,733 6,439,308
Management fee to affiliate 3,028,118 3,092,354 2,804,374
Depreciation and amortization 24,415,370 24,672,569 21,738,425
------------ ------------ ------------
Total operating expenses 66,873,118 67,397,418 59,335,261
------------ ------------ ------------
Operating income 418,388 1,410,345 3,001,957
Interest expense (20,914,341) (21,036,934) (20,132,735)
Interest income 52,533 23,710 36,128
Gain (loss) on sale of assets (4,088,370) (226,185) 183,095
Other income (expense), net (314,587) (218,818) (384)
------------ ------------ ------------
Net loss $(24,846,377) $(20,047,882) $(16,911,939)
============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN PARTNERS' CAPITAL (DEFICIT)
Limited Partners
General -------------------------------------------------------------------------
Partners Class B Class C Class D Class E Total Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (18,257,812) (256) (106,366) (1,632,311) (51,137) (1,790,070) (20,047,882)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1997 -- 744 309,634 4,751,689 148,863 5,210,930 5,210,930
Net loss (19,635,447) (744) (309,634) (4,751,689) (148,863) (5,210,930) (24,846,377)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1998 $(19,635,447) $ -- $ -- $ -- $ -- $ -- $(19,635,447)
============ ============ ============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(24,846,377) $(20,047,882) $(16,911,939)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 20,572,418 20,554,588 17,646,095
Amortization expense 3,842,952 4,117,981 4,092,330
Amortization included in interest expense 1,269,126 934,770 1,294,650
Financeable interest -- -- 597,849
Provision for doubtful accounts receivable 1,209,797 1,992,318 1,229,536
Loss on disposal of cable systems 4,088,370 226,185 --
Gain on disposal of equipment -- -- (183,095)
Changes in assets and liabilities:
Subscriber receivables (120,100) (1,418,451) (3,715,522)
Prepaids and other 561,633 (1,288,805) (397,610)
Accounts payable and accrued expenses (3,837,431) (1,637,383) 7,751,279
Subscriber deposits and deferred revenue (1,355,690) 670,770 2,116,914
------------ ------------ ------------
Net cash provided by operating activities 1,384,698 4,104,091 13,520,487
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of cable systems - net of trades (999,452) (825,000) (16,009,136)
Proceeds from sales of cable systems 38,619,045 3,304,334 --
Proceeds from sale of equipment -- -- 683,172
Acquisition of capital assets (11,337,085) (15,222,381) (21,397,549)
Other intangible assets (84,742) (536,197) (873,882)
------------ ------------ ------------
Net cash provided by (used in) investing
activities 26,197,766 (13,279,244) (37,597,395)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under term debt and revolver 10,825,000 12,400,000 38,226,377
Payments under term debt and revolver (39,550,000) (3,051,377) (14,893,894)
Borrowings under other debt 4,014,110 259,386 372,663
Payments under other debt (2,153,802) (368,103) (311,925)
Payment of debt issue costs (907,093) -- (408,803)
------------ ------------ ------------
Net cash provided by (used in) financing
activities (27,771,785) 9,239,906 22,984,418
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (189,321) 64,753 (1,092,490)
Cash and cash equivalents, beginning of year 2,403,098 2,338,345 3,430,835
------------ ------------ ------------
Cash and cash equivalents, end of year $ 2,213,777 $ 2,403,098 $ 2,338,345
============ ============ ============
<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
fifteen states, predominantly including Mississippi, Nebraska, Kansas,
Missouri, Illinois, Kentucky, Iowa, Alabama, Georgia and Florida.
The Partnership has incurred losses each year since its inception and
has a partnership deficit of $19.6 million at December 31, 1998. During
1998, the Partnership began implementation of a strategy whereby it
would sell its cable television systems in its non-core regions and
focus on improving and acquiring cable television systems in its core
regions, which are primarily located in Illinois, Kansas, Kentucky,
Mississippi and Nebraska. In 1998, the Partnership received net proceeds
from sales of its non-core cable television systems of $38.6 million,
which was primarily used to pay down the amounts due under its revolving
line of credit. Management intends to seek new debt and/or equity
financing and reduce its borrowings under its revolving line of credit
through the sales of non-core systems in order for the Partnership to
meet its business plan and sustain operations. However, there is no
assurance that the Partnership will be able to implement its strategy
and raise new capital.
