SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
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For the transition period from to
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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
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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 securitiesheld by non-affiliates of
Galaxy Telecom Capital Corp.: $0
Number of shares of Galaxy Telecom Capital Corp. outstanding as of March 31,
2000: 100
DOCUMENTS INCORPORATED BY REFERENCE: Not applicable.
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GALAXY TELECOM, L.P.
FORM 10-K
Year Ended December 31, 1999
TABLE OF CONTENTS
Item Topic Page
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PART I
1. Business............................................................ 3
2. Properties..........................................................29
3. Legal Proceedings...................................................29
4. Submission of Matters to a Vote of
Security Holders....................................................29
PART II
5. Market for the Registrant's Securities
and Related Security Holder Matters.................................30
6. Selected Financial Data.............................................30
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................31
7a. Qualitative and Quantitative Disclosures about
Market Risks........................................................41
8. Financial Statements and Supplementary Data........................F-1
9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure............................. 42
PART III
10. Directors and Executive Officers of the Registrant..................42
11. Executive Compensation............................................. 43
12. Security Ownership of Certain Beneficial
Owners and Management...............................................44
13. Certain Relationships and Related Transactions......................46
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.............................................50
Signatures..................................................................50
2
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PART I
Item 1. Business.
General
The Company owns, operates and develops clusters of classic cable
television systems ("Systems"), primarily in rural and non-metropolitan areas in
the Midwestern and Southeastern United States. The Company seeks to be the
premier provider of cable and broadband services in its core service areas
(which include Southeastern Nebraska, Kansas, Southern Illinois, Western
Kentucky and Northern and Central Mississippi) by: (i) developing, upgrading and
acquiring cable television systems in these areas, and (ii) utilizing its fiber
optic network to provide enhanced cable television services, such as digital
cable and high-speed Internet access, and advanced telecommunications and broad
band network services.
The Partnership has incurred losses each year since its inception and has a
partnership deficit of $31.9 million at December 31, 1999. During 1999, the
Partnership continued 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 1999 and
1998, the Partnership received proceeds from sales of its non-core cable
television systems of $10.1 million and $36.8 million, respectively, which was
primarily used to pay down the amounts due under its revolving line of credit.
At December 31, 1999, the Partnership was not in compliance with certain
covenants under its term loan agreement. As discussed in Note 7, on March 31,
2000 the Partnership amended its term loan agreement to modify financial
covenants and change the maturity date of all outstanding borrowings under the
term loan agreement.
Additionally, as part of this amended term loan agreement, the Partnership must
have a definitive sale agreement in force by May 31, 2000 to sell substantially
all the interests of the Partnership sufficient for the repayment of all
Partnership loans including the Senior Subordinated Notes. This definitive
agreement shall not contain any such contingencies allowing the purchaser to
terminate such an agreement arising from: (a) the failure of such purchaser to
obtain the financing necessary for purchase, (b) the failure of such purchaser
to obtain the approvals necessary for such purchase or (c) relating to the
completion of any due diligence review by such purchaser other than completion
of reasonable due diligence customarily to be completed in such transaction
after signing such agreement. Absent of such an agreement to sell substantially
all the assets of the Company triggers an event of default under the terms of
the amended loan agreement.
Management is actively pursuing the sale of the interests of the
Partnership in accordance with the amended term loan agreement. However,
entering into a definitive agreement as described above by May 31, 2000 is not
assured.
In light of the Partnership's current projected earnings and cash flow,
the Partnership believes it will have the financial resources to maintain its
current level of operations until December 31, 2000, the term loan maturity
date. However, cash generated from operations alone will not be sufficient to
pay the term loan on December 31, 2000 without proceeds from the sale of assets
or refinancing of the term loans. Additionally, such a sale as required by the
loan agreement would represent a change in control as defined in the Senior
Subordinated Loan Agreement and would represent an event of redemption.
Absence of the completion of the aforementioned definitive agreement, and
the Partnership's inability to meet its cash flow needs, raises substantial
doubt about its ability to continue as a going concern.
Galaxy believes there are significant advantages to acquiring and
operating classic cable television systems. Historically, 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.
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The three 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(TM) 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.
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.
At December 31, 1999, the Partnership was not in compliance with certain
covenants under its term loan agreement. As discussed in Note 7, on March 31,
2000 the Partnership amended its term loan agreement to modify financial
covenants and change the maturity date of all outstanding borrowings under the
term loan agreement.
Background
The Senior Managers, Tommy L. Gleason, Jr., James M. Gleason and J. Keith
Davidson have been involved in the construction, acquisition, ownership,
management and operation of classic cable television systems as a team for more
than 15 years. They have collective experience in the cable television industry
exceeding 60 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.
4
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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.
During 1996, Galaxy entered into definitive agreements to acquire selected
cable television systems representing approximately 16,200 subscribers from
Cablevision of Texas, High Plains Cable, Midcontinent Cable, Five Rivers Cable
Company, Hurst Communications and CS Cable Services, Inc., for approximately
$15.8 million, or approximately $980 per subscriber. During 1996, Galaxy traded
one system located in Kansas representing approximately 7,000 subscribers for
assets comprising six cable television systems of Tele-Communications, Inc.
located in northern Mississippi representing approximately 10,400 subscribers.
Galaxy also 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.
During 1997, Galaxy entered into definitive agreements to acquire selected
cable television systems representing approximately 1,610 subscribers from TCI
Cable of the Midland., for approximately $1.7 million, or approximately $1,056
per subscriber. During 1997, Galaxy sold systems located in South Carolina,
Mississippi and Kansas representing approximately 3,080 subscribers for
approximately $3.3 million, or approximately $1,070 per subscriber.
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 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"). 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 Acquisitions, Dispositions and Trades
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, and recorded a gain on sale of approximately $1.0 million. Galaxy
used the proceeds from this sale to pay down principal of the revolving note.
On May 1, 1999, Galaxy traded 6 cable television systems,
representing approximately 7,500 subscribers for seven cable television systems,
representing approximately 7,100 subscribers from Mississippi Cablevision, Inc.
("MCI"), an affiliate of Telecommunications, Inc. The Galaxy cable television
systems are located primarily in Colorado, Iowa and South Dakota, while the MCI
cable television systems are located in Mississippi. The trade was accounted for
as a business combination in accordance with the Accounting Principles Board
Opinion No. 16 "Business Combinations." The estimated fair market value of the
cable television systems received was approximately $9.4 million or
approximately $1,300 per subscriber. The fair market value of the cable
television systems received was estimated by using the purchase price (price per
subscriber) for similar cable television systems bought from MCI by an affiliate
of Galaxy. The net historical cost of the cable television systems given up was
approximately $6.9 million, resulting in Galaxy recording a gain on sale of
approximately $2.5 million, net of expenses.
On June 23, 1999, Galaxy sold 8 cable television systems, located
primarily in Alabama, representing approximately 5,500 subscribers for
approximately $8.4 million, or approximately $1,540 per subscriber, and recorded
a gain on sale of approximately $1.8 million. Galaxy used the proceeds from this
sale to pay down principal of the revolving note.
On October 1, 1999, Galaxy sold seven satellite master antenna television
systems("SMATV's") and two cable systems located primarily in the Kansas City
area, representing approximately 1,165 subscribers for approximately $1.36
million, or approximately $1,161 per subscriber, and recorded a gain on sale of
approximately $244,000. Galaxy used the proceeds from this sale to pay down
principal of the revolving note.
Pending Dispositions
On March 31, 2000, Galaxy sold one cable television system, located in
Kansas, representing approximately 1,424 subscribers for approximately $3.5
million, or approximately $2,492 per subscriber. Galaxy will use the proceeds
from this sale to pay down principal of the term loan.
Cable Operations
The Company has been focusing on increasing its cash flow generated from
classic cable markets which are in or contiguous to its Core Systems. By
clustering Systems, the Company believes that it realizes economies of scale,
such as reduced payroll expenses, reduced local management and technical costs
per subscriber, reduced direct sales expenses, increased local advertising sales
and more efficient introduction and utilization of new technologies. The Company
will continue to explore acquiring systems in its core service areas and
divesting its Non-Core Systems.
The Company is in the midst of a significant capital expenditure plan
designed to upgrade and interconnect its Core Systems by installing fiber optic
cable and associated electronic equipment. Such installation allows the Company
to significantly increase the transmission capacity of the affected systems
(thereby providing the Company with the opportunity to add new programming
services, such as Digital Cable), increase the quality of such transmissions and
achieve operational efficiencies, including the reduction of headends and
related expenses. The Company has realized increased revenues and cash flow in
its Core Systems where the Company has implemented upgrades and
interconnectivity.
Cable Strategy. The Company's cable strategy is to achieve superior operating
performance by consolidating its operations within its Core Systems and
utilizing and expanding its fiber optic network beyond its current 1,400 miles
to offer a broader array of services while improving service quality and
lowering operating costs. The Company's cable strategy consists of the following
elements:
o Focus on Expansion of Core Systems. The Company intends to continue its
focused acquisition and consolidation strategy within its Core Systems. The
Company recently acquired cable systems from TCI that are contiguous to the Core
Systems operations in Northern Mississippi. The Company will continue to pursue
acquisitions of systems in close proximity to its Core Systems that can be
incorporated into its current or planned fiber network. The Company believes
that it will be able to further enhance subscriber cash flows as it completes
acquisitions complementary to its Core Systems, further upgrades and expands its
fiber network in its core service areas, and continues to divest its Non-Core
Systems.
o Implement Operating Efficiencies. Upon acquiring a System, the Company
implements extensive management, operational and technical changes designed to
improve operating efficiencies and increase operating cash flow. By centralizing
and upgrading customer support functions, the Company expects to reduce
administrative costs and better manage and train employees, while providing a
higher level of customer service. The Company also seeks to reduce technical
operating costs and capital expenditures by consolidating headend facilities.
The Company's goal is to continue to reduce the number of headends in its Core
System to fewer than 100, while assuming the same number of total subscribers.
o Strategically Upgrade Systems. The Company is currently upgrading and
interconnecting its system capabilities by significantly increasing the amount
of fiber optic cable in its Core Systems. In addition to the resulting reduction
in the number of headends required and increased channel capacity, the
installation of fiber optic cable will allow the Company to provide enhanced
services, including Digital Cable and high-speed Internet access via cable
modems. Digital Cable, which the Company is currently testing in one of its Core
Systems, includes near video-on-demand, multi-channel pay-per-view, inter-active
navigator and multiplex premium services by employing video compression
technology. This technology allows the Company to offer up to 12 digital
channels in the same frequency spectrum required to transmit a single analog
channel. Cable modems permit high-speed Internet access and enhanced web site
services. The Company has 44 cable modem customers as of December 31, 1999. The
fiber enhancement of the Company's Core Systems will also allow it to aggregate
larger numbers of subscribers on each headend. The Company believes this allows
it to increase advertising margins because the ad insertion equipment which the
Company installs in each headend will reach more subscribers.
o Enhance Customer Value. The Company strives to assure product quality and
reliable service. The Company's regional call centers incorporate advanced
computer technology and communications equipment which allow the Company to
effectively manage its Systems. The Company believes that by investing in
ongoing, recurring training and incentive plans for both its customer service
staff and technical personnel it is able to maintain a high level of commitment
to service among these important customer contact employees.
Telecommunications Services Operations
As the Company began to deploy fiber optic cable in Nebraska and Kansas to
interconnect its Systems, it was approached by a group of educational
institutions and state agencies about utilizing this network to provide them
with advanced telecommunications services. Upon further review of demand for
these services in Nebraska and Kansas, the Company realized that the offering of
video conferencing for distance learning, wide area network connections and an
intrastate virtual private telephone network (which includes four-digit dialing
and Internet access) (the "Telecom Services") represented an attractive new
business opportunity for the Company with the potential for high operating
margins. In July 1997, and September, 1997, the Company began to provide one or
more of these services to schools in Nebraska and Kansas, respectively. As of
December 31, 1999, the Company served 70 schools in Nebraska and 6 schools in
Kansas.
Markets Served. The Company has developed detailed business and network
architecture plans for each of Nebraska and Kansas in order to successfully
market to the educational institutions and state agencies in these states and
take advantage of the sizeable demand for such Telecom Services. The Nebraska
plans call for these services to be delivered over the Company's Nebraska fiber
optic network (the "Nebraska Network"), which was originally designed to serve
its cable television systems. As a result, the Telecom Services can be delivered
at little additional incremental cost to the Company. The Company has already
constructed 900 miles of fiber optic cable in Nebraska and 36 miles of fiber
optic cable in Kansas.
Although the Nebraska market represents a potentially large revenue
opportunity for the Company, the size of the Kansas market opportunity is
significantly greater. Kansas has approximately 2,350 schools and 109 state
agencies, and the Company currently intends on offering Telecom Services to many
of these schools and agencies which are inside service territories currently
served by the Company's Kansas Systems. Other of these educational sites and
state agencies, however, are in areas outside of the service territories served
by the Company's Kansas Systems. As a result, Galaxy intends to expand its
Kansas fiber optic network (the "Kansas Network") beyond the areas served by its
Kansas Systems. This expansion will only occur in areas where either a school or
state agency has entered into an exclusive long-term contract with the Company
to provide Telecom Services. The actual miles of fiber optic cable laid in the
Kansas Network will be dependent on the number schools and state agencies which
enter into contracts with the Company.
Telecommunications Strategy. The Company's telecommunications services
strategy is to significantly enhance profitability by leveraging its fiber optic
network and existing infrastructure to broaden its customer base through the
provision of telecommunications and broadband services.
o Expand Telecommunications Offerings. The Company has designed its fiber
optic network with significant excess capacity to support a wide array of
telecommunications services and to be compatible with technologies still under
development in the industry, including server-based applications such as virtual
LANs, e-commerce, and voice over the Internet. The Company's fiber optic network
can provide up to 150 megabit WAN connections, private intranet services,
high-speed Internet access and intrastate virtual private networks using
four-digit dialing for multi-site customers. The Company can resell its excess
capacity to competitive local exchange carriers ("CLECs") and long distance
companies operating in its service areas. As the fiber optic network is built
out, the Company expects to expand its customer base initially to include
additional schools, and eventually governmental entities, businesses, and
strategic partners all of which can be added to the network at little
incremental cost.
o Concentrate Operations Geographically. The Company intends to provide
the Telecom Services in Nebraska and Kansas where it believes it has a
competitive advantage to be the low cost, superior customer service provider.
The Company can build out its fiber optic network at lower incremental costs
than competitors in these states because of the Company's existing cable
infrastructure, lower labor costs than in urban markets and favorable
topography. In addition, the fact that the Company will be first-to-market with
Telecom Services in these states, the sparse population of areas served and the
lack of existing infrastructure in both states create significant time and cost
barriers to entry for potential competitors.
o Provide Customized Services. The Company tailors service offerings,
sales and marketing techniques and network deployment to meet the different
needs of its customers. By working closely with customers, the Company designs
and engineers the services for each customer to meet the particular needs of
that customer. The Company has found that many of its competitors only offer
communication connections to customers, and that those customers must then
determine how to effectively use the communication capability. The Company
offers turn-key solutions by providing scaleable technology and training
together with fiber optic connections, thereby permitting the customer to more
effectively use its fiber optic connection. The Company believes its ability to
tailor services provides a distinct advantage over its potential competition for
contracts.
o Pursue Demand-Driven Network Deployment. The Company utilizes a
demand-driven approach to network construction by marketing and securing
long-term contracts for its services before committing capital expenditures to
develop or expand its fiber plant. The Company seeks to secure 5-10 year
contracts which provide for the Company to be the exclusive provider to its
customers of the services rendered for the duration of the contract.
Furthermore, pursuant to the terms of certain customer contracts, the Company
receives up-front reimbursement for a portion of the capital expenditures
required to purchase the necessary equipment and add the customer to its
network.
o Develop Strategic Relationships. The Company continues to seek to enter
into mutually beneficial strategic relationships with telecommunications service
providers and other entities operating in the same regions as its Core Systems.