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 7). Capital
Corp. does not have any operations other than its related purpose as
co-issuer. Investments in 20- to 50-percent-owned affiliates are
accounted for using the equity method (see Note 10).
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. (Class B),
Galaxy Telecom, Inc. (Class C and E), and Vantage Cable Associates, L.P.
(Class D). 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, and thereafter up to a maximum of 18
percent in annual 2 percent increments. General partner priority returns
increase to a maximum of 35 percent. The cumulative priority return totaled
approximately $95,487,000, $57,553,000 and $31,291,000 at December 31,
1998, 1997 and 1996, respectively.
F-7
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Organization, continued:
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.
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 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 their capital contributions and priority return
distributions to such partners. Partnership losses are allocated as
follows: first, to the general partners in proportion to their percentage
interest up to their capital amounts; secondly, to the limited partners in
proportion to their percentage interest up to their capital amounts; and
thereafter, to the general partners in proportion to their percentage
interest.
2. Summary of Significant Accounting Policies:
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, 1998 and 1997.
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
$3.0 million and $2.0 million at December 31, 1998 and 1997, respectively.
Though limited primarily to cable television subscribers, the concentration
of credit risk with respect to receivables is minimized by
F-8
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Concentrations of Credit Risk, continued:
geographical dispersion through approximately 540 individual cable
television systems ranging in size from approximately 10 subscribers to
approximately 4,800 subscribers located in small communities in the Midwest
and Southeast United States, and the large number of customers with
individually small balances on short payment terms.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("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 7) are valued using the closing bid price
market quotes, and as a result, the fair value of the Notes at December 31,
1998 and 1997 was $127,020,000 and $133,200,000, 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, 1998 and 1997.
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, to the extent of direct selling costs,
with any remaining balance deferred and recognized as revenue over the
estimated period that subscribers are expected to remain connected to the
cable television system.
Marketing Costs
Marketing costs are charged to operations in the period incurred totaling
approximately $1,822,000, $1,516,000 and $243,000 for the years ended
December 31, 1998, 1997 and 1996.
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.
F-9
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Systems and Equipment
Systems and equipment 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.
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.
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. These assumptions 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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000, for the Partnership). SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction, and, if it is, the type of hedge transaction.
Management of the Partnership anticipates that the adoption of SFAS No.
133 will not have a significant effect on the Partnership's results of
operations or its financial position.
3. Reporting Comprehensive Income:
In 1998, Galaxy adopted 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. Comprehensive loss was the same as net loss reported.
F-11
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Acquisitions and Dispositions of Cable Television Systems:
1998 Acquisitions and Dispostions
During 1998, the Partnership acquired one cable television system
serving approximately 300 subscribers in Georgia for approximately
$141,000, and traded four cable television systems serving approximately
850 subscribers in Nebraska for one cable television system serving
approximately 730 subscribers in Colorado.
During 1998, the Partnership disposed of the following cable systems:
Number
of
Cable Cash paid
Systems Selling by Partnership for Net
Region Sold Price Selling Expense Cash Received
-------------- --------- ------------- -------------- ---------------
Alabama 18 $ 2,760,000 $ 179,480 $ 2,580,520
Central 27 6,120,000 136,289 5,983,711
Illinois 36 2,596,300 48,780 2,547,520
Iowa 18 2,572,629 40,815 2,531,814
Kansas 20 1,579,146 24,896 1,554,250
Louisiana 5 9,500,000 39,701 9,460,299
Missouri 63 5,201,444 91,454 5,109,990
Nebraska 10 2,125,100 15,146 2,109,954
South Carolina 2 2,050,000 60,055 1,989,945
Wyoming 17 4,930,000 178,958 4,751,042
--------- ------------- --------------- ---------------
Total 216 $ 39,434,619 $ 815,574 $ 38,619,045
========= ============= =============== ===============
The aggregate sales price and related loss were as follows:
Systems and equipment 27,141,381
Intangible assets 15,566,034
---------------
Assets sold 42,707,415
Net sales price 38,619,045
---------------
Total loss on sale (4,088,370)
===============
F-12
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Acquisitions and Dispositions of Cable Television Systems, continued:
1997 Acquisitions and Dispositions
During 1997, the Partnership acquired certain cable television systems
serving approximately 1,610 subscribers in Nebraska for approximately
$875,000. In 1998, the purchase price was adjusted in accordance with
the amended asset purchase agreement and the Partnership paid an
additional $853,000 in cash. The effect of this adjustment on systems
and equipment, franchise cost and net loss was immaterial.