The Company has an agreement with Broadband Networks, Inc. ("BNI"), a
telecommunications system designer and integrator, pursuant to which BNI
provides system design, grant process and marketing support, and equipment
procurement and installation to Telecom Service customers of the Company. The
Company has developed a strategic relationship with Cable USA, a communications
provider serving areas in Nebraska not currently served by the Company, to
interconnect their respective fiber optic networks to offer their broadband
services over a larger network. The Company is also in discussions with certain
CLEC providers pursuant to which the Company will provide the CLEC with access
to its fiber network. This will give the CLEC a broader reach into the tertiary
and more rural markets See "Risk Factors-Reliance Upon Certain Key Vendors" and
"Company-Telecommunications Services Operations; Strategic Relationships.".
The Company feels that their fiber network in both markets will be an
affordable means to CLECs for the transportation of both local and long distance
traffic back to their switch locations. One such CLEC is Birch Telecom, a Kansas
City based operator, whom the Company is working to develop an agreement which
will give Birch a broader reach into the tertiary and more rural markets. The
Company has developed a strategic relationship with Cable USA in Nebraska to
interconnect their respective fiber optic networks to offer their broadband
services over a larger network. Cable USA is a cable television provider, a
certified competitive access provider, a long distance carrier, a cellular
provider and has also filed with the Nebraska Public Service Commission for
authorization to conduct CLEC services in the State.
Marketing, Rates and Collections
The Company aggressively markets and promotes its cable television systems
with the objective of increasing penetration and average revenue per subscriber.
The Company actively markets the basic and premium programming of the Systems
primarily through door-to-door selling efforts, telemarketing, and, to a lesser
degree, through media advertising and direct mail. Each of the Company's
customer service centers has a Marketing Director who coordinates direct
door-to-door campaigns throughout the geographic areas of the Systems and is
responsible for internal incentives for the customer service and technical
staffs. The Marketing Director also insures that the Company is providing high
quality sales and service by supervising and training direct sales
representatives and assessing picture and service quality within the Company's
Systems. Customer service representatives follow up by telephone contact with
the customer on three separate occasions, generally 10, 30 and 60 days following
a new installation, to assess the quality of the installation, the overall
service the customer is receiving and to assure customer satisfaction.
The Company's current monthly rates for full basic service range from
$15.00 to $31.20, and rates for premium services from $6.95 to $13.40 per
service. The Company's goal has been to standardize its programming, rates, and
premium security over all of the Systems. During the past two years emphasis has
been placed on adding core programming to standardize channel line-ups,
obtaining discounted programming rates for channel placement, and negotiating
programming contracts that offer attractive rates and launch support. The
Company has restructured its packaging strategy offering multiple premium
services to range from $7.95 to $28.95. For example, a customer can receive the
Starz/Encore package for as low as $7.95 or the Showtime/The Movie Channel
Package for $10.95. This has allowed the customer several premium package
choices, while uncomplicating the sales and training process. Standardization of
the Company's channel lineups, programs, and pricing has simplified training,
improved system performance, and reduced cost.
The Company uses Convergys' Cablemaster 2000 for its billing system. 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 the Company's central payment processing center in Sikeston,
Missouri. If after 15 days a customer has not made a payment, the customer is
charged a late payment fee. The Company 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 to the customer within a week after disconnection and 30
days thereafter the customer's account is referred to a collection agency. The
Company has contact with the Convergys center via phone and computer interface
and has immediate access to all of its billing and customer information as if
the process were done in-house.
In addition to monthly and installation fees, additional potential sources
of revenue for cable operators are the sale of local spot advertising time on
locally originated and satellite-delivered programming. The Company is realizing
significant growth in local advertising as it consolidates headends. The Company
believes that significant growth can be sustained as the average number of
subscribers per headend increases with consolidation. Cable systems also
generate revenue through sales of products offered through home shopping
channels since the local cable system receives a commission each time one of its
subscribers makes a purchase. The Company has increased its carriage of both QVC
and Home Shopping Network and has received launch support from each programmer.
Consequently the Company has increased its revenue from home shopping 33% from
1997 to 1999. Other potential sources of revenue include pay-per-view movies and
events (such as concerts, sporting events, and other entertainment features).
The Company currently does not generate significant revenues from pay-per-view.
However, the Company believes that, through its planned roll out of Digital
Cable service, pay-per-view revenues will show significant growth over the next
few years.
Programming
The Company typically carries a wide array of programming on its basic
service. To enhance value for its customers, the Company selectively modernizes
and upgrades its cable plant to increase the number of channel offerings and
improve the quality of signal delivered to its customers. The Company regularly
evaluates the programming offered to its customers and has significantly
increased the number of basic channels offered in its systems over the past two
years. The Company has launched an aggregate of approximately 3,000 channels of
programming over that time period. The Company was also one of the first cable
operators to commit to provide The Disney Channel as part of its basic service,
and now carries the Disney channel only as a basic service. The Company also has
an ongoing program of repackaging its premium channels to improve customer value
and satisfaction.
The Company has various arrangements to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per subscriber. The Company has negotiated programming arrangement
with premium service suppliers that offer cost incentives to the Company under
which premium service unit prices decline as certain premium service growth
thresholds are met. In addition to volume pricing discounts, some program
suppliers offer marketing support to the Company in the form of advertising
funds, promotional materials, rebates and other incentives. The Company's
programming arrangements generally are for a fixed period of time, typically
three to five years, and are subject to negotiated renewal, and may be
terminated in certain instances.
The Company is also a member of the National Cable Television Cooperative
(the "NCTC"), a purchasing cooperative that negotiates volume discounts on
behalf of its members for both programming and hardware, and benefits in the
aggregate nearly 10 million cable subscribers.
The Company has various retransmission consents with several commercial
broadcast stations. None of these consents require direct payment of fees for
carriage; however, in some cases the Company has entered into agreements with
certain stations to carry satellite-delivered cable programming which is
affiliated with the network carried by such stations. In one case, the Company
agreed to spend small amounts on advertising with the station on an annual basis
over the three-year term of the agreement. These agreements are in effect until
December 31, 2002. There can be no assurance that such agreements can or will be
renewed under similar terms. See "-Legislation and Regulation."
The Company's cable programming costs have increased in recent years and
are expected to continue to increase due to additional programming being
provided to customers, increased costs to produce or purchase cable programming
and other factors. The Company believes it will continue to have access to cable
programming services at reasonable price levels, although there can be no
assurances with respect thereto. The Company believes that a significant amount
of new cable television programming is becoming available and that the Company
will be able to identify and take advantage of available incentives associated
with channel position and additional channels to accommodate such expanding
programming. The Company expects it will be able to recover programming cost
increases through rate increases.
Service, Installation and Repair
As competition has increased in the cable television industry, the Company
has developed an infrastructure that attempts to maximize the value of services
provided to its customers by assuring the customer of a quality product and
reliable on time service. The Company has equipped its regional customer service
call centers with advanced computer technology and communications equipment that
allow the Company to efficiently manage geographically diverse classic cable
television systems. This centralizing of the customer service function has
allowed the Company to create an infrastructure that provides the customer with
superior service through a smaller number of high quality, well motivated
employees than through a series of small disjointed offices. The Company invests
significant resources in ongoing training and incentive plans for both its
customer service staff and field technical personnel to maintain a high level of
enthusiasm among these customer contact employees.
The Company has developed an integrated computer network with advanced
software systems to facilitate effective interaction with the customer, while
providing for ease of management oversight. The Company's computer network
integrates PC network functions, such as management reporting, internal and
external e-mail and Internet access, with its mainframe billing provided by
Convergys (formerly Cincinnati Bell Information Systems) all interfaced with the
OmniTRACS satellite based dispatch system. Not only does this integration allow
a customer service representative in the call center to schedule service with a
customer at the time of the call, but allows real time dispatch and follow
through from the field technical personnel. All of the Company's service
vehicles are equipped with a Qualcomm OmniTRACS unit which receives via
satellite and stores the individual service technician's work orders and service
orders. Based on the work load of the individual technician the customer service
representative can schedule any new work from a customer because as the
technician finishes each job that individual completes the order in the central
billing computer immediately through the OmniTRACS unit in the vehicle.
Therefore, at any time the actual work load and schedule of any individual
technician is available. This real time two way communication also allows any
manager with access to a PC to dial in from remote locations to access the
system to monitor these functions from anywhere. Management can monitor each of
the field technician's current work load, work history, status of all assigned
work and even the exact location of the individual vehicle as well as a history
of the vehicle's travels. This information allows management to efficiently
assign work by area or job type, and then monitor its progress in real time
without the costs and delays involved in fax machines, cell phones, and pagers.
Technology and Engineering
All of the plant in the Systems has a channel capacity of 36 channels or
more. Although many of the Systems presently have the capability to increase the
number of channels offered to subscribers without having to increase existing
bandwidth, the Company has an ongoing plan to increase all of its Systems to at
least 550 MgHz, which will allow up to 80 channels, by December, 2001. The
following table sets forth certain information with regard to the channel
capacities of the Systems as of December 31, 1999.
Up to 29 30 to 53 54 or more
Channels Channels Channels Total
--------- --------- --------- ------
Systems:
Number of systems 6 223 26 255
Percent of total systems 2.3% 87.5% 10.2% 100%
Miles of plant 56 4,821 995 5,872
Percent of total plant miles 1.0% 82.1% 16.9% 100%
The Company is currently offering Digital Cable in six systems to test its
marketing and roll-out strategies. This technology is allowing up to 12 channels
to be carried in the space of one analog channel. These digital signals allow
cable television systems to carry more and varied programming with improved
quality and reliability for both video and audio. This new service allows
systems to carry multichannel pay-per-view and multiplexed premium services
which is significantly increases the amount of programming available to the
customer. The Company intends to continue to add Digital Cable service to its
Core Systems over the next two years now that the technology is generally
available.
Franchises
Cable television systems generally are 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 1992 Cable Act and the 1996 Telecom Act. See "Legislation and
Regulation."
The table below illustrates the grouping of the franchises of the Systems
by date of expiration.
Year of Percentages
Franchise Number of of Total
Expiration Franchises Franchises
----------- ----------- ------------
2000-2001 57 11.1%
2002-2004 136 26.4%
After 2004 322 62.5%
-------- -------
Total 515 100.0%
======= ======
The 1984 Cable Act provides for among other things, an orderly franchise
renewal process in which franchise renewal may 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.
The Company believes that it generally maintains a good relationship with the
franchising communities it serves. The Company maintains internal procedures to
ensure effective communications with the franchising authorities by use of a
newsletter and individual contact from both the call center responsible for the
individual system and the Company's field management. Moreover, as the Company
has worked closely in some areas with the local schools, close relationships
with the local area and state politicians have become more commonplace.
The Company also believes that maintaining high quality and well trained
technical field personnel is important to good community relations. Because the
local technician may be the only Company representative an individual customer
may ever meet, the effectiveness of that interaction is important. To improve
that effectiveness, the Company has an ongoing training program for its field
personnel not only in the technical area, but in customer service and sales
functions. The Company strives to have its local field technicians represent the
Company in each of their respective service areas as well trained, experienced
and responsible members of the community.
Competition
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include broadcast television and radio, newspapers, magazines and other
printed sources of information and entertainment, as well as satellite and
wireless video distribution systems and directly competitive cable television
operations. Federal law prohibits cities from granting exclusive cable
franchises and from unreasonably refusing to grant additional, competitive
franchises. In addition, an increasing number of cities are exploring the
feasibility of owning their own cable systems in a manner similar to
city-provided utility services. The 1996 Telecom Act may initiate more
competition with cable service, because it allows local exchange carriers to
provide video services in their local service areas, in direct competition with
local cable companies (with certain regulatory safeguards).
The Company believes that of the competitive threats to the Company's
cable television business, four are the most substantial. (1) DBS, (2) MMDS, (3)
overbuilds by municipalities or telephone companies, and (4) SMATV systems.
There are two major DBS providers which currently serve approximately 11.8
million subscribers nationally as of December 31, 1999. The Company believes
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 of cable television systems. The Company believes however,
that it can effectively compete with DBS because of its ability to offer local
and regional broadcast stations on it systems, many of which are not well
received with a home antenna, and the "whole house" nature of cable service vs.
DBS. The Company also believes that with its intended roll out of digital cable
service over the next two years, many of the competitive advantages DBS may have
today in offering digital picture and audio for multichannel pay-per-view,
multiplexed premiums, digital audio service, and narrow-cast basic services will
be negated. However, DBS service currently has some unique programming rights,
and is not subject to a variety of regulatory burdens imposed on franchise cable
operators (e.g. franchise fees). Although the effect of competition from these
DBS services cannot be specifically predicted, there has been significant growth
in DBS customers nationwide and the Company expects that such competition may
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. The
Company operates in several areas where it competes directly with wireless
operators. The Company believes that its 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 it serves 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 the Company has no
knowledge of the digital plans of wireless operators with which it competes, the
Company does not believe that this additional service, if offered by such
operators, will materially affect its ability to compete with such operators.
Since the passage of the Telecom Act of 1996, and the announced
deregulation of the electric utility business, several local exchange carriers
(LECs) and local municipal owned power companies have built video systems to
directly compete with existing cable television systems. This process is known
as "overbuilding." The Company has experienced two instances of LEC overbuilds
in two small systems, one in Alabama and one in Kansas, and has been threatened
with an overbuild by one municipally owned power company in Mississippi. The
Company believes that this is an increasingly more likely threat to cable
systems in general, and has the potential to have more impact in individual
markets than the other forms of competition because the new operator is offering
a competing service, it is identical to the incumbent system with the same
competitive advantages. The Company believes that in areas where it is able to
complete its plan of fiber interconnect and offer a very high level of service,
it is less likely to face this type of competition because of its relationship
with its franchise authorities and customers. Typically, these overbuild
situations occur in systems where either the incumbent cable operator is not
offering a competitive service, or the relationship between the operator and the
franchise authority is strained in some way. The Telecom Act of 1996 permits
telephone companies to provide competitive video programming through several
means, subject to certain limitations, and has relaxed statutory and regulatory
restrictions on the ability of LECs, including the RBOCs, and their
subsidiaries, to compete with operators of cable television systems.
Cable television operators also compete with SMATV systems. These systems
are essentially small, closed cable systems which operate within specific
hotels, apartment or condominium complexes and individual residences. Due to the
widespread availability of earth stations, such SMATV systems can offer both
improved reception of local television stations and many offer the same
satellite-delivered program services which are offered by franchised cable
operators. SMATV systems currently benefit from operating advantages not
available to franchised cable television systems, including fewer regulatory
burdens (such as, in many cases, no rate regulation). The 1996 Telecom Act
broadens an exemption from regulation as a "cable system", which may exempt
additional SMATV systems from regulation.
The Telecom Act of 1996 also established a new framework for the delivery
of video programming -- the open video system ("OVS"). Under these rules, a LEC
or other entrant may provide in-region distribution of video programming to
subscribers, with certain regulatory conditions. The FCC has certified several
companies to provide OVS in various parts of the United States.
Telecommunications Services Operations
The Company has realized that the offering of Telecom Services represented
an attractive new business opportunity for the Company with the potential for
high operating margins.
Markets Served. The Company has developed detailed business and network
architecture plans for each of Nebraska and Kansas in order to successfully
market to the educational institutions and state agencies in these states and
take advantage of the sizeable demand for such Telecom Services. The Nebraska
plans call for these services to be delivered over the Company's Nebraska
Network, which was originally designed to serve its cable television systems. As
a result, the Telecom Services can be delivered at little additional incremental
cost to the Company.