During 1997, the Partnership sold certain non-core cable television
systems serving approximately 3,080 subscribers in South Carolina,
Mississippi and Kansas for approximately $3.3 million.
Pending Transaction
On December 30, 1998, the Partnership entered into an asset exchange
agreement with Mississippi Cablevision, Inc. ("MCI"), an affiliate of
Telecommunications, Inc., whereby the Partnership will exchange 1 cable
television system plus pay $19.6 million in cash for 8 cable television
systems from MCI. The Partnership's cable television systems are located
primarily in Colorado, Iowa and South Dakota, while the MCI cable
television systems are located in Mississippi. This pending acquisition is
dependent on Galaxy obtaining various approvals and sufficient financing.
5. Systems and Equipment:
Systems and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
Depreciation Useful Life December 31,
Method Term 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cable television distribution
systems:
Head-end Straight-line 7 years $ 28,390,239 $ 36,996,781
Distribution plant Straight-line 12 years 91,011,687 106,644,279
Subscriber drops Straight-line 5 years 23,783,738 27,184,290
Other distribution -- -- 1,029,403 1,023,188
------------- -------------
144,215,067 171,848,538
Other:
Vehicles Straight-line 5 years 4,672,900 4,924,324
Buildings Straight-line 5 years 1,873,474 1,808,057
Furniture, fixtures and equipment Straight-line 5 years 5,479,623 5,127,605
Land -- -- 91,000 94,000
------------- -------------
156,332,064 183,802,524
Less accumulated depreciation (52,134,390) (45,072,932)
------------- -------------
Systems and equipment, net $ 104,197,674 $ 138,729,592
============= =============
</TABLE>
F-13
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Amortization Amortization December 31,
Method Period 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Goodwill, franchise costs and
subscriber lists Straight-line 15 years $ 41,306,900 $ 60,848,942
Debt issuance costs:
Senior Subordinated Notes Level Yield 10 years 5,403,197 5,402,197
Revolver and Term Loan Level Yield 7 years 3,286,912 2,778,347
Other Straight-line 15 years 1,114,325 812,858
------------ ------------
51,111,334 69,842,344
Less accumulated amortization (12,850,656) (12,649,243)
------------ ------------
Intangible assets, net $ 38,260,678 $ 57,193,102
============ ============
</TABLE>
7. Long-Term Debt:
Outstanding long-term debt is as follows:
December 31,
1998 1997
------------ ------------
Revolving Credit Facility $ 30,500,000 $ 59,225,000
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (405,000) (465,000)
Other, including capital leases 2,350,620 490,312
------------- -------------
Total $ 152,445,620 $ 179,250,312
============= =============
F-14
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Long-Term Debt, continued:
Revolving Credit Facility
The Term Loan Agreement was amended in September 1995 to a Revolving
Credit Facility ("the Revolver"). The Revolver, which has been
periodically amended, with the latest amendment occurring in March 1999,
allows the Partnership to borrow up to $55.9 million until June 1999
when the outstanding balance converts to a term loan. The first
principal payment is due on December 31, 1999, in an amount equal to 22%
of the converted balance, and in subsequent quarterly installments
escalating annually from 22 percent to 30 percent of the converted
balance through December 2002. Net proceeds from any system sale will
be used to reduce the commitment available under the Revolver. The
Revolver will require Galaxy to maintain compliance with certain
financial ratios and other covenants, such as total debt to annualized
cash flow, cash flow to interest expense, capital expense limits and
basic subscribers to total long term debt. The financial covenants in
the Revolving Credit Facility may significantly limit Galaxy's ability
to borrow under the Revolver.
The Revolving Credit Facility bears interest at prime plus 1.75% (9.50% and
10.25% at December 31, 1998 and 1997, 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, 1998 and 1997,
$30,500,000 and $59,225,000, respectively, of the Revolving Credit Facility
had been converted to an adjusted LIBOR rate at 8.879% and 8.875%,
respectively. The Partnership is required to pay a 0.50% per annum
commitment fee on the unfunded portion of the Revolving Credit Facility.
While the Partnership may elect to reduce amounts due under the Revolving
Credit Facility through payments of not less than $100,000, a mandatory
prepayment is required annually before each May 1 beginning in 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.
F-15
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Long-Term Debt, continued:
Revolving Credit Facility, continued:
The Revolving Credit Facility 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
incurrence ratio (total debt to pro forma annualized operating cash flow,
as defined).
The Revolving Credit Facility is collateralized by the Partnership's
assets. In the event of default, the lenders have the right to offset
deposits against the balance due.
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.
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
F-16
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Long-Term Debt, continued:
Senior Subordinated Notes, continued
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 1996 were received accordingly. No such
contributions were required in 1997 or 1998.
Five Year Maturities
The required principal payments on the Company's long-term debt and
obligations under capital leases at December 31, 1998, assuming no
additional borrowings, are as follows:
1999 $ 7,841,602
2000 7,929,018
2001 7,930,000
2002 9,150,000
2003 -
Thereafter 120,000,000
-------------
$ 152,850,620
=============
F-17
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Supplemental Disclosure of Cash Flow Information:
Interest payments during 1998, 1997 and 1996 were approximately $20.0
million, $20.8 million and $20.0 million, respectively.
Noncash investing and financing transactions for the year ended
December 31, 1998 were as follows:
Acquisition of cable systems through trades
of current systems $975,099
Capital expenditures included in accounts payable $1,539,197
Noncash investing and financingtransactions for the year ended
December 31, 1997 were as follows:
Capital expenditures included in accounts payable $1,051,408
Acquisition of equipment through issuance
of capital leases payable $212,800
Noncash investing and financingtransactions for the year ended
December 31, 1996 were as follows:
Capital expenditures included in accounts payable $417,910
Acquisition of equipment through issuance
of capital leases payable $159,585
Acquisition of cable systems through trades
of current systems $5,993,605
9. Commitments and Contingencies:
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 noncancelable capital leases consist of the
following:
Year Ending
December 31,
------------
1999 $ 33,765
2000 -
2001 -
2002 -
2003 -
-------------
Total minimum lease payments 33,765
Less amounts representing interest 2,187
-------------
Obligations under capital leases $ 31,578
=============
F-18
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Commitments and Contingencies, continued:
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
$304,000, $346,000 and $298,000 during 1998, 1997 and 1996, 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,
------------
1999 $ 274,990
2000 234,944
2001 223,604
2002 194,282
2003 176,566
Thereafter -
-----------
$ 1,104,386
===========
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 $1,235,000, $1,143,000 and $1,177,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, under such contracts.
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
approximately $217,000, $198,000 and $150,000 to the plan during 1998, 1997
and 1996, 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.
F-19
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Commitments and Contingencies, continued:
Franchises and Programming, continued
The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on
a fixed fee per subscriber. The Partnership has negotiated programming
agreements with premium service suppliers that offer cost incentives to the
Partnership under which premium unit prices decline as certain premium
service growth thresholds are met. In addition to volume pricing discounts,
some program suppliers offer marketing support to the Partnership in the
form of advertising funds, promotional materials, rebates and other
incentives. The Partnership's programming contracts are generally for a
fixed period of time, typically three to five years, and are subject to
negotiated renewal.
Cable Service Rate Regulation
Galaxy's operations are subject to regulation at the federal, state and
local levels. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals.
In October 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 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
9. 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; however, management does not expect the
new bill to have a significant adverse impact on the financial position or
results of operations of the Partnership.
Management of Galaxy believes that it has complied in all material respects
with the provisions of the FCC rules and regulations and the provisions of
local franchising authorities. Accordingly, no provision has been made in
the financial statements for any potential refunds. These rules and
regulations are, however, subject to judgmental interpretations, and the
impact of potential rate changes or refunds ordered by local franchising
authorities or the FCC could cause Galaxy to make refunds and/or lower its
rates for regulated services 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 the Partnership's
consolidated financial position, or future results of operations or cash
flows.