Although the Nebraska market represents a potentially large revenue
opportunity for the Company, the size of the Kansas market opportunity is
significantly greater. Kansas has approximately 2,350 schools and 109 state
agencies representing 250 sites, and the Company currently intends on offering
Telecom Services to many of these schools and agencies which are inside service
territories currently served by the Company's Kansas Systems. Other of these
educational sites and state agencies, however, are in areas outside of the
service territories served by the Company's Kansas Systems. As a result, Galaxy
intends to expand its Kansas Network beyond the areas served by its Kansas
Systems. This expansion will only occur in areas where either a school or state
agency has entered into an exclusive long-term contract with the Company to
provide Telecom Services. The actual miles of fiber optic cable laid in the
Kansas Network will be dependent on the number schools and state agencies which
enter into contracts with the Company.
Services Offered. Telecom Services offered by the Company include:
o Full Motion Video Conferencing. The GRADES service platform offers fully
interactive video conferencing. Students participate in classroom learning in
multiple sites remote from the teaching resource. All user sites can participate
interactively in lectures, meetings, seminars, private consultations and
demonstrations. The conference is broadcast real time and interactive without
the choppy stop-motion video common to conferences that are held using
fractional video compression techniques over twisted pair copper systems. In
providing full motion video conferencing, GRADES utilizes proprietary EDCOMM
software developed by Broadband Networks Incorporated ("BNI"). This software
permits users to automatically schedule conferences in advance and the software
then connects the conference sites. Non-scheduled conferences can be easily
arranged on-demand with the simple use of remote control. The system allows each
user to originate up to four video sources and receive up to eighty sources.
This provides the ability for many simultaneous videoconferences at one time and
permits charts and exhibits to be viewed in addition to the lecturer. The GRADES
services can deliver a video conference to a conference classroom or directly to
the desktop of an individual student or administrator. This service has allowed
schools to share teaching resources and significantly upgrade their curriculum
in subjects such as higher level math, science, and language. With the addition
of colleges and universities to the network, high school students can receive
college level course work and credit, further enhancing the benefits to the user
schools. Teachers can also continue their education through participating in
graduate level course work at remote locations. In-service training over the
network allows teachers and administrators to remain at their schools and not
travel to a training location, increasing their available time for teaching.
Through an ATM Gateway in the network hierarchy, schools can take students on
interactive field trips to the Library of Congress, The Smithsonian Museums,
NASA, or any other location in the world. The ATM Gateway insures that
inter-connectivity and interoperability exist between all other conference
sources. The Company plans on offering this tool to schools, hospitals, nursing
homes, medical centers, state agencies and other multiple user sites where there
is a community of interest.
o WAN Connections. This service connects each site's local area network ("LAN")
over a fiber-based WAN backbone and provides for a distributed link for
communications between all sites connected to the network. The WAN network has
been configured in full compliance with the appropriate IEEE Standards for LANs
for physical and data link as defined by the International organization for
Standardization of Open Systems. The WAN is scaleable from 100 megabits to 1
gigabit of capacity based on the needs of the end user. For example, schools
will use the WAN connections to connect themselves to the State Department of
Education for the purpose of having a dedicated full-time data connection to any
network database. This type of dedicated connection provides a means of fast and
immediate file transfers maintaining accurate and up to date databases for
record, statistical information and general files that are accessible to any
user at any time. Other customers, such as banks and professional offices with
multiple locations, can use a WAN connection for file transfer, accessing a
central library and other data transfers at speeds not generally available at
competitive costs over existing networks. With WAN connections in place,
customers will not only have their own private intranet for e-mail and file
sharing for communications between locations in the same community, but will
also have the same ability to share digitized documentaries, training videos and
other specialty videos across the network and between all sites. This type of
service is in demand by schools as it allows dedicated high-speed access to
valuable shared resources. The Company plans on offering this service to health
care facilities for access to pharmacy and patient records, government agencies
for high-speed access to databases such as motor vehicle records, and banks and
multi-site businesses for file transfer, central database access and other
high-speed data transfers.
o High Speed Internet Connections. Customers connected to the fiber access will
be able to subscribe to high-speed Internet access. Customers that subscribe to
this service will be able to customize their bandwidth needs based on a minimum
connection speed per computer connected to the Internet. The Company's network
is designed to be dynamic, flexible and scaleable and will support the
customers' need for additional bandwidth as the number of computers at each
location increase. The Company plans to offer, through subcontractors, e-mail
services, web hosting and development, and back room technical support. Through
the fiber network, multiple location customers can aggregate their bandwidth
needs and can share in the expense of one large bandwidth connection out to the
Internet through one access point on the network. The Company is aggressively
pursuing this type of commercial Internet connection. The Company believes they
can provide high-speed Internet connections at affordable rates as compared to
the competition by leveraging its fiber network. The Company's strategy is to
take full advantage of its Internet service by not only providing commercial and
residential cable modem and dial-up Internet service to its cable television
customers, but to make high speed Internet connections available through other
cable operators or dial-up Internet service providers ("ISP's"). This is done
easily through an established fiber connection in each particular town. The
fiber network will give the cable operator or ISP in a connected town an
opportunity of providing Internet services with the back room support entity
already in place, at a fraction of the cost.
The Company has selected the ISP Channel to aid in the provision of high
speed Internet access in certain markets to residential and business customers.
The ISP Channel is a turn key high speed Internet access service provider and is
furnishing the necessary headend and related transmission equipment, connection
to the Internet, marketing and sales material and customer installation of cable
modems. The Company has chosen the ISP Channel because of their expertise in
marketing, end user support and their ability to be a technical resource in
providing such services. The Company is supplying sufficient cable system
bandwidth, which will allow the ISP Channel to provide such services. In return
the ISP Channel will share revenues derived from the end users Internet use.
o Four-Digit Dialing Connections. Multiple location customers that are
connected to the Company's fiber network will be able to subscribe to four digit
dialing which permits them to dial four digits and connect themselves to each
other at non-metered/flat rates. This eliminates usage-based short haul toll
charges sites now incurred when calling other sites outside the local telephone
exchange. The Company believes that because the majority of a school's short
haul toll calls are to other schools, the demand for this non-metered/flat rate
connection over a private line network will be significant. This service will
permit schools to save money by only using the local exchange carriers for calls
that go off the network. In addition, by aggregating all user sites at one PBX,
schools will then be able to negotiate volume discounts for long distance calls
with inter-exchange carriers.
The GRADES solution, when fully implemented, will allow the Company to
offer a full complement of telephone services to businesses, hospitals,
governmental offices and individual homes. The fiber network the Company is
constructing has been designed with the capacity to provide high speed data,
voice and video services to many users. The future Internet customers on the
network will not only have a high speed Internet connection for research or web
browsing, but will be able to subscribe to an Internet Protocol (IP) Telephone
service. IP Telephone is the technology that will allow the Company to deliver
high quality, low-cost telephone communications through the customer's Internet
connection. This is done through a translation of a typical voice signal to a
digitized and compressed packet of data, identical to the data being moved
around the Internet today, and then reconverted from data to voice on the other
end. The Company believes that this will be a service offering that will be
widely subscribed to by both the individual Internet customer as well as the
business customer.
Telecommunications Strategy. The Company's telecommunications services
strategy is to significantly enhance profitability by leveraging its fiber optic
network and existing infrastructure to broaden its customer base through the
provision of telecommunications and broadband services.
Expand Telecommunications Offerings. The Company has designed its fiber
optic network with significant excess capacity to support a wide array of
telecommunications services and to be compatible with technologies still under
development in the industry, including server-based applications such as virtual
LANs, e-commerce, and voice over the Internet. The Company's fiber optic network
can provide up to 1 gigabit WAN connections, private intranet services,
high-speed Internet access and intrastate virtual private networks using
four-digit dialing for multi-site customers. The Company intends to resell its
excess capacity to competitive local exchange carriers ("CLECs") operating in
its service areas. As the fiber optic network is expanded, the Company expects
to expand its customer base to include additional schools, governmental
entities, and businesses, all of which can be added to the network at little
incremental cost.
Concentrate Operations Geographically. The Company intends to provide
these state-of-the-art telecommunications services in Nebraska and Kansas where
it believes it has a competitive advantage to be the low cost, superior customer
service provider.
Provide Customized Services. The Company tailors service offerings, sales
and marketing techniques and network deployment to meet the different needs of
customers. By working closely with customers, the Company designs and engineers
the services for each customer to meet the particular needs of that customer.
The Company believes its ability to tailor services provides a distinct
advantage over its potential competition for contracts.
o Pursue Demand-Driven Network Deployment. The Company utilizes a
demand-driven approach to network construction by marketing and securing
long-term contracts for its services before committing capital expenditures to
develop or expand its fiber plant. The Company seeks to secure 5-10 year
contracts which provide for the Company to be the exclusive provider to its
customers of the services rendered for the duration of the contract.
Furthermore, pursuant to the terms of certain customer contracts, the Company
receives up-front reimbursement for a portion of the capital expenditures
required to add the customer to its network.
o Develop Strategic Relationships. The Company continues to seek to enter
in mutually beneficial strategic relationships with telecommunications service
providers and other entities operating in the same regions as its Core Systems.
To date the Company has entered into arrangements with BNI, Birch Telecom, Cable
USA and MediaCity. In conjunction with Broadband Networks, Inc. ("BNI"), the
Company has commenced providing these services to these original schools.
See "Risk Factors-Reliance Upon Certain Key Vendors."
Marketing and Rates. The Company markets its Telecom Services to educational
institutions under the "GRADES" brand name. GRADES stands for Galaxy's Regional
Access Distance Education System. The Company's objective is to provide advanced
telecommunications services that offer schools and state agencies an integrated
solution to their need for video conferencing, data transfer, content services
(such as the Internet), and more efficient voice communications. When compared
to similar services offered by competitors using twisted pair copper technology,
the Company's telecommunications solutions provide a superior level of
functionality at greater speeds and at lower costs. The Company is currently
providing GRADES service to primary and secondary schools in both Nebraska and
Kansas and is in the process of negotiating contracts to provide GRADES service
to additional schools, colleges and universities in both states.
The Company ultimately intends to offer its Telecom Services and access to
its Nebraska and Kansas Networks to businesses, hospitals, and individual homes
in addition to educational institutions and state agencies. In fact, the Company
is currently working with 28 hospitals within the areas served by its Nebraska
Network to provide video and data services. The Company further believes that it
will have the opportunity to provide carriers carrier services as it continues
to build out its Nebraska and Kansas Networks. The Company is currently
negotiating with long distance carriers, independent local carriers and start-up
competitive local exchange carriers ("CLECs") in Nebraska and Kansas to give
them access to the Company's Nebraska and Kansas Networks. Such access would
allow these carriers to negotiate alternative back-haul agreements at
potentially more affordable pricing levels. The Company may also make its
headends available to other cable operators in an effort to give other cable
operators an affordable opportunity to consolidate their systems. This
consolidation would allow them to provide similar enhanced services as those
provided to Galaxy's subscriber base. See Telecommunications Services -
Strategic Relationships.
Service Contracts. In Nebraska, the GRADES contracting process is primarily
being orchestrated by Educational Service Units ("ESUs") located throughout
state. ESUs are administrative and purchasing centers for geographical groups of
school districts. The Company and each ESU negotiate the basic contract terms
and rate structure for the schools districts located within the area served by
that ESU. The individual school district then has an option of signing up for
the services offered pursuant to the terms of the contract. Each individual
school within a school district may subscribe to any level of service it
desires. The Company currently provides GRADES services to schools located in
four of Nebraska's nineteen ESUs. Those four ESUs represent a total of 250
schools. The Company is currently working on contracts with five additional ESUs
for similar GRADES service offerings. In Kansas, each individual school district
is responsible for negotiating its own contract with the Company.
The standard GRADES contract establishes the Company as the provider of video,
facsimile, NEBSAT access and internet access services during the term of the
contract. The contract has an initial term of four years, which may be extended
annually for a one-year period up to a total of ten years. Schools that enter
into the standard contract may terminate the contract for cause only, subject to
the payment of an early termination fee. A school may not terminate in order to
acquire similar services from another fiber optic cable network provider. In
addition to the recurring charges outlined in Telecommunication Services -
Marketing and Rates, the Company charges an up-front design, installation and
engineering fee which supports its cost of connecting the school to the fiber
optic cable network and the wiring of the classrooms and offices within the
school. The Company is responsible for maintenance and repair costs, and any
costs associated with technology migration and system upgrades chosen by the
Company. The schools pay a monthly fixed service charge, based on the services
received.
The Company has contracts with the 24 school districts and educational
service units (`ESUs") in Nebraska that receive GRADES services and an
additional 32 school districts and ESUs which are in the process of being
connected to the Nebraska Network. The Company also has a contract and is
providing service to one Kansas school district representing 6 schools and is in
the design stage with a Kansas ESU that represents over 125 schools. In
addition, the Company plans on responding to some of the 300 schools in Kansas
that have posted requests for proposal's ("RFPs") on the Internet as part of the
U.S. Government's Universal Service Fund ("USF") process. The RFPs range in
requests from Internet access to long distance service. The Company's strategy
is to respond to the posted RFPs based on geographic area which will provide,
along with the Southeast Kansas ESU, a substantial base for construction and
expansion of the Kansas Network.
Service, Installation and Repair. The Company plans to outsource the technical,
maintenance and equipment aspects of providing the GRADES services. The Company
has entered into a five year contract with BNI to assist in the initial design,
integration and ongoing support of all of the fiber network components. BNI is a
network design engineering company and a manufacturer of optical transmission
electronics, data modems and ethernet switches. BNI will provide advice and
expertise on the selection of other equipment and services needed from vendors
in order to provide a service with a specific requirement, such as bandwidth and
speed, security or media file service access. Currently, the Company and
Broadband Networks ("BNI") are engaged in a joint effort to bid on providing
telecommunications services to educational facilities, health facilities, state
agencies and other prospective users within the Kansas and Nebraska service
areas.
Technology and Engineering. The fiber network architecture being constructed
for the Company's cable television systems provides significant excess capacity
for new telecommunications service offerings. The Nebraska and Kansas Networks
are being designed in a fully redundant topology with multiple rings and will be
able to fully support Synchronous Optical Network (SONET) and Asynchronous
Transfer Mode (ATM) switching. The Nebraska and Kansas Networks provide up to 96
spare fibers on primary routes and 24 spare fibers on secondary routes. The
Company is taking advantage of this excess capacity through the provision of the
advanced telecommunications services and content delivery opportunities
described above. These new opportunities are expected to yield higher operating
margins than those that could be achieved by a similar independent startup
enterprise because of the Company's ability to capitalize upon the fiber optic
network that has been installed to support and enhance the delivery of its cable
television services. As of December 31, 1999, the Company had installed over
1,400 miles of fiber optic cable for use by its Systems in Nebraska, Kansas,
Kentucky and Mississippi.
The Company is also working closely with Kansas to substantially upgrade the
state's T-1 (1.54Mb) internal communications system to a system that will be
based on 100Mb Ethernet and provide faster Internet connections, full motion
video conferencing and four-digit dialing. These services will provide Kansas
with the ability to offer enhanced services at affordable rates, while at the
same time augmenting the current support infrastructure which supports the 109
state agencies and their approximately 250 sites across the State.
Regulation. The services provided by the Company over the Nebraska and Kansas
Networks are subject to state regulations only, and are not subject to FCC
regulations at this time. In Nebraska, the Company is currently certified
through the Nebraska Public Service Commission as an Intrastate Interexchange
Carrier over a private line network. This gives the Company the ability to
provide video, non-switched voice, IP telephone and data services. The Company's
statewide certificate and completed 1,400 mile fiber network will give the
Company a market equivalent to 330 towns (50% of Nebraska's towns) and a covered
population of 1,155,325 (70% of Nebraska's population).
The Company recently received its certification by the Kansas Corporation
Commission as an Intrastate Interexchange Carrier. This will also give the
Company the authority to provide video, non-switched voice and data services.
The Company's statewide certificate will give it a market equivalent to 87% of
Kansas' towns and 95% of its population.
Competition. The Company believes that there is a large and growing demand
for high bandwidth services such as those available in the GRADES service line.