Certain customers in Mississippi have filed a class action lawsuit in
the U.S. District Court for the Northern District of Mississippi
alleging that the Partnership illegally charged a late fee on monthly
cable bills. The Partnership has denied any liability with respect to
this claim and is defending this action. Similar class actions against
other cable companies have been filed in several states, some of which
have been successful. At this point, management is unable to predict
the likely outcome or the potential for an adverse judgment, if any. An
adverse judgment against us could have a material, adverse affect on the
Partnership's consolidated financial position, or future results of
operations or cash flows. Management has not recorded any liability in
the consolidated financial statements that may arise from the
adjudication of this lawsuit.
F-21
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Related Party Transactions:
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 $3,294,000,
$3,409,000 and $3,071,000 for the years ended December 31, 1998, 1997 and
1996. 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, 1998 and 1997. 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
$515,000 and $405,000 as of December 31, 1998 and 1997, respectively, of
which approximately $205,000 and $118,000 as of December 31, 1998 and 1997,
respectively, represent receivables from GSMI.
Investment
The Partnership has a 40 percent membership interest in Galaxy American
Communications, L.L.C. ("GAC"). GAC was formed in September 1998 to
acquire, develop and operate cable television systems. During the period
from inception to December 31, 1998, GAC did not have any significant
operations. At December 31, 1998, the Partnership's investment balance in
GAC was $0 and the Partnership had a receivable balance from GAC of
approximately $223,000. In January 1999, the Partnership made its required
capital contribution of $800 in services to GAC and the other two members
of GAC made their required capital contributions of $600 each.
On December 31, 1998, GAC issued debt of approximately $31 million. Also,
on December 31, 1998, the Partnership sold cable systems, comprising
approximately 8,300 subscribers, to GAC for approximately $6.2 million and
recorded a loss on the sale of $4.3 million.
In December 1998, GSMI entered into a management agreement with GAC whereby
GSMI will operate and manage the GAC cable systems. For its management
services, GSMI will be paid a monthly fee of 2.5 percent of the gross
monthly receipts from the GAC cable systems. Also, in January 1999, the
Partnership entered into a shared cost agreement with GAC whereby the
Partnership will provide services in connection with the administration of
the GAC cable systems. The Partnership will be reimbursed for actual costs
incurred for administrative services provided to GAC.
F-22
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Quarterly Data, Unaudited:
The results of operations for each of the quarters in 1998 and 1997 were as
follows (thousands of dollars):
1998
--------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----- ----- ----- -----
Revenue $17,331 $17,472 $16,853 $15,636
Operating income (loss) 145 366 86 (179)
Net loss (3,858) (6,571) (8,348) (6,069)
1997
--------------------------------
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)
12. Subsequent Event:
On March 23, 1999, Galaxy signed an asset purchase agreement to sell
approximately 20 cable television systems located in Alabama, representing
approximately 5,800 subscribers for approximately $8,500,000, or
approximately $1,470 per subscriber.
F-23
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Partners
of Galaxy Telecom, L.P.
Our audits of the consolidated financial statements referred to in
our report dated February 19, 1999, except for Notes 7 and 12, as to
which the date is March 31, 1999, appearing on page F-2 of this 1998
Annual Report on Form 10-K also included an audit of the financial
statement schedule listed in the accompanying index on page F-1. In
our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Austin, Texas
February 19, 1999
F-24
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALAXY TELECOM, L.P. AND SUBSIDIARY
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - ---------------------------------- -------- --------------------- -------- --------
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other Accounts Deductions End of
Description of Period Expenses Describe Describe Period
- - ---------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Reserve and allowances deducted
from asset accounts-allowance
for uncollectible accounts $154,692 $1,614,118 $ - $1,652,238 (2) $116,572
Year ended December 31, 1997:
Reserve and allowances 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 allowances deducted
from asset accounts-allowance
for uncollectible accounts $834,425 $1,229,536 $ 186,791 (1) $1,838,802 (2) $411,950
<FN>
(1) Allowance for uncollectible purchased accounts.
(2) Uncollectible accounts written off, net of recoveries.
</FN>
</TABLE>
F-25
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 10. Directors and Executive Officers of the Registrants.
The general partners of Galaxy, Galaxy Telecom, Inc. ("Galaxy GP") and
Galaxy Telecom Investments, L.L.C. ("Galaxy Investments") (collectively, the
"General Partners"), have designated Galaxy GP as the managing general partner
of Galaxy, and, as such, Galaxy GP has responsibility for the overall management
of the business and operations of Galaxy. Galaxy Investments retains the right
to become the managing general partner at any time upon written notice to Galaxy
GP. The directors of Galaxy GP are also the managers of Galaxy Investments.