The Company further believes that the secondary and tertiary markets that the
Company plans to compete in are under-served at this point for these services.
The primary competitors are the numerous facilities based established Incumbent
Local Exchange Carriers ("ILECs"). These competitors have financial and
technical resources, long-standing relationships with their customers and offer
services similar to those offered by the Company. Unlike the ILEC competitors,
the Company is deploying a network design to primarily consolidate the Company's
cable television business. The fiber optic networks that the Company is
employing are high bandwidth by their nature and are superior to the ILECs
primary networks which are twisted pair copper networks. Further, certain ILECs
(the former Bell Operating Companies) are subject to regulatory restrictions
that prohibit them from transporting services across an entire service area.
The Company's competitors are and will continue to deploy fiber networks.
However, the Company believes that the secondary and tertiary markets will not
be the primary focus of the major ILECs. There are numerous smaller
independently owned ILECs which serve the markets targeted by the Company. These
smaller ILECs typically serve markets that are rural, low-density population
areas and are adjacent to or are in some cases surrounded by the larger ILECs.
In order for the ILECs to compete it is often necessary for them to form a
consortium in order to cover the geographic requirements of a particular bid
from a customer such as a school district. These consortiums are often difficult
to form as each ILEC has different business objectives and strategies. Further,
the ILECs are typically highly regulated, have different cost structures, and
often required to meet regulatory requirements in pricing services.
In addition to ILECs, entities potentially capable of offering services
similar to GRADES include Interexchange Carriers ("IXCs") and other cable
television companies. IXCs have fiber optic networks that are capable of
providing competing services. However, the IXCs lack local infrastructure to
deliver the services to the end-user customer. While IXCs could build the
required local infrastructure, it is unlikely that they will do so in the
secondary and tertiary markets. Some IXCs have acquired CLECs which have fiber
optic local infrastructure. However, at this time, those networks are confined
to primary markets and it is unlike that they will pursue smaller markets in the
foreseeable future. While other cable television operators may pose a
competitive threat, they also are a source of strategic business partnerships.
The Company has been pursuing and will continue to pursue strategic business
relationships with other cable operators.
The Company intends to distinguish itself to customers on the basis
of functionality, creative product implementation, and price. The competition
proposes end-user services based upon the telephony model, which is a T-1
(1.54Mb) that provides inferior video quality, or T-3 (45Mb) which provides full
motion video but is limited to 4 channels as compared to GRADES which provides
up to 80 channels. The T-1 telephony model for data services is 7 times slower
than the 10Mb standard with GRADES and the GRADES pricing structure has proved
lower in all applications to date.
Legislation And Regulation
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting the cable television industry. Other
existing federal, state and local regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the cable
television industry or the Company, can be predicted at this time.
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The industry currently is
regulated by the FCC, some state governments and most local governments. The
Telecommunications Act of 1996 (the "1996 Telecom Act") substantially altered
federal, state and local laws pertaining to cable television, telecommunications
and other services. Congress and the FCC have frequently revisited the subject
of cable regulation.
Cable Communications Policy Act of 1984. The 1984 Cable Act, which amended
the Communications Act of 1934 (the "Communications Act"), established
comprehensive national standards and 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.
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 CPS rates of
all other cable operators by March 31, 1999, and deregulated basic service rates
for cable systems serving 50,000 or fewer subscribers, where such systems
offered only a basic tier as of December 31, 1994.
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.
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 third election was made in
October, 1999. The next election will be made in October, 2002. 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.
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.
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 local exchange carriers ("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.
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.
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 1999, cable television systems were required to pay
regulatory fees of $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 rates for cable programming service
("CPS" or "non-basic") 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 expired on March 31, 1999. 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.
Telecommunications Regulation. The 1996 Telecom Act has substantially
revised communications regulation in the United States. The legislation is
intended to allow providers to enter communications markets that have
historically been closed to them as a result of legal restrictions, as well as
practical and economic considerations. At the same time, implementation of the
1996 Telecom Act may leave incumbent providers in previously closed markets
sufficiently free from regulation that they will be able to defend their markets
aggressively. Galaxy is unable to predict the outcome of the proceedings that
will implement the legislation.
For example, the 1996 Telecom Act establishes local exchange competition
as a national policy by preempting laws that prohibit competition in the local
exchange and by establishing uniform requirements and standards for
interconnection, unbundling and resale. These standards will be developed and
implemented by the FCC in conjunction with the states in numerous proceedings
and through a process of negotiation and arbitration. By establishing national
standards for interconnection, unbundling, and resale of competitive local
exchange services, the 1996 Telecom Act significantly enhances Galaxy's
opportunity to enter this market.
At the same time, Galaxy's ability to compete in offering certain services
may be adversely affected, depending on the degree and form of regulatory
flexibility ultimately afforded LECs by the FCC and the states, as well as on
the pricing, scope and applicability of these interconnection requirements. In
addition, if Galaxy offers local exchange services within the meaning of the
1996 Telecom Act, other service providers may take advantage of the
interconnection duty to require Galaxy to use its local exchange facilities to
carry their customer traffic.
The 1996 Telecom Act also opens the way for Bell operating companies
("BOCs") and their affiliates to provide long distance telecommunications
services between a local access and transport area and points outside that area.
Prior to the 1996 Telecom Act, BOCs were generally prohibited from offering such
"interLATA" services. Under the 1996 Telecom Act such services may be offered
outside of a BOC's local exchange service states immediately. BOCs may offer
interLATA services inside such states (in-region) when the FCC determines either
that the BOC is providing access and interconnection to a competent exchange
service provider under a state-approved agreement or that no such provider has
requested such access and interconnection within ten months after enactment, and
the state has approved the BOC's general terms for providing such access and
interconnection. In either case, the FCC also must conclude that the BOC has
satisfied a "competitive checklist" of interconnection and other requirements
specified in the 1996 Telecom Act. These BOC preconditions have been held
unlawful by at least one federal court and are still being litigated. If Galaxy
decides itself to provide interLATA service, it will likely face vigorous
competition from BOC entrants, as well as from existing long distance carriers.
Telecommunications common carriers subject to the jurisdiction of the FCC
generally must file tariffs detailing the prices and terms and conditions of
services, and whether the terms offered by the carrier are just, reasonable and
nondiscriminatory. The 1996 Telecom Act provides that the FCC, in response to a
petition from a carrier, shall forbear from enforcing regulations, including
those requiring tariffs, under certain circumstances. Such actions could free
Galaxy from regulatory burdens, but might also increase the pricing flexibility
of its competitors.
State and Local Regulation. Cable systems are subject to state and local
regulation, typically imposed through the franchising process because a cable
television system uses local streets and rights-of-way. Regulatory
responsibility for essentially local aspects of the cable business such as
franchisee selection, billing practices, system design and construction, and
safety and consumer protection remains with either state or local officials and,
in some jurisdictions, with both. Cable television systems generally are
operated pursuant to nonexclusive franchises, permits or licenses granted by a
municipality or other state or local government entity. 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.
In the offering of its telecommunications services, the Company is also
subject to state regulation. The Company has been certified as an intrastate
interexchange carrier for a private line network in Nebraska and Kansas. As a
certificated carrier, the Company will have a variety of regulatory obligations.
State regulatory authorities generally have the authority to sanction a carrier
for non-compliance with applicable telecommunications laws and regulations
through the imposition of fines, sanctions, the revocation of operating
authority, and other penalties. There can be no assurance that the Company will
be able to obtain all necessary authorizations in the future.
Proposed Changes
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, 1999, Galaxy had approximately 342 full-time employees
and 67 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 40 people who are dedicated primarily to
servicing Galaxy.
Item 2. Properties.
Galaxy owns or leases parcels of real property for signal reception sites
(antenna towers and headends), microwave facilities and business offices, and
owns most of its service vehicles. Galaxy believes that its properties, both
owned and leased, are in good condition and are suitable and adequate for
Galaxy's business operations.
Galaxy's cables generally are attached to utility poles under pole rental
agreements with local public utilities, although in some areas the distribution
cable is buried in underground ducts or trenches. The physical components of
Galaxy's systems require maintenance and periodic upgrading to keep pace with
technological advances.
Item 3. Legal Proceedings.
Except as described below, there are no material pending legal proceedings to
which either of the Issuers is a party or to which any of its properties are
subject.
Certain customers in Mississippi have filed a class action in the
U.S. District Court for the Northern District of Mississippi alleging that
Galaxy illegally charges a late fee on monthly cable bills. Galaxy 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, Galaxy is unable to predict
the likely outcome or the potential for an adverse judgment, if any. An adverse
judgment against Galaxy could have a material, adverse affect on its business
and its ability to make timely payments of principal and interest on the Notes.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There is no established public trading market for Galaxy's classes of
common equity.
Item 6. Selected Financial Data.
The combined statement of operations data for the calendar years 1996
through 1999 and the balance sheets data as of December 31, 1996 through 1999
set forth below have been derived from Galaxy's audited 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>
1995 1996 1997 1998 1999
------------ --------- --------- --------- ---------
(Dollars in thousands)
Statements of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues 29,995 $ 62,337 $ 68,808 67,291 56,914
------------ ------------ ------------ ------------ ------------
Operating expenses:
Systems operations 13,219 28,353 31,503 31,343 26,938
Selling, general and administrative 3,681 6,439 8,130 8,087 6,072
Management fee to affiliate 1,348 2,804 3,092 3,028 2,052
Depreciation and amortization 14,755 21,739 24,673 24,415 20,916
------------ ------------ ------------ ------------ ------------
Total operating expenses 28,711 59,335 67,398 66,873 55,978
------------ ------------ ------------ ------------ ------------
Operating income 1,284 3,002 1,410 418 935
Interest expense (10,422) (20,133) (21,037) (20,914) (18,847)
Other income (expense) 608 219 (421) (4,350) 5,676
------------ ------------ ------------ ------------ ------------
Net loss $ (8,530) $ (16,912) $ (20,048) $ (24,846) $ (12,236)
============ ============ ============ ============ ============
EBITDA (a) $ 11,490 $ 24,741 $ 26,083 $ 24,833 $ 21,851
============ ============ ============ ============ ============
Balance Sheet Data (at end of period):
Total assets 199,913 $ 217,498 $ 207,048 151,743 $ 137,530
Total long-term debt and other obligations 145,527 169,738 179,250 152,446 148,177
Partners' capital (deficit) 42,171 25,259 5,211 (19,635) (31,872)
Net cash provided by operating activities 7,646,964 13,520,488 4,104,091 1,384,698 5,455,226
Net cash provided by (used in) investing activities (98,492,590) (37,597,396) (13,279,244) 26,197,766 (2,807,995)
Net cash provided by (used in) financing activities 91,386,051 22,984,418 9,239,906 (27,771,785) (4,474,523)
</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 evaluation the performance 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Going Concern Uncertanties
The Partnership has incurred losses each year since its inception and has
a partnership deficit of $31.9 million at December 31, 1999. During 1999, the
Partnership continued 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 1999 and
1998, the Partnership received proceeds from sales of its non-core cable
television systems of $10.1million and $38.6 million, respectively, which was
primarily used to pay down the amounts due under its revolving line of credit.
At December 31, 1999, the Partnership was not in compliance with certain
covenants under its term loan agreement. As discussed in Note 7, on March 31,
2000 the Partnership amended its term loan agreement to modify financial
covenants and change the maturity date of all outstanding borrowings under the
term loan agreement.
Additionally, as part of this amended term loan agreement, the Partnership
must have a definitive sale agreement in force by May 31, 2000 to sell
substantially all the interests of the Partnership sufficient for the repayment
of all Partnership loans including the Senior Subordinated Notes. This
definitive agreement shall not contain any such contingencies allowing the
purchaser to terminate such an agreement arising from: (a) the failure of such
purchaser to obtain the financing necessary for purchase, (b) the failure of
such purchaser to obtain the approvals necessary for such purchase or (c)
relating to the completion of any due diligence review by such purchaser other
than completion of reasonable due diligence customarily to be completed in such
transaction after signing such agreement. Absent of such an agreement to sell
substantially all the assets of the Company triggers an event of default under
the terms of the amended loan agreement.
Management is actively pursuing the sale of the interests of the
Partnership in accordance with the amended term loan agreement. However,
entering into a definitive agreement as described above by May 31, 2000 is not
assured.
In light of the Partnership's current projected earnings and cash flow,
the Partnership believes it will have the financial resources to maintain its
current level of operations until December 31, 2000, the term loan maturity
date. However, cash generated from operations alone will not be sufficient to
pay the term loan on December 31, 2000 without proceeds from the sale of assets
or refinancing of the term loans. Additionally, such a sale as required by the
loan agreement would represent a change in control as defined in the Senior
Subordinated Loan Agreement and would represent an event of redemption.
Absence of the completion of the aforementioned definitive agreement, and
the Partnership's inability to meet its cash flow needs, raises substantial
doubt about its ability to continue as a going concern.
Overview
In each of the past three years, 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.
Total revenues decreased from 1997 through 1999, primarily as a result of
system dispositions. Total systems operations expenses and selling, general and
administrative expenses decreased from 1997 through 1999, 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:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- ------------- -------------
% of % of % of
Amount Revenues Amount Revenues Amount Revenues
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $68,808 100.0% $67,291 100.0% 56,914 100.0%
------- ------ ------- ------ ------- ------
Operating expenses:
System operations 31,503 45.8% 31,343 46.6% 26,938 47.3%
Selling, general and administrative 8,130 11.8% 8,087 12.0% 6,072 10.7%
Management fee to affiliate 3,092 4.5% 3,028 4.5% 2,052 3.6%
Depreciation and amortization 24,673 35.9% 24,415 36.3% 20,916 36.7%
------- ------ ------- ------ ------- ------
Total operating expenses 67,398 98.0% 66,873 99.4% 55,978 98.3%
------- ------ ------- ------ ------- ------
Operating income (loss) 1,410 2.0% 418 0.6% 935 1.7%
Interest expense (21,037) (30.5%) (20,914) (31.1%) (18,847) (33.1%)
Interest income 24 0.0% 53 0.1% 77 0.1%
Gain (loss) on sale of assets (226) (0.3%) (4,088) (6.1%) 5,599 9.8%
Other income (expense),net (219) (0.3%) (315) (0.4%) - 0.0%
------- ------ ------- ------ ------- ------
Net loss $(20,048) (29.1%) $(24,846) (36.9%) $(12,236) (21.5%)
======= ====== ======= ====== ======= ======
EBITDA (a) 26,083 37.9% 24,833 36.9% 21,851 38.4%
======= ====== ======= ====== ======= ======
</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 evaluation the performance 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.
1999 Compared to 1998
Revenues decreased 15.4%, or approximately $10.4 million, from 1998 to
1999. The decrease in revenues resulted primarily from the sale of certain
Systems during 1999, resulting in a reduction in the number of basic subscribers
during 1999, offset somewhat by an increase in basic rates during the year.
Systems operations expenses decreased 14.1%, or approximately $4.4
million, from 1998 to 1999. The decrease in these expenses was due primarily to
the sale of certain Systems during 1999. Programming expenses increased from
24.4% of revenue in 1998 to 25.6% in 1999. As a result, system operations
expenses as a percentage of revenue increased from 46.6% in 1998 to 47.3% in
1999, respectively.
Selling, general and administrative expenses decreased 24.9%, or
approximately $2.0 million, from 1998 to 1999. Selling, general and
administrative expenses, as a percentage of revenues, decreased to 10.7% in 1999
from 12.0% in 1998. The decrease was a result of closing a call center, the sale
of some systems and the reimbursement of certain costs from affiliated companies
for shared services.
Management fees to affiliate decreased 32.2%, or approximately $1.0
million, from 1998 to 1999. Management fees are calculated as a percentage of
revenue. The decrease was a result of the reduction of this percentage in
accordance with the Management Agreement and a reduction in revenues discussed
above.
Depreciation and amortization expense decreased 14.3%, or approximately
$3.5 million, from 1998 to 1999. This decrease in expenses was due primarily to
the sale of certain Systems during 1999. As a percentage of revenues,
depreciation and amortization increased from 36.3% in 1998 to 36.7% in 1999.
Interest expense decreased 9.9%, or approximately $2.1 million, from 1998
to 1999. This decrease was a result of payments made to reduce Galaxy's
revolving note as a result of the sale of certain Systems during the year,
offset by an increase in amortization of intangible loan costs. Interest
expense, as a percentage of revenues, increased from 31.1% in 1998 to 33.1% in
1999. Interest income increased 45.3% from 1998 to 1999 due to higher cash
balances in 1999.
Gain (loss) on sale of assets went from a loss of 4.1 million, or 6.1% of
revenues in 1998 to a net gain of $5.6 million, or 9.8% of revenues in 1999.
This increase is directly attributable to the sale of certain Systems during
1999.
Other expense, net, was zero in 1999, as compared to a net expense of
$315,000 during 1998. During 1998, there were one-time non-operating charges to
write off current assets and liabilities realized at the time of the purchase of
the Initial Systems. There were no such expenses during 1999.
Galaxy pays no income taxes, although it is required to file federal and
state income tax returns for informational purposes only. All income or loss
flowed through to the partners of Galaxy as specified in the governing
partnership agreement.
As a combined result of the items discussed above, net loss decreased
45.5%, or approximately $11.3 million, from 1998 to 1999. As a percentage of
revenues, net loss decreased from 36.9% in 1998 to 23.8% in 1999.
EBITDA decreased 12.0%, or approximately $3.0 million, from 1998 to 1999,
due primarily to the sale of certain systems. As a percentage of revenues,
EBITDA increased from 36.9% in 1998 to 38.4% in 1999, primarily as a result of
the decrease in selling, general and administrative costs. 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
evaluation the performance 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.
1998 Compared to 1997
Revenues decreased 2.2%, or approximately $1.5 million, from 1997 to 1998.
The decrease in revenues resulted primarily from the sale of certain Systems
during 1998, offset somewhat by an increase in basic rates during the year.
System operations expenses decreased 0.5%, or approximately $0.2 million,
from 1997 to 1998. The decrease in these expenses was due primarily to the sale
of certain Systems during 1998. Systems operations expenses, as a percentage of
revenues, increased from 45.8% in 1997 to 46.6% in 1998. The increase in these
expenses was primarily the result of increases in programming and other
subscriber related expenses that typically vary with revenues and the increased
number of channels carried.
Selling, general and administrative expenses decreased 0.5%, or
approximately $43,000, from 1997 to 1998. Selling, general and administrative
expenses, as a percentage of revenues, increased from 11.8% in 1997 to 12.0% in
1998. These changes were attributable to a decrease in the amount of
reimbursements from programmers for marketing campaigns from 1.3% of revenue in
1997 to 0.2% in 1998, offset by a decrease in other marketing expenses from 3.5%
of revenue in 1997 to 2.9% of revenue in 1998.
Management fees to affiliate decreased 2.1%, or approximately $64,000,
from 1997 to 1998. Management fees are calculated as a percentage of revenue.
The decrease was directly proportionate to the decrease in revenue.
Depreciation and amortization expense decreased 1.0%, or approximately
$258,000, from 1997 to 1998. This decrease was due to the reduction of fixed
assets as a result of the sale of certain Systems, offset by capital
expenditures. As a percentage of revenues, depreciation and amortization
increased from 35.9% in 1997 to 36.3% in 1998.
Interest expense decreased 0.6%, or approximately $123,000, from 1997 to
1998. This decrease was a result of payments made to reduce Galaxy's revolving
note as a result of the sale of certain Systems during the year, offset by an
increase in amortization of intangible loan costs.
Loss on sale of assets went from a net loss of $0.2 million, or 0.3% of
revenues during 1997 to a net loss of $4.1 million, or 6.1% of revenues in 1998.
This increase is directly attributable to the loss on sale of certain Systems
during 1998.
Other expense, net, increased from a net expense of $219,000 during 1997
to a net expense of $315,000 during 1998. This change of $0.1 million was a
result of one-time non-operating charges to write off current assets and
liabilities realized at the time of the purchase of the Initial Systems.
Galaxy pays no income taxes, although it is required to file federal and
state income tax returns for informational purposes only. All income or loss
flowed through to the partners of Galaxy as specified in the governing
partnership agreement.
As a combined result of the items discussed above, net loss increased
23.9%, or approximately $4.8 million, from 1997 to 1998. As a percentage of
revenues, net loss increased from 29.1% in 1997 to 36.9% in 1998.
EBITDA decreased approximately $1.2 million, or 4.8%, from 1997 to 1998,
primarily due to the decrease in revenues. As a percentage of revenues, EBITDA
decreased from 37.9% in 1997 to 36.9% in 1998. 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 evaluation the performance 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.
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.
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.
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 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"). 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 Acquisitions, Dispositions and Trades
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, and recorded a gain on sale of approximately $1.0 million. Galaxy
used the proceeds from this sale to pay down principal of the revolving note.
On May 1, 1999, Galaxy traded 6 cable television systems,
representing approximately 7,500 subscribers for seven cable television systems,
representing approximately 7,100 subscribers from Mississippi Cablevision, Inc.
("MCI"), an affiliate of Telecommunications, Inc. The Galaxy cable television
systems are located primarily in Colorado, Iowa and South Dakota, while the MCI
cable television systems are located in Mississippi. The trade was accounted for
as a business combination in accordance with the Accounting Principles Board
Opinion No. 16 "Business Combinations." The estimated fair market value of the
cable television systems received was approximately $9.4 million or
approximately $1,300 per subscriber. The fair market value of the cable
television systems received was estimated by using the purchase price (price per
subscriber) for similar cable television systems bought from MCI by an affiliate
of Galaxy. The net historical cost of the cable television systems given up was
approximately $6.9 million, resulting in Galaxy recording a gain on sale of
approximately $2.5 million, net of expenses.
On June 23, 1999, Galaxy sold 8 cable television systems, located
primarily in Alabama, representing approximately 5,500 subscribers for
approximately $8.4 million, or approximately $1,540 per subscriber, and recorded
a gain on sale of approximately $1.8 million. Galaxy used the proceeds from this
sale to pay down principal of the revolving note.
On October 1, 1999, Galaxy sold seven satellite master antenna television
systems("SMATV's") and two cable systems located primarily in the Kansas City
area, representing approximately 1,165 subscribers for approximately $1.36
million, or approximately $1,161 per subscriber, and recorded a gain on sale of
approximately $244,000. Galaxy used the proceeds from this sale to pay down
principal of the revolving note.
Pending Dispositions
On March 31, 2000, Galaxy sold one cable television system, located in
Kansas, representing approximately 1,424 subscribers for approximately $3.5
million, or approximately $2,492 per subscriber. Galaxy will use the proceeds
from this sale to pay down principal of the term loans.
Liquidity and Capital Resources
The cable television business requires substantial financing for
construction, expansion and maintenance of plant. Galaxy intends to continue
pursuit of a business strategy 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 $148.1 million of indebtedness as of December 31, 1999,
representing $119.6 million of senior subordinated notes (net of unamortized
discount of $0.4 million), $25.3 million drawn under Galaxy's revolving line of
credit (See "The Revolving Credit Facility and Term Loan"), and $3.2 million in
various other obligations. Net payments were made under Galaxy's revolving line
of credit of approximately $5.1 million during 1999. Except for the debt
repayments required under term loan, Galaxy anticipates that operating cash
flows, sales proceeds of assets sold outside its Core Areas and debt and equity
restructuring will provide sufficient funds necessary to meet debt service,
working capital and capital expenditure needs.
Galaxy provided net cash by operating activities of $1.4 million in 1998
and $5.5 million in 1999, respectively, an increase in net cash provided by
operating activities of $4.1 million. This increase is mainly due to a decrease
in the cash used for accounts payable and accrued expenses during 1999.
Galaxy provided net cash by investing activities of $26.2 million in 1998,
and used net cash in investing activities of $2.8 million in 1999, an increase
in net cash used in investing activities of $29.0 million. This increase is
mainly due to a decrease in proceeds from sale of assets and an increase in the
acquisition of capital assets.
Galaxy used net cash in financing activities of $27.7 million and $4.5
million in 1998 and 1999, respectively, a decrease in net cash used in financing
activities of $23.2 million, mainly due a decrease in net borrowings on the
Revolver.
At December 31, 1999, Galaxy was not in compliance with certain covenants
under its term loan agreement. On March 31, 2000 Galaxy amended its term loan
agreement to modify financial covenants and change the maturity date of all
outstanding borrowing under the term loan agreement and entered into a new $5
million Term Loan Agreement from three of the four lenders under the term loan
agreement. As discussed in Note 2 to the consolidated financial statements,
based on current estimates of operating cash flow, management does not believe
it will have sufficient cash to fund required debt payments on December 31,
2000. As required by the terms of Galaxy's amended term loan and new loan
agreement described in Note 2, Galaxy's partners are negotiating to sell their
Galaxy partnership interests to a third party. However, closing of such
transaction is not assured. Absent the completion of the aforementioned
transaction and the partnership's inability to meet its cash flow needs raises
substantial doubt about its ability to continue as a going concern.
Capital Expenditures
During 1999, Galaxy's capital expenditures (exclusive of system
acquisitions) were approximately $12.5 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. Galaxy
anticipates capital expenditures over the next two years will total
approximately $15.0 million. 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. Absent the requirements of the term loan,
Galaxy would have expected to finance the anticipated capital expenditures
described above with cash flows generated from operations, proceeds from system
sales and other debt as necessary.
The Revolving Credit Facility and Term Loan
Galaxy's September 1995 Amended and Restated Loan Agreement ("the
Revolver") has been periodically amended and subsequently converted to a Term
Loan, with the latest amendment occurring in March 2000. Net proceeds from any
system sale will be used to reduce the commitment available under the Revolver.
On December 31, 2000, Galaxy is required to pay the outstanding principal
balance together with all accrued and unpaid interest, fees and expenses. The
Revolver requires Galaxy to maintain compliance with certain financial ratios
and other covenants, such as annualized cash flow to interest expense, capital
expense limits and basic subscribers to total long term debt. Galaxy is not
permitted to borrow additional funds under the Revolver without the prior
written consent of the lenders. At December 31, 1999, Galaxy was not in
compliance with certain covenants under its term loan agreement. On March 31,
2000 Galaxy amended its term loan agreement to modify financial covenants and
change the maturity date of all outstanding borrowing under the term loan
agreement
On March 31, 2000, Galaxy entered into a new $5 million Term Loan
Agreement from three of the four lenders under the Revolver ("New Loan"). The
New Loan also requires Galaxy to maintain compliance with certain financial
ratios and other covenants, such as annualized cash flow to interest expense,
capital expense limits and basic subscribers to total long term debt. The New
Loan restricts Galaxy's ability to borrow without the consent of the lenders.
The New Loan is due the earlier of December 31, 2000 or upon the occurrence of
certain events set forth in the Loan Agreement.
Under the March 2000 amendment to the Revolver and the New Loan, it is an
"Event of Default" with respect to each if a definitive agreement for the sale
of Galaxy and an entity affiliated with the Company or system asset sales of
substantially all the systems owned by Galaxy and the affiliate has not been
executed and delivered by May 31, 2000 with an unaffiliated third party buyer in
a form reasonably satisfactory to the majority lenders. There can be no
assurances that a definitive purchase agreement will be delivered by this date
or, in the event of Galaxy and the affiliate's failure or inability to comply,
that such provisions will be waived by the majority lenders.
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"). Absent a sale of assets as required of the term of
the term loan as discussed above which sale would be considered an event of
redemption, such notes mature 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.
Inflation
Galaxy does not believe that inflation in the United States in recent
years has had a significant effect on results on operations.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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. This
statement, as amended, is effective for the Partnership beginning January 1,
2001, Management of the Partnership anticipates that the adoption of SFAS #133
will not have a significant effect on the Partnerships' 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.
Notwithstanding any disposition of cable systems, modest increases in
revenues and subscribers are anticipated in 2000; however, the rate of increase
cannot be estimated with precision or certainty. Galaxy believes that general
and administrative expenses and depreciation and amortization expense will
continue to increase to support overall growth.
Because of the foregoing uncertainties affecting Galaxy's future operating
results, past performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical results or trends as
determinative of Galaxy's future performance. In addition, Galaxy's
participation in a developing industry employing rapidly changing technology
will result in significant volatility in the market value of the Notes.
In addition to the matters noted above, certain other statements made in
this Form 10-K are forward looking. Such statements are based on an assessment
of a variety of factors, contingencies and uncertainties deemed relevant by
management, including technological changes, competitive products and services
and management issues. As a result, the actual results realized by Galaxy could
differ materially from the statements made herein. Readers of this Form 10-K are
cautioned not to place undue reliance on the forward looking statements made in
this Form 10-K or in Galaxy's other securities filings.
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 domestic interest rates due to our
floating-rate of interest (LIBOR interest rate) on certain debt.
Based on Galaxy's fixed/floating debt at December 31, 1999, a 1% increase
in market interest rates would increase our yearly interest expense and decrease
income by approximately $266,000. This amount was calculated using the
hypothetical interest rate on our floating rate debt at December 31, 1999,
assuming a constant level of variable-rate debt. This amount does not include
other results that could result from increased interest rates, such as a
downturn in overall economic activity, or actions the management could take to
lessen our risk. This also does not take into account any changes in our
financial structure that may result from higher interest rates.
<PAGE>
F-25
<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:
Reports of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule:
Reports of Independent Accountants on Financial Statement Schedule F-20
Schedule II - Valuation and Qualifying Accounts
F-22
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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Galaxy Telecom, LP:
We have audited the accompanying consolidated balance sheet of Galaxy Telecom,
L.P. and subsidiary ("the Partnership") as of December 31, 1999 and the related
consolidated statements of operations, changes in partners' capital (deficit),
and cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 1999 and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Partnership's inability to meet its cash
flow needs and to comply with certain debt covenants raise substantial doubt
about its ability to continue as a going concern. Management's plan concerning
these matters is also described in Note 2. The 1999 financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
March 17, 2000
(April 11, 2000 as to Notes 2,4 and to the term loan described in Note 7)
St. Louis, Missouri
<PAGE>
Report of Independent Accountants
To the Partners
Galaxy Telecom, L.P.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and changes in partners'
capital (deficit) as of and for each of the two years in the period ended
December 31, 1998 present fairly, in all material respects, the financial
position, results of operations and cash flows of Galaxy Telecom, L.P. and its
subsidiary (the "Partnership") as of and for each of the two years in the period
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, 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. We have not
audited the consolidated financial statements of the Partnership for any period
subsequent to December 31, 1998.