Galaxy is party to a Management Agreement with Galaxy Systems
Management, Inc. ("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.....53 Chairman, Chief Executive Officer and
Director of Galaxy Management and Galaxy GP
James M. Gleason.........35 President, Chief Operating Officer of
Galaxy Management and Galaxy GP
J. Keith Davidson........43 Executive Vice President, Chief Financial
Officer, Secretary and Director of Galaxy
Management and Galaxy GP
Ronald Voss..............55 Vice President - Corporate Development of
Galaxy Management
William P. Collatos......45 Director of Galaxy GP
Kenneth T. Schiciano.....36 Director of Galaxy GP
Richard D. Tadler........42 Director of Galaxy GP
Tommy L. Gleason, Jr. has served as Chairman, Chief Executive Officer and a
director of Galaxy Management and Galaxy GP, and a manager of Galaxy Investments
since December 1994. Mr. Gleason was President of CableMaxx, Inc., a wireless
cable television company, from 1993 to 1996. Since 1987, he has served as
president and director of Galaxy Cablevision Management, Inc., a general partner
of the managing general partner of Galaxy Cablevision, L.P. from which the
Company acquired the Galaxy Cablevision Systems. Mr. Gleason is an individual
general partner of Community Investment Partners, a venture capital fund in St.
Louis, Missouri and is currently a director of Galaxy America Communications.
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. Mr. Gleason is chairman of the NCTC. Mr. Gleason was
inducted into the Cable TV Pioneers in 1989.
43
<PAGE>
James M. Gleason has served as President, Chief Operating Officer and a
director of Galaxy Management since December 1994. Mr. Gleason also presently
serves as President, 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. Mr. Gleason is on the
board of the Small Business Cable Association and in 1992, he served as Chairman
of the Board of the NCTC. Mr. Gleason has 17 years of experience in the cable
television industry and is the brother of Tommy L. Gleason, Jr.
J. Keith Davidson has served as Executive Vice President, Chief Financial
Officer, Secretary and Director of Galaxy Management and Galaxy GP, director of
Galaxy Management and a manager of Galaxy Investments since December 1994. Mr.
Davidson is currently a director of Galaxy American Communications. From 1988 to
1994, Mr. Davidson was the Chief Financial Officer and Assistant Secretary of
Galaxy Cablevision Management, Inc. Mr. Davidson has 18 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 has 18
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 1995, Mr. Tadler was
a general partner of TA Associates. Mr. Tadler is a director of TechForce
Corporation.
44
<PAGE>
Item 11. Executive Compensation.
Management Agreement
Pursuant to the Management Agreement between Galaxy Management and Galaxy,
Galaxy Management, including Messrs. Tommy L. Gleason, Jr., J. Keith Davidson,
James Gleason and Ronald 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. In connection therewith they
undertake those activities and services that are customary in the cable
television industry for the account and on behalf of Galaxy. For a more detailed
description of the Management Agreement, see Item 13 of this Part III ("Certain
Relationships and Related Transactions -- Management Agreement").
Executive Compensation
None of the employees of Galaxy are deemed to be executive officers of
Galaxy. The Senior Managers are employees of Galaxy Management and the services
of such individuals are provided to Galaxy, for which services Galaxy pays
Galaxy Management a fee pursuant to the Management Agreement. The Senior
Managers are compensated in their capacity as executive officers of Galaxy
Management and therefore receive no compensation from 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,
1998, 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.
45
<PAGE>
<TABLE>
<CAPTION>
Galaxy Telecom, L.P.
--------------------
Name and Address of Number of % of % of
Beneficial Owner Type of Interest Units(1) Class Total Units
- - ------------------------------------ -------------------------------- ---------- ----- ------
<S> <S> <C> <C>
Galaxy Telecom Systems, Inc. Class A General Partnership Units 133,333 1 *
Class C Limited Partnership Units 416,000 100 *
Senior Managers Class E Limited Partnership Units 200,000 100 *
Galaxy Communications Systems, L.L.C Class A General Partnership Units 44,491,667 99.7 86.2
Class B Limited Partnership Units 1,000 100 *
Class D Limited Partnership Units - - -
Vantage Cable Associates, L.P. Class D Limited Partnership Units 6,384,000 100 12.4
c/o Farm Bureau Life Ins. Co.