PricewaterhouseCoopers LLP
Austin, Texas
February 19, 1999
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 386,485 $ 2,213,777
Subscriber receivables, net of allowance for doubtful accounts of
$87,449 and $116,572, respectively 4,431,946 4,334,563
Systems and equipment, net 94,568,015 104,197,674
Intangible assets, net 34,266,208 38,260,678
Prepaids and other 3,877,975 2,735,940
------------- -------------
Total assets $ 137,530,629 $ 151,742,632
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued expenses $ 17,198,650 $ 14,854,052
Subscriber deposits and deferred revenue 4,026,920 4,078,407
Long-term debt and other obligations 148,176,701 152,445,620
------------- -------------
Total liabilities 169,402,271 171,378,079
Total partners' capital (deficit) (31,871,642) (19,635,447)
------------- -------------
Total liabilities and partners' capital (deficit) $ 137,530,629 $ 151,742,632
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 56,913,515 $ 67,291,506 $ 68,807,763
------------ ------------ ------------
Operating expenses:
Systems operations 26,938,188 31,343,006 31,502,762
Selling, general and administrative 6,071,542 8,086,624 8,129,733
Management fee to affiliate 2,052,074 3,028,118 3,092,354
Depreciation and amortization 20,916,494 24,415,370 24,672,569
------------ ------------ ------------
Total operating expenses 55,978,298 66,873,118 67,397,418
------------ ------------ ------------
Operating income (loss) 935,217 418,388 1,410,345
Interest expense (18,847,367) (20,914,341) (21,036,934)
Interest income 77,188 52,533 23,710
Gain (loss) on sale of assets 5,598,767 (4,088,370) (226,185)
Other income (expense), net -- (314,587) (218,818)
------------ ------------ ------------
Net loss $(12,236,195) $(24,846,377) $(20,047,882)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN PARTNERS' CAPITAL (DEFICIT)
General Limited Partners
Partners Class B Class C Class D Class E Total Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Net Loss (12,236,195) -- -- -- -- -- (12,236,195)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
1999 $(31,871,642) $ -- $ -- $ -- $ -- $ -- $(31,871,642)
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,236,195) $(24,846,377) $(20,047,882)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 18,363,959 20,572,418 20,554,588
Amortization expense 2,552,535 3,842,952 4,117,981
Amortization included in interest expense 1,320,000 1,269,126 934,770
Provision for doubtful accounts receivable 991,364 1,209,797 1,992,318
Loss (gain) on disposal of cable systems (5,598,766) 4,088,370 226,185
Changes in assets and liabilities:
Subscriber receivables (1,088,747) (120,100) (1,418,451)
Prepaids and other (1,142,035) 561,633 (1,288,805)
Accounts payable and accrued expenses 2,344,598 (3,837,431) (1,637,383)
Subscriber deposits and deferred revenue (51,487) (1,355,690) 670,770
------------ ------------ ------------
Net cash provided by operating activities 5,455,226 1,384,698 4,104,091
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of cable systems - net of trades -- (999,452) (825,000)
Proceeds from sales of cable systems 10,118,327 38,619,045 3,304,334
Purchase of capital assets (12,509,465) (11,337,085) (15,222,381)
Other intangible assets (416,857) (84,742) (536,197)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (2,807,995) 26,197,766 (13,279,244)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under term debt and revolver 3,000,000 10,825,000 12,400,000
Payments under term debt and revolver (8,175,000) (39,550,000) (3,051,377)
Borrowings under other debt 3,151,427 4,014,110 259,386
Payments under other debt (2,305,346) (2,153,802) (368,103)
Payment of debt issue costs (145,604) (907,093) --
Net cash provided by (used in) financing
activities (4,474,523) (27,771,785) 9,239,906
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,827,292) (189,321) 64,753
Cash and cash equivalents, beginning of year 2,213,777 2,403,098 2,338,345
------------ ------------ ------------
Cash and cash equivalents, end of year $ 386,485 $ 2,213,777 $ 2,403,098
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Galaxy Telecom, LP (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.
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, LP
(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.
Property 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 unpaid
priority return totaled approximately $144,543,000, $95,487,000 and
$57,553,000 at December 31, 1999, 1998 and 1997, respectively.
Distributions - First, to Class C, D and E limited partners in proportion
to their respective capital contributions to the extent of such capital
contributions and priority returns.
Second, to General and Class B limited partners in proportion to their
respective capital contributions to the extent of such capital
contributions.
Third, to general partners in proportion to their percentage interest to
the extent all distributions to the general partners equal the first
priority return.
Fourth, 94.05 percent to general partners in proportion to their percentage
interest and 5.95 percent to Class B limited partner to the extent all
distributions to the general partners equal to the second priority return.
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 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. Going Concern Uncertainties
The Partnership has incurred losses each year since its inception and has a
partnership deficit of $31.9 million at December 31, 1999. During 1999, the
Partnership continued 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 1999 and 1998, the Partnership received proceeds from sales of its
non-core cable television systems of $10.1million and $38.6 million,
respectively, which was primarily used to pay down the amounts due under
its revolving line of credit.
At December 31, 1999, the Partnership was not in compliance with certain
covenants under its term loan agreement. As discussed in Note 7, on March
31, 2000 the Partnership amended its term loan agreement to modify
financial covenants and change the maturity date of all outstanding
borrowings under the term loan agreement.
Additionally, as part of this amended term loan agreement, the Partnership
must have a definitive sale agreement in force by May 31, 2000 to sell
substantially all the interests of the Partnership sufficient for the
repayment of all Partnership loans including the Senior Subordinated Notes.
This definitive agreement shall not contain any such contingencies allowing
the purchaser to terminate such an agreement arising from: (a) the failure
of such purchaser to obtain the financing necessary for purchase, (b) the
failure of such purchaser to obtain the approvals necessary for such
purchase or (c) relating to the completion of any due diligence review by
such purchaser other than completion of reasonable due diligence
customarily to be completed in such transaction after signing such
agreement. Absent of such an agreement to sell substantially all the assets
of the Company triggers an event of default under the terms of the amended
loan agreement.
Management is actively pursuing the sale of the interests of the
Partnership in accordance with the amended term loan agreement. However,
entering into a definitive agreement as described above by May 31, 2000 is
not assured.
In light of the Partnership's current projected earnings and cash flow, the
Partnership believes it will have the financial resources to maintain its
current level of operations until December 31, 2000, the term loan maturity
date. However, cash generated from operations alone will not be sufficient
to pay the term loan on December 31, 2000 without proceeds from the sale of
assets or refinancing of the term loans. Additionally, such a sale as
required by the loan agreement would represent a change in control as
defined in the Senior Subordinated Loan Agreement and would represent an
event of redemption.
Absence of the completion of the aforementioned definitive agreement, and
the Partnership's inability to meet its cash flow needs, raises substantial
doubt about its ability to continue as a going concern.
3. Significant Accounting Policies
The significant policies followed are summarized below:
a. Basis 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 9).
b. 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, 1999 and 1998.
c. 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 were negligible in 1999 and totaled
approximately $3.0 million at December 31, 1998. Though limited
primarily to cable television subscribers, the concentration of credit
risk with respect to receivables is minimized by geographical
dispersion through approximately 255individual cable television systems
ranging in size from approximately 10 subscribers to approximately
3,000 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.
d. 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 as reflected in the
financial statements approximate 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, 1999 and 1998
were $125,472,000 and $127,020,000, respectively. Based on borrowing
rates currently available to Galaxy for similar debt, the fair value of
the revolver debt and term loan approximates its carrying value at
December 31, 1999 and 1998.
e. 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.
f. Marketing Costs - Marketing costs are charged to operations in the
period incurred and totaled approximately $1,045,000, $1,822,000 and
$1,516,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
g. 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.
h. 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.
i. Intangible Assets - Goodwill related to the acquisition of cable
television systems represents the excess of purchase price plus related
direct costs over the fair value of the net assets acquired. Other
intangible assets consist primarily of debt issuance costs. Debt
issuance costs and original issue discounts are amortized to interest
expense using the interest method. The intangible assets are amortized
over the life of the borrowings or the estimated useful lives of the
assets of 15 years using the straight-line method.
j. 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.
k. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
l. Reclassifications - Certain prior year balances have been reclassified
to conform to the current year's presentation.
m. Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board issued a Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that derivatives be reported as assets and
liabilities at fair value and that changes in fair value be accounted
for depending on the intended use of the derivative and the resulting
designation. This statement, as amended, is effective for the
Partnership beginning January 1, 2001. 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.
n. 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 at December 31, 1999 and 1998.
4. ACQUISITIONS AND DISPOSITIONS OF CABLE TELEVISION SYSTEMS
Acquisition - On May 1, 1999, Galaxy traded 18 cable television systems,
representing approximately 7,500 subscribers for seven cable television systems,
representing approximately 7,100 subscribers from Mississippi Cablevision, Inc.
("MCI"), an affiliate of Telecommunications, Inc. The Galaxy cable television
systems are located primarily in Colorado, Iowa and South Dakota, while the MCI
cable television systems are located in Mississippi. The estimated fair market
value of the cable television systems received was approximately $9.4 million or
approximately $1,300 per subscriber. The fair market value of the cable
television systems received was estimated by using the purchase price (price per
subscriber) for similar cable television systems bought from MCI by an affiliate
of Galaxy. The net historical cost of the cable television systems given up was
approximately $6.9 million, resulting in Galaxy recording a gain on sale of
approximately $2.5 million, net of expenses.
The excess of the purchase price over the fair value of the assets acquired
(franchise costs) was approximately $4.8 million and is being amortized on a
straight-line basis over 15 years. The trade was accounted for as a business
combination in accordance with the Accounting Principles Board Opinion No. 16,
Business Combinations, accordingly, the results of the acquired cable television
systems have been included in the statement of operations since the acquisition
date. Management believes that the pro forma results of the Partnership would
have been insignificant if the trade had occurred on January 1, 1999.
Dispositions - 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, and recorded a gain on sale of approximately $1.0
million. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
On June 23, 1999, Galaxy sold 8 cable television systems, located primarily in
Alabama, representing approximately 5,500 subscribers for approximately $8.4
million, or approximately $1,540 per subscriber, and recorded a gain on sale of
approximately $1.8 million. Galaxy used a majority of the proceeds from this
sale to pay down principal of the revolving note.
On October 1, 1999, Galaxy sold seven satellite master antenna television
systems("SMATV's") and one cable system located primarily in the Kansas City
area, representing approximately 1,165 subscribers for approximately $1,360,000,
or approximately $1,161 per subscriber, and recorded a gain on sale of
approximately $244,000. Galaxy used the proceeds from this sale to pay down
principal of the revolving note.
1998 Acquisitions and Dispositions - 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 Cash Paid
of Cable by Partnership Net
Systems Selling for Selling Cash
Region Sold Price Expense 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)
1997 Acquisition and Trades - 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 March 31, 2000, Galaxy sold one cable television
system, located in Kansas, representing approximately 1,424 subscribers for
approximately $3.5 million, or approximately $2,492 per subscriber. Galaxy will
use the proceeds from this sale to pay down principal of the term loan.
5. SYSTEMS AND EQUIPMENT
Systems and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
Depreciation Useful Life December 31,
Method Term 1999 1998
------ ---- ---- ----
<S> <C> <C> <C> <C>
Cable television distribution
systems:
Head-end Straight-line 7 years $ 28,899,620 $ 28,390,239
Distribution plant Straight-line 12 years 97,040,462 91,011,687
Subscriber drops Straight-line 5 years 24,706,433 23,783,738
Other distribution -- -- 668,140 1,029,403
----------- -----------
151,314,655 144,215,067
Other:
Vehicles Straight-line 5 years 3,957,956 4,672,900
Buildings Straight-line 5 years 1,742,390 1,873,474
Furniture, fixtures and equipment Straight-line 5 years 3,841,024 5,479,623
Land -- -- 60,000 91,000
----------- -----------
160,916,025 156,332,064
Less accumulated depreciation (66,348,010) (52,134,390)
----------- -----------
Systems and equipment, net $ 94,568,015 $ 104,197,674
============= =============
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
Amortization Amortization December 31,
Method Period 1999 1998
Goodwill, franchise costs and
subscriber lists Straight-line 15 years $ 39,834,390 $ 41,306,900
Debt issuance costs:
Senior Subordinated NotesLevel Yield 10 years 5,403,197 5,403,197
Revolver and Term Loan Level Yield 7 years 3,432,516 3,286,912
Other Straight-line 15 years 725,545 1,114,325
----------- -----------
49,395,648 51,111,334
Less accumulated amortization (15,129,440) (12,850,656)
----------- -----------
Intangible assets, net $ 34,266,208 $ 38,260,678
============ ============
</TABLE>
7. LONG-TERM DEBT
Outstanding long-term debt is as follows:
<TABLE>
December 31,
1999 1998
<S> <C> <C>
Term loan with interest payable monthly, at an
adjusted LIBOR rate of LIBOR plus 3.25% (9.72125% at
December 31, 1999) $ 25,325,000.00$ --
Revolving credit facility with interest payable monthly, at an
adjusted LIBOR rate of LIBOR plus 3.25% (8.879% at
December 31, 1998) 30,500,000.00
12.375% senior subordinated notes, net of unamortized
discount of $345,000 and $405,000 at December 31, 1999
and 1998, respectively, with interest payable semiannually
on April 1 and October 1 119,655,000.00 119,595,000.00
Other, including capital leases 3,196,701.00 2,350,620.00
Total $ 148,176,701.00$ 152,445,620.00
</TABLE>
Revolving Credit Facility - In March 2000, the Partnership amended the Revolving
Credit Facility which previously had been converted to a term loan in June 1999
whereby the amendment allowed the Partnership to borrow $5.0 million in addition
to their $25,325,000 term loan outstanding at December 31, 1999. Prior to
advancing funds under this agreement, the Partnership had funds available in an
account with the appropriate administrative agent when combined with the
proceeds of $5.0 million adequate to fund the Senior Subordinated Notes
semi-annual interest payment due April 1, 2000. The new amended loan agreement
bears interest at the Alternate Base Rate (ABR), as defined in the amendment, of
ABR plus 2%, payable quarterly, from the amendment date to June 30, 2000. After
June, 2000 the term loan bears interest at ABR plus 4% until maturity of the
loan. The entire term loan matures on December 31, 2000.
The partnership will owe an $800,000 fee which will be due and payable upon
repayment of the additional $5.0 million borrowing. The $800,000 fee shall be
reduced by 50% to $400,000 if the additional borrowing is paid in full by June
30, 2000. If the additional borrowing is not paid in full by June 30, 2000, but
paid in full by September 15, 2000 such fee shall be reduced by 25% to $600,000.
The amended senior term loan sets forth modified financial covenants including a
maximum total leverage ratio, a maximum senior debt leverage ratio, a maximum
senior debt to basic subscriber ratio, minimum interest coverage, debt service
coverage, fixed charge coverage ratios and restrictions on capital expenditures.
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").
There are no mandatory sinking fund requirements for the Notes. However, the
Partnership may be obligated, under certain circumstances, to (a) make an offer
to purchase all outstanding Notes at a redemption price of 101% of the principal
amount thereof, plus accrued interest upon a change of control, as defined, and
(b) make an offer to purchase Notes with a portion of the net cash proceeds of
assets sales, as defined. Subsequent to September 2000, the Notes are subject to
optional redemption in whole or in part at annually decreasing redemption prices
ranging from 106.15% in 2000 to 100% in 2003 and thereafter. Subject to certain
conditions, the Partnership may at any time defease the Notes.
The payment of principal and interest on the Notes is subordinated in right of
payment to the term loan. The Notes will rank pari passu with all other senior
subordinated indebtedness of the Partnership, if any, and is senior to all
subordinated debt of the Partnership. Absent a change of control in the
Partnership (see Note 2) such notes are due 2005.
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. No such contributions were required in 1997,
1998 or 1999.
Five-Year Maturities - The required principal payments on the Company's
long-term debt and obligations under capital leases at December 31, 1999,
assuming no additional borrowings and assuming no accelerated payment
requirements of the Senior Subordinated Notes (see Note 2), are as follows:
[OBJECT OMITTED]
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments during 1999, 1998 and 1997 were approximately $17.5 million,
$20.0 million and $20.8 million, respectively.
Noncash investing and financing transactions for the year ended December 31,
1999 were as follows:
Acquisition of cable systems through trades of current systems $9,440,402
Capital expenditures included in accounts payable 1,582,482
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 financing transactions 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
9. INVESTMENT IN AFFILIATES
At December 31, 1999, the Partnership has a 40% membership interest in Galaxy
American Communications, L.L.C. ("GAC") for which the Partnership uses the
equity method of accounting. 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. 1999
summarized financial information for 100% of GAC is as follows:
Results of operations:
Revenue $ 11,532,000
Operating expenses 11,729,000
Operating income (194,000)
Net loss (4,560,000)
Financial position:
Total assets 33,028,000
Total liabilities 37,600,000
At December 31, 1999, the Partnership's investment balance in GAC was $-0- and
the Partnership had a receivable balance from GAC of approximately $308,000.
10. COMMITMENTS AND CONTINGENCIES
Leases - The Corporation leases certain office facilities and equipment under
capital and operating lease arrangements.
Future minimum payments for capital and noncancelable operating leases as of
December 31, 1999, are as follows:
Capital Operating
Leases Leases
2000 $ 23,733 $ 305,791
2001 25,274 293,278
2002 13,243 262,357
2003 235,250
2004 215,170
Net minimum lease payments 62,250 $1,311,846
Less amounts representing interest 4,935
Present value of minimum lease payments $ 57,315
The Partnership leases computer equipment and vehicles under capital lease
agreements which generally provide purchase options at the end of the original
lease terms.
Rent expense under the operating leases was $346,000, $304,000 and $346,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
In addition, the Partnership, as an integral part of its cable operations, has
entered into short-term operating lease contracts for pole usage. Rent expense
approximated $1,058,000, $1,235,000 and $1,143,000 for the years ended December
31, 1999, 1998 and 1997, 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 matching contributions
on behalf of each employee of an amount not to exceed the employee's
contribution or 8% of such employee's salary. The Partnership contributed
approximately $329,000, $217,000 and $198,000 to the plan during 1999, 1998 and
1997, 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 non-renewal of existing franchise agreements.
The Partnership has various contracts to obtain basic and premium programming
from program suppliers whose compensation is typically based on a fixed fee per
subscriber. The Partnership has negotiated programming agreements with premium
service suppliers that offer cost incentives to the Partnership under which
premium unit prices decline as certain premium service growth thresholds are
met. In addition to volume pricing discounts, some program suppliers offer
marketing support to the Partnership in the form of advertising funds,
promotional materials, rebates and other incentives. The Partnership's
programming contracts are generally for a fixed period of time, typically three
to five years, and are subject to negotiated renewal.
Cable Service Rate Regulation - 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.
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.
11. 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 GSMI's expenses,
the Partnership pays GSMI a management fee monthly, in arrears based upon 3% of
gross revenues as defined in the management agreement. Management fees and
reimbursed expenses approximated $2,263,000, $3,294,000 and $3,409,000 for the
years ended December 31, 1999, 1998 and 1997. The management agreement's initial
term through December 31, 1999 was automatically extended for one year 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, 1999 and 1998. 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 $820,000 and $515,000 as of December 31, 1999 and 1998,
respectively, of which approximately $750,000 and $205,000 as of December 31,
1999 and 1998, respectively, represent receivables from GSMI.
On December 31, 1998, GAC issued debt of approximately $31 million. 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.
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 was reimbursed
approximately $500,000 for costs incurred for administrative services provided
to GAC.
12. QUARTERLY DATA - UNAUDITED
The results of operations for each of the quarters in 1999 and 1998 were as
follows (thousands of dollars):
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
Revenue $ 14,569 $14,517 $14,184 $ 13,644
Operating income (loss) 516 543 706 (830)
Net income (loss) (3,323) 1,518 (3,901) (6,530)
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 income (loss) (3,858) (6,571) (8,348) (6,069)
<PAGE>
INDEPENDENT AUDITORS' REPORT To the Partners of Galaxy Telecom L.P.
We have audited the financial statements of Galaxy Telecom, L.P. and subsidiary
("the Partnership") as of December 31, 1999, and for the period ended December
31, 1999, and have issued our report thereon dated March 17, 2000 (April 11,
2000 as to Notes 2,4 and to the term loan described in Note 7); such report,
which includes an explanatory paragraph as to the uncertainty of the entity's
ability to continue as a going concern, is included elsewhere in this Form 10-K.
Our audit also included the financial statement schedule of Galaxy Telecom L.P.
and subsidiary, listed in the accompanying index on F-1. This financial
statement schedule is the responsibility of the Partnernship's management. Our
responsibility is to express an opinion based on our audit. In our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
March 17, 2000
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Partners
Galaxy Telecom, L.P.
Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999, appearing on page F-3 of this 1999 Annual Report on
Form 10-K, also included an audit of the financial statement schedule listed in
the accompanying index on page F-1 for the years ended December 31, 1998 and
1999.. 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
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALAXY TELECOM, LP AND SUBSIDIARY
Column A Column B Column C Column D Column E
- -------------------------------- ------------- ------------------------- ------------------- -----------
-------------------------
Additions
-------------------------
Charged
Balance at Charged to to Other Balance
Beginning Cost and Accounts Deductions at End of
Description of Period Expenses Describe Describe Period
- -------------------------------- ------------- -------------- --------- --------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Reserve and allowances
deducted from asset
accounts-allowance for
uncollectible accounts $ 116,572 $ 991,364 $ - $ 1,020,487 (1) $ 87,449
Year ended December 31, 1998:
Reserve and allowances
deducted from asset
accounts-allowance for
uncollectible accounts $ 154,692 $ 1,614,118 $ - $ 1,652,238 (1) $ 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 (1) $ 154,692
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
-61-
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 20, 2000, the Company dismissed PricewaterhouseCoopers LLP as
the Company's independent accountant. The reports of PriceweaterhouseCoopers LLP
on the financial statements of the Company for each of the past two fiscal years
ending 12/31/98 and 12/31/97, respectively, contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
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.......54.....Chairman, Chief Executive Officer
and Director of Galaxy Management
and Galaxy GP
J. Keith Davidson........44.....Executive Vice President, CFO,
Secretary and Director of Galaxy
Management and Galaxy GP
James M. Gleason..........36.....President and Chief Operating Officer
of Galaxy Management and Galaxy GP
William P. Collatos......45.....Director of Galaxy GP
Kenneth T. Schiciano.......37.....Director of Galaxy GP
Richard D.Tadler...........43.....Director of Galaxy GP
Tommy L. Gleason, Jr. has served as Chaiman, Chief Executive Officer and a
director of Galaxy Management and Galaxy GP, and a manager of Galaxy Investments
since December 1994. Mr. Gleason is past President of CableMaxx, Inc., a
wireless cable television company. Since 1987, he has served as president and
director of Galaxy Cablevision Management, Inc., a general partner of the
managing general partner of Galaxy Cablevision, L.P. from which Galaxy acquired
the Galaxy Cablevision Systems. He was a director of Capital Bancorporation,
Inc. of Cape Girardeau, Missouri, and an individual general partner of Community
Investment Partners, a venture capital fund in St. Louis, Missouri. Mr. Gleason
began his cable television career in 1964, and from then until 1971 he was a
field engineer responsible for the operation of 45 headend facilities in 11
states. From 1971 through 1976, he was a product sales manager for Essex Wire
Corp. of Chicago, Illinois. From 1976 through 1982, he was President of Galaxy
Communications Systems, which operated 29 cable television systems in four
states. Prior to 1979, he engineered and built eight cable television systems in
Illinois. In 1988 and 1989, Mr. Gleason served as Secretary and Director of the
NCTC, he is currently a Director of the NCTC and the Immediate Past President.
Mr. Gleason was inducted into the Cable TV Pioneers in 1989.
J. Keith Davidson has served as Executive Vice President, Chief Financial
Officer, Secretary and a director of Galaxy Management and Galaxy GP and a
manager of Galaxy Investments since December 1994. From 1988 to 1994, Mr.
Davidson was the Chief Financial Officer and Assistant Secretary of Galaxy
Cablevision Management, Inc. Mr. Davidson has 18 years of experience in the
cable television industry. James M. Gleason has served as President and Chief
Operating Officer and a director of Galaxy Management since December 1994. Mr.
Gleason also presently serves as Chief Operating Officer of Galaxy GP. From 1988
to 1994, he served as Vice President - Administrative Operations of Galaxy
Cablevision Management, Inc. Mr. Gleason is responsible for field office
administration and customer service, computer operations, and was responsible
for implementing Galaxy Management's MIS operations. He has prior experience in
cable television system construction, mapping, marketing and operations. In
1992, Mr. Gleason served as Chairman of the Board of the NCTC. Mr. Gleason has
16 years of experience in the cable television industry and is the brother of
Tommy L. Gleason, Jr. 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 that he co-founded in May 1994. From 1990 to 1994, Mr. Collatos was a
private equity investor. Mr. Collatos was an Associate and General Partner of
funds managed by Media Communications Partners and TA Associates, Inc., a
private equity capital firm ("TA Associates") from 1980 to 1990. From 1976 to
1980, Mr. Collatos worked in and subsequently ran the media-lending group at
Fleet National Bank. Kenneth T. Schiciano has served as a director of Galaxy GP
and a manager of Galaxy Investments since December 1994 and has been a Principal
of TA Associates since January 1995. Mr. Schiciano was a Vice President of TA
Associates from August 1989 to December 1994. Richard D. Tadler has served as
director of Galaxy GP and a manager of Galaxy Investments since December 1994.
Mr. Tadler has been a Managing Director of TA Associates since January 1994.
From 1987 to December 1993, Mr. Tadler was a general partner of TA Associates.
Mr. Tadler is a director of TechForce Corporation.
Item 11. Executive Compensation.
Management Agreement
Pursuant to the Management Agreement between Galaxy Management and Galaxy,
Galaxy Management, including Messrs. Tommy L. Gleason, Jr., J. Keith Davidson
and James Gleason, 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,
1999, concerning the beneficial ownership of (i) the units of general
partnership interests and limited partnership interests of Galaxy owned by each
person known by Galaxy to own beneficially more than 5.0% of any class of
Galaxy's partnership interests, (ii) equity securities of and member interests
in Galaxy GP and Galaxy Investments, respectively, owned by all executive
officers and directors of Galaxy GP and the managers of Galaxy Investments,
respectively, owned by all executive officers and directors of Galaxy GP and the
managers of Galaxy Investments as a group, and (iii) member interests in Galaxy
Management owned by the Senior Managers.
<TABLE>
<CAPTION>
Name and Address No. of Units/ % of
Of Beneficial Owner Type of Interest Shares(1) Class
------------------- ---------------- --------- -----
<S> <C> <C> <C>
Galaxy Telecom, Inc. Class A General Partnership Units of Company 133,333 *
1220 North Main Street Class C Limited Partnership Units of Company 416,000 100.0
Sikeston, Missouri 63801 Class E Limited Partnership Units of Company 200,000 100.0
Galaxy Telecom Investments, L.L.C. Class A General Partnership Units of Company 44,491,667 99.7
1220 North Main Street Class B Limited Partnership Units of Company 1,000 100.0
Sikeston, Missouri 63801
Farm Bureau Life Insurance Company Class D Limited Partnership Units of Company 6,384,000 100.0
Vantage Cable Associates, L.P.
5400 University Avenue
W. Des Moines, Iowa 50266
Galaxy Telecom Management, L.L.C. Class A Voting Common Stock of Galaxy GP 20,000 16.9
1220 North Main Street Common Interests in Galaxy Investments 990 99.0
Sikeston, Missouri 63801 Voting Preferred Interests in Galaxy Investments 288,459 7.3
TA Associates Group (2) Class A Voting Common Stock of Galaxy GP 63,281 53.3
c/o TA Associates, Inc. Common Interests in Galaxy Investments 8 *
125 High Street, Suite 2500 Voting Preferred Interests in Galaxy Investments 3,452,523 87.8
Boston, Massachusetts 02110
Spectrum Equity Investors, L.P. Class A Voting Common Stock of Galaxy GP 24,615 20.7
125 High Street, Suite 2600 Common Interests in Galaxy Investments 2 *
Boston, Massachusetts 02110
Fleet Equity Partners(3) Class A Voting Common Stock of Galaxy GP 5,810 4.9
111 Westminster Street Class B Nonvoting Common Stock of Galaxy GP 14,703 100.0
Providence, Rhode Island 02903 Common Interests in Galaxy Investments 2 *
Voting Preferred Interests in Galaxy Investments 192,646 4.9
Nonvoting Preferred Interests in Galaxy Investments 570,368 100.0
Tommy L. Gleason, Jr. Common Interests of Galaxy Management Limited 1,030,000 38.5
James M. Gleason Common Interests of Galaxy Management Limited 925,000 33.8
J. Keith Davidson Common Interests of Galaxy Management Limited 45,000 2.0
All executive officers and directors of Class A Voting Common Stock of Galaxy GP
Galaxy GP as a group (6 persons) (4) Common Interests in Galaxy Investments 107,896 91.0
All managers of Galaxy Investments as 998 99.8
a group (4 persons) (5) Voting Preferred Interests in Galaxy Investments 3,740,995 95.1
</TABLE>
* Less than one percent.
(1) Share and unit ownership amounts have been rounded to the nearest
whole number.
(2) Includes 19,524 shares of Class A Voting Common Stock of Galaxy GP
("Class A Stock") owned by Advent Atlantic and Pacific II L.P., 7,040 shares of
Class A Stock owned by Advent Industrial II L.P., 3,282 Class A Stock owned by
Advent New York, L.P., 32,820 shares of Class A Stock owned by Advent VII L.P.,
and 615 shares of Class A Stock owned by TA Venture Investors Limited
Partnership. Includes 6 units of Common Interests in Galaxy Investments ("Common
Interests") owned by Advent VII Investor Corp. Includes 3,452,523 units of
Voting Preferred Interests in Galaxy Investments ("Voting Preferred Interests")
owned by Advent VII Investor Corp. All of the above beneficial owners are part
of an affiliated group of investment partnerships and companies referred to,
collectively, as the TA Associates Group. Messrs. Tadler and Schiciano,
Directors of Galaxy GP and managers of Galaxy Investments, are a Managing
Director and a Principal, respectively, of TA Associates, Inc., which is the
sole general partner of TA Associates VII L.P., TA Associates VI L.P. and TA
Associates AAP II Partners L.P. TA Associates VII L.P. is the sole general
partner of Advent VII L.P. TA Associates is the sole general partner of Advent
New York L.P. and Advent Industrial II L.P. TA Associates AAP II Partners L.P.
is the sole general partner of Advent Atlantic and Pacific II L.P. TA
Associates, Inc. exercises sole voting and investment power with respect to all
of the shares or units, as the case may be, held of record by the named
investment partnerships, with the exception of those shares of Class A Stock
held by TA Venture Investors Limited Partnership. Principals and employees of TA
Associates, Inc. (including Messrs. Tadler and Schiciano) comprise the general
partners of TA Venture Investors Limited Partnership. In such capacity, each of
Messrs. Tadler and Schiciano may be deemed to share voting and investment power
with respect to 615 shares of Class A Stock held of record by TA Venture
Investors Limited Partnership. Messrs. Tadler and Schiciano each disclaim
beneficial ownership of such shares, except to the extent of their respective
pecuniary interests.
(3) Includes 581 shares of Class A Stock and 1,470 shares of Class B
Nonvoting Common Stock of Galaxy GP ("Class B Stock") owned by Chisholm Partners
II L.P., and 5,229 shares and 13,233 shares of Class A Stock and Class B Stock,
respectively, owned by Fleet Growth Resources, Inc. Also includes 0.18 units of
Common Interests, 15,460 units of Voting Preferred Interests, and 45,775 units
of Nonvoting Preferred Interests in Galaxy Investments ("Nonvoting Preferred
Interests") owned by Chisholm Partners II L.P., 1.14 units of Common Interests,
124,030 units of Voting Preferred Interests and 367,215 units of Nonvoting
Preferred Interests owned by Fleet Growth Resources, Inc., and 0.49 units of
Common Interests, 53,156 units of Voting Preferred Interests and 157,378 units
of Nonvoting Preferred Interests owned by Fleet Equity Partners VII, L.P.
(4) Includes (i) 20,000 shares owned of record by Galaxy Management
Limited as to which Tommy L Gleason, Jr. and J. Keith Davidson may be deemed to
have shared voting and investment power, (ii) 63,281 shares owned of record by
TA Associates Group as to which shares Messrs. Tadler and Schiciano may be
deemed to have shared voting and investment power and (iii) 24,615 shares owned
of record by Spectrum Equity Investors, L.P. ("Spectrum") as to which shares Mr.