5400 University Avenue
West Des Moines, IA 50266
Galaxy Telecom Systems, Inc.
--------------------
Name and Address of Number of % of % of
Beneficial Owner Type of Interest Units(1) Class Total Units
- - ------------------------------------ -------------------------------- ---------- ----- ------
Galaxy Telecom, Inc. Common Stock 100 100
Galaxy Communications Systems, L.L.C.
--------------------
Name and Address of Number of % of % of
Beneficial Owner Type of Interest Units(1) Class Total Units
- - ------------------------------------ -------------------------------- ---------- ----- ------
Galaxy Telecom Investments, L.L.C. Common Interests 100 100
[Galaxy Holdings] Common Interests
Galaxy Telecom, Inc.
--------------------
Name and Address of Number of % of % of
Beneficial Owner Type of Interest Units(1) Class Total Units
- - ------------------------------------ -------------------------------- ---------- ----- ------
Galaxy Telecom Management, L.L.C. (2) Class A Voting Common Stock 20,000 16.9 15.6
TA Associates Group (3) (4) Class A Voting Common Stock 63,281 53.3 49.3
125 High Street, Suite 2500
Boston, MA 02110
Spectrum Equity Investors, L.P. Class A Voting Common Stock 24,615 20.7 19.2
One International Pl., 29th Fl.
Boston, MA 02110
Fleet Equity Partners (5) Class A Voting Common Stock 5,810 4.9 4.5
50 Kennedy Plaza Class B Non-Voting Common Stock 14,703 100.0 11.4
Providence, RI 02903
46
<PAGE>
Galaxy Telecom Investments, L.L.C.
--------------------
Name and Address of Number of % of % of
Beneficial Owner Type of Interest Units(1) Class Total Units
- - ------------------------------------ -------------------------------- ---------- ----- ------
Galaxy Telecom Management, L.L.C. (6) Common Interests 990 99.0 *
Voting Preferred Interests 288,459 7.3 6.4
TA Associates Group (7) (3) Common Interests 8 * *
125 High Street, Suite 2500 Voting Preferred Interests 3,452,523 87.8 76.6
Boston, MA 02110
Spectrum Equity Investors, L.P. Common Interests 2 * *
One International Pl., 29th Fl.
Boston, MA 02110
Fleet Equity Partners (8) Common Interests 2 * *
50 Kennedy Plaza Voting Preferred Interests 192,646 4.9 4.3
Providence, RI 02903 Non-Voting Preferred Interests 570,367 100.0 12.7
Galaxy Telecom Management, L.L.C.
--------------------
Name and Address of Number of % of % of
Beneficial Owner Type of Interest Units(1) Class Total Units
- - ------------------------------------ -------------------------------- ---------- ----- ------
Tommy L. Gleason, Jr. Common Interests 1,027,500 51.9 51.4
James M. Gleason Common Interests 922,500 46.1 46.1
J. Keith Davidson Common Interests 45,000 2.3 2.3
Ronald Voss Common Interests 5,000 * *
<FN>
*..Less than one percent.
(1)Share and unit ownership amounts have been rounded to the nearest whole
number.
(2)Includes: (i) 20,000 shares owned of record by Galaxy Management as to which
shares 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.
(3)Includes 19,524 shares of Class A Voting Common Stock of Galaxy Telecom
Systems, Inc. ("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
shares of 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.
(4)The beneficial owners listed in Notes 3 and 7 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
Telecom Systems, Inc. and managers of Galaxy Communications Systems, L.L.C.,
are a Managing Director and a Vice President, 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 VI L.P. 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.
(5)Includes 581 shares of Class A Stock and 1,470 shares of Class B Nonvoting
Common Stock of Galaxy Telecom Systems, Inc. ("Class B Stock") owned by
Chisholm Partners II L.P., and 3,660 shares and 9,263 shares of Class A Stock
and Class B Stock, respectively, owned by Fleet Growth Resources, Inc.
47
<PAGE>
(6)Includes: (i) 990 Common Interests and 298,459 Voting Preferred Interests
owned of record by Galaxy Management 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.
(7)Includes 8 units of Common Interests in Galaxy Communications Systems,
L.L.C. ("Common Interests") and 3,452,523 units of Voting Preferred Interests
in Galaxy Communications Systems, L.L.C. ("Voting Preferred Interests") owned
by Advent VII Investor Corp.
(8)Includes 0.18 units of Common Interests, 15,460 units of Voting Preferred
Interests, 45,775 units of Non-Voting Preferred Interests in Galaxy
Communications Systems, L.L.C. 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 Non-Voting Preferred Interests owned by Fleet Growth Resources, Inc.
and 0.49 units of Common Interest, 53,155 units of Voting Preferred
Interests, and 157,378 units of Non-Voting Preferred Interests owned by Fleet
Equity Partners VII, L.P.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions.
Management Agreement
Galaxy Management, which is owned by the Senior Managers, 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 neither
Tommy L. Gleason, Jr., nor 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. The
Management Agreement will terminate in its entirety upon the sale or other
distribution of all of Galaxy's systems or upon the dissolution or winding up of
Galaxy, which may be effected by the Equity Investors in certain circumstances
pursuant to the terms of the Equity Holders Agreement described below.
The Management Agreement provides that Galaxy Management is authorized to
perform management services including, among other things: operation and control
of the physical assets of the Systems; engineering and supervision of expansion
and construction activities relating to the Systems; negotiation, administration
and extension of franchise and pole attachment agreements and agreements with
utility companies; management of programming agreements; marketing; purchasing;
budgeting; billing, record-keeping, accounting and financial reporting; tax
return preparation; and hiring, supervision and termination of 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 1998, Galaxy
paid Galaxy Management approximately $266,000 in reimbursed expenses.
48
<PAGE>
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, 1998, Galaxy
incurred a management fee of $3,028,118. 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, 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.
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.
49
<PAGE>
The Equity Holders Agreement also restricts transfers of equity interests
in Galaxy GP and Galaxy Investments by the Senior Managers and provides the
Equity Investors with piggyback registration rights and demand registration
rights with respect to equity interests in the Company, Galaxy GP and Galaxy
Investments. The Equity Investors have the right to require the Company, Galaxy
GP and Galaxy Investments to restructure in order to facilitate a sale of the
Company or its cable systems and to consummate such a sale.
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.
50
<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.
On December 31, 1998, Galaxy acquired a 40% interest in Galaxy American
Communications, LLC ("GAC"). This interest was acquired in conjunction with the
sale of cable television systems to GAC. There was no cash investment by Galaxy
and there is no present market value for this interest.
51
<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.
52
<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, 1999 /s/ Tommy L. Gleason, Jr.
By: Tommy L. Gleason, Jr.
Chairman, Chief Executive Officer
and Director
March 31, 1999 /s/ James M. Gleason
By: James M. Gleason
Chief Operating Officer
March 31, 1999 /s/ J. Keith Davidson
By: J. Keith Davidson
Executive Vice President, Chief
Financial Officer and Director
53
<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.
54
<PAGE>
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.
55
<PAGE>
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 of the Amended and Restated Loan Agreement dated
October 21, 1996 by and among Galaxy, Galaxy Telecom Capital Corp.
and Fleet National Bank. It was 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.
10.14- Amendment No. 2 of the Amended and Restated Loan Agreement dated
March 28, 1997 by and among Galaxy, Galaxy Telecom Capital Corp.
and Fleet National Bank, is incorporated herein by reference.
10.15- Amendment No. 3 of the Amended and Restated Loan Agreement dated
November 14, 1997 by and among Galaxy, Galaxy Telecom Capital
Corp. and Fleet National Bank, is incorporated herein by reference.
10.16- Amendment No. 4 of the Amended and Restated Loan Agreement dated
March 27, 1998 by and among Galaxy, Galaxy Telecom Capital Corp.
and Fleet National Bank, is incorporated herein by reference.
10.17- Amendment No. 5 of the Amended and Restated Loan Agreement dated
September 8, 1998 by and among Galaxy, Galaxy Telecom Capital Corp.,
Fleet National Bank, State Street Bank and Trust Company, The First
National Bank of Chicago and Union Bank. It was filed as Exhibit 10
to Galaxy's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, 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.
56
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