Collatos may be deemed to have shared voting and investment power.
(5) Includes (i) 990 Common Interests and 288,459 Voting Preferred
Interests owned of record by Galaxy Management Limited as to which shares
Messrs. Gleason, Jr. and Davidson may be deemed to have shared voting and
investment power, (ii) 6 Common Interests and 2,494,591 Voting Preferred
Interests owned of record by TA Associates Group as to which shares Messrs.
Tadler and Schiciano may be deemed to have shared voting and investment power
and (iii) 2 Common Interests and 915,583 Voting Preferred Interests owned of
record by Spectrum as to which shares Mr. Collatos may be deemed to have shared
voting and investment power.
Item 13. Certain Relationships and Related Transactions.
Management Agreement
Galaxy Management, which is owned by the Senior Managers, 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 expired
December 31, 1999, but was automatically renewed for a successive one-year term.
Galaxy may terminate the Management Agreement with 90 days' written notice prior
to the expiration of the initial or any renewal term. Galaxy also has the option
to terminate the Management Agreement in the event (i) of a material breach of
the Management Agreement by Galaxy Management and failure to cure same or
commence cure within 30 days after receipt of notice from Galaxy, (ii) of an
unwaived and uncured default by Galaxy of any substantive covenant contained in
its financing documents, (iii) of a 10% reduction in Galaxy's gross revenues or
operating cash flow over the prior fiscal year or (iv) that none of Tommy L.
Gleason, Jr., 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 1999, Galaxy
paid Galaxy Management approximately $211,000 in reimbursed expenses.
In return for its management services, Galaxy Management receives a
management fee, payable monthly, equal to a percentage of the gross revenues
derived by Galaxy from the Systems, excluding revenues from the sale of Systems
or franchises. The Management Agreement also provides that, prior to January 1,
1998, the dollar amount of the management fee may not increase as a result of
revenues attributable to acquired cable television systems until such time as
the gross revenues of Galaxy reach a certain minimum level. The management fee
is currently 3% of revenues. For the year ended December 31, 1999, Galaxy
incurred a management fee of $2,052,074. 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 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 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,
as amended in March 2000 (the "Subordination Agreement") with Fleet National
Bank and the Lenders under Galaxy's Loan Agreement (the "Senior Parties"). Under
the terms of the Subordination Agreement, all obligations and liabilities of
Galaxy, Galaxy GP and Galaxy Investments to make any payments of cash or other
property to any of the other Subordinated parties are subordinated in right of
payment and remedies to the prior final payment in full of the obligations and
liabilities of Galaxy, Galaxy GP and Galaxy Investments to the Senior Parties
under the Loan Agreement and the financing documents related thereto.
Equity Holders Agreement
Galaxy, Galaxy GP, Galaxy Investments, the Senior Managers, the Equity
Investors and Vantage Cable have entered into the Equity Holders Agreement
relating to the management of Galaxy GP and Galaxy Investments, the general
partners of Galaxy, and certain other matters. Under the Equity Holders
Agreement, each stockholder of Galaxy GP and each member of Galaxy Investments
has agreed to elect as directors or managers, as the case may be, three
designees of the Equity Investors and Tommy Gleason, Jr. and one other designee
of the Senior Managers. The current designees of the Equity Investors are
William P. Collatos, Kenneth T. Schiciano and Richard D. Tadler. J. Keith
Davidson is the current second designee of the Senior Managers. The Equity
Holders Agreement provides that James M. Gleason shall serve as a director and
manager if Tommy Gleason, Jr. is unable to serve.
The Equity Holders Agreement also restricts transfers of equity interests
in Galaxy GP and Galaxy Investments by the Senior Managers and provides the
Equity Investors with piggyback registration rights and, on or after December
23, 1998, demand registration rights with respect to 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 on or after December 23, 1998 or the occurrence of a payment default on
notes issued by Galaxy Investments to the Equity Investors.
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 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.
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 and Class D 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 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 Investors
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.
Galaxy Air Services, Inc.
Galaxy leases an aircraft from Galaxy Air Services, Inc. ("Galaxy Air"), a
corporation jointly owned by James Gleason and Tommy Gleason, Jr., at a rate of
$2,079.60 per hour, plus $400 per night for incidental costs related to
overnight trips. The Company paid a total of $215,066 to Galaxy Air during
fiscal 1999. Galaxy Air derives more than 75% of its revenues from the Company.
The Company believes that the arrangements with Galaxy Air are as favorable as
those that could have been obtained in arms-length negotiations with
unaffiliated third parties.
<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.
<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
April 14, 2000 /s/ Tommy L. Gleason, Jr.
---------------------------
By: Tommy L. Gleason, Jr.
Chairman, Chief Executive Officer and Director
April 14, 2000 /s/ J. Keith Davidson
-----------------------
By: J. Keith Davidson
Executive Vice-President, Chief Financial
Officer and Director
April 14, 2000 /s/ James M. Gleason
----------------------
By: James M. Gleason
President, Chief Operating Officer and Director
<PAGE>
INDEX TO EXHIBITS
2.1- Asset purchase agreement by and between Douglas Cable Communications,
Limited Partnership and Galaxy, dated as of July 19, 1995,
incorporated herein by reference to Exhibit 2.1 to the Registration
Statement on Form S-1 (Reg. No. 37-95278) (the "Form S-1").
2.2- Asset Purchase Agreement by and between Friendship Cable of Florida,
Friendship Cable of Georgia, Friendship Cable of South Carolina,
Buford Group, Inc. and Galaxy, dated as of July 19, 1995,
incorporated herein by reference to Exhibit 2.2 to the Form S-1.
2.3- Asset Purchase Agreement by and between Vista Communications Limited
Partnership I and Galaxy, dated as of August 31, 1995, incorporated
herein by reference to Exhibit 2.3 to the Form S-1.
2.4- Asset Purchase Agreement by and between Vista/Narragansett Cable,
L.P. and Galaxy, dated as of August 8, 1995, incorporated herein by
reference to Exhibit 2.4 to the Form S-1.
2.5- Asset Purchase Agreement by and between Phoenix Country Cable Joint
Venture and Galaxy, dated as of July 19, 1995, incorporated herein by
reference to Exhibit 2.5 to the Form S-1.
2.6- Agreement by and between Galaxy and Anderson Pacific Corporation,
dated as of August 4, 1995, incorporated herein by reference to
Exhibit 2.6 to the Form S-1.
3.1- Limited Partnership Agreement (the "Partnership Agreement") of
Galaxy, dated as of December 23, 1994, incorporated herein by
reference to Exhibit 3.1 to the Form S-1.
3.2- Certificate of Limited Partnership of the Company, dated December 23,
1994, incorporated herein by reference to Exhibit 3.2 to the Form
S-1.
3.3- Certificate of Incorporation of Galaxy Telecom Capital Corp.
("Capital Corp."), incorporated herein by reference to Exhibit 3.3
to the Form S-1.
3.4- Bylaws of Capital Corp., incorporated herein by reference to Exhibit
3.4 to the Form S-1.
3.5- Amendment No.1 to the Limited Partnership Agreement, dated as of
December 1, 1995, filed as Exhibit 3.5 to Galaxy's Annual Report on
Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
3.6- Amendment No.2 to the Limited Partnership Agreement, dated as of
December 29, 1995, filed as Exhibit 3.6 to Galaxy's Annual Report on
Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
4.1- Indenture by and among Galaxy, Capital Corp. and Boatman's Trust
Company, as Trustee, relating to the 12 3/8% Senior Subordinated
Notes due 2005, incorporated herein by reference to Exhibit 4.1 to
the Form S-1.
4.2- Form of Note (included in Exhibit 4.1).
10.1- Management Agreement by and between Galaxy Systems Management, Inc.
and Galaxy, dated as of December 23, 1994, incorporated herein by
reference to Exhibit 10.1 to the Form S-1.
10.2- Securities Purchase Agreement by and among Galaxy, Galaxy Telecom,
Inc. and Galaxy Telecom Investments, L.L.C. and the Purchasers and
other parties named therein, dated as of December 23, 1994 (the
"Securities Purchase Agreement"), incorporated herein by reference
to Exhibit 10.2 to the Form S-1.
10.3- Equity Holders Agreement by and among Galaxy, Galaxy Telecom, Inc.,
Vantage Cable Associates, L.P. and the Management Stockholders and
Purchasers named in the Securities Purchase Agreement, dated as of
December 23, 1994, incorporated herein by reference to Exhibit 10.3
to the Form S-1.
10.4- Contract by and between Galaxy and QUALCOMM Incorporated, dated as of
November 18, 1993, as amended, incorporated herein by reference to
Exhibit 10.5 to the Form S-1.
10.5- Asset Purchase Agreement by and between Galaxy (as assignee of Galaxy
Management, Inc.) and Galaxy Cablevision, L.P., dated as of May 16,
1994, incorporated herein by reference to Exhibit 10.6 to the Form
S-1.
10.6- Asset Purchase Agreement by and between Galaxy (as assignee of Galaxy
Management, Inc.) and Vantage Cable Associates, L.P., dated as of
June 8, 1994, as amended as of December 23, 1994, incorporated
herein by reference to Exhibit 10.7 to the Form S-1.
10.7- Asset Purchase Agreement by and between Galaxy (as assignee of Galaxy
Management, Inc.) and Chartwell Cable of Colorado, Inc., dated
November 11, 1994, incorporated herein by reference to Exhibit 10.8
to the Form S-1.
10.8- Asset Purchase Agreement by and between Galaxy and Galaxy
Cablevision, L.P., dated as of December 23, 1994, incorporated herein
by reference to Exhibit 10.9 to the Form S-1.
10.9- Agreement of Purchase and Sale by and between Galaxy (as assignee of
Galaxy Management, Inc.) and Vista Communications Limited Partnership
III, dated as of June 13, 1994, incorporated herein by reference to
Exhibit 10.10 to the Form S-1.
10.10- Affiliate Subordination Agreement by and among Galaxy and the other
parties named therein, dated as of December 23, 1994, incorporated
herein by reference to Exhibit 10.11 the Form S-1.
10.11- First Amendment to Securities Purchase Agreement, dated as of
December 1, 1995, filed as Exhibit 10.11 to Galaxy's Annual Report on
Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
10.12- Amended and Restated Loan Agreement dated as of September 28, 1995 by
and among Galaxy and Fleet National Bank, as Agent, Lender and
Co-Arranger, and Internationale Nederlanden (U.S.) Capital
Corporation, as Lender and Co-Arranger, and the other Financial
Institutions party thereto. Filed as Exhibit 10.12 to Galaxy's Annual
Report on Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
10.13- Amendment No. 1 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.
10.18- Amendment No. 6 of the Amended and Restated Loan Agreement dated
March 31, 1999 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.
10.19- Amendment No. 7 of the Amended and Restated Loan Agreement dated
March 31, 2000 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.
10.20- $5,000,000 Term Loan Agreement by and among Galaxy Telecom, L.P. and
Fleet National Bank as Agent and Lender and certain other banks dated
March 31, 2000.
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.
<PAGE>
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<EPS-DILUTED> 0
</TABLE>
AMENDMENT NO. 7
This Amendment No. 7 entered into as of March 31, 2000 (this "Amendment")
by and among GALAXY TELECOM, L.P., ("GTLP"), GALAXY TELECOM CAPITAL CORP.
("Capital Corp."); and together with GTLP, the "Borrower"), the financial
institutions party to the Loan Agreement referred to below (the "Lenders"), and
FLEET NATIONAL BANK ("Fleet"), a national banking association organized under
the laws of the United States of America, as agent for itself and the other
Lenders (the "Agent").
PRELIMINARY STATEMENTS:
WHEREAS, the Borrower, the Lenders, and the Agent have entered into an
Amended and Restated Loan Agreement dated as of September 28, 1995, as amended
by Amendment No. 1 dated as of October 21,1996, Amendment No. 2 dated as of
March 28, 1997, Amendment No. 3 dated as of November 14, 1997 and Amendment No.
4 dated as of March 30, 1998, Amendment No. 5 dated as of August 31, 1998 and
Amendment No. 6 dated as of March 31, 1999 (as amended, the "Loan Agreement");
WHEREAS, capitalized terms used herein and not otherwise defined shall
have the meanings specified in the Loan Agreement; and
WHEREAS, the Borrower has requested that the Lenders amend certain
provisions of the Loan Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. The following definitions contained in Section 1.1 of
the Loan Agreement are amended as follows:
(a) The definition of "Annualized Operating Cash Flow" is amended in its
entirety, effective as of December 31, 1999, to read as follows:
""Annualized Operating Cash Flow" means Operating Cash Flow for the
most recently ended calendar month and for the two immediately
preceding calendar months based on the Borrower's accurate monthly
financial statements provided to the Lenders in accordance with
Sections 5.3.3(a) and 5.3.7 for the calendar months in question
times four (4)."
(b) The definition of "Converted Loan Repayment Date" is amended,
effective as of December 31, 1999, by changing "...December 31,
2002..." to "...December 31, 2000...".
(c) The definition of "Effective Prime" is amended in its entirety,
effective as of March 31, 2000, to read as follows:
""Effective Prime" means the Prime Rate plus two percent (2.0%) per
annum until the close of business on June 30, 2000 and thereafter
means the Prime Rate plus four percent (4.0%) per annum."
(d) The definition of "Federal Funds Rate" is amended, effective as of
March 31, 2000, by inserting "...plus one-half percent (.50%)..."
immediately prior to "...provided" in the sixth line of such
definition.
(e) The definition of "Fixed Charge Coverage Ratio" is amended,
effective as of December 31, 1999, in its entirety to read as
follows:
""Fixed Charge Coverage Ratio" means, as of the last day of each
calendar month, a fraction, the numerator of which shall be an
amount equal to Operating Cash Flow for such month and each of the
two immediately preceding calendar months times four (4) less (a)
Capital Expenditures made by the Borrower (other than those Capital
Expenditures paid for with (i) purchase money Indebtedness, (ii)
Loans, (iii) cash (except to the extent that the Borrower's cash
balance at the end of such calendar month is less than $1,500,000),
or (iv) Capitalized Lease Obligations permitted to exist under this
Agreement) and its Subsidiaries times four (4) and (b) Permitted
Restricted Payments paid during such three calendar month period in
each case times four (4), and the denominator of which shall be an
amount equal to Total Debt Service (exclusive of voluntary
prepayments of principal on the Loans and exclusive of Closing
Costs) for such three calendar month period times four (4)."
(f) The definition of "Interest Expense" is amended, effective as of
December 31, 1999, in its entirety to read as follows:
""Interest Expense" means, with respect to any period, the aggregate
amount required to be paid in cash by the Borrower and its
Subsidiaries for interest, fees, charges and expenses, however
characterized, on its Indebtedness, including, without limitation,
all such interest, fees, charges and expenses accrued and required
to be paid in cash with respect to Indebtedness under the Financing
Documents (but not including fees associated with the purchase of
any interest rate protection arrangement)."
(g) The definition of "Prime Rate" is amended in it entirety effective
as of March 31, 2000 to read as follows:
""Prime Rate" means the higher of (i) the floating rate of interest
per annum designated from time to time by the Agent as being its
"prime rate" of interest, such interest rate to be adjusted on the
effective date of any change thereof by the Agent, it being
understood that such rate of interest may not be the lowest rate of
interest from time to time charged by the Agent and (ii) the Federal
Funds Rate plus one-half percent (.50%), such interest rate to be
adjusted on the effective date of any change thereof by the Federal
Reserve Bank of New York."
(h) The definition of "Total Cash Interest Expense" is amended,
effective as of December 31, 1999, in its entirety to read as
follows:
""Total Cash Interest Expense" means, with respect to any period,
Interest Expense for such period. "
(h) The definition of "Total Debt Service" is amended, effective as of
December 31, 1999, in its entirety to read as follows:
""Total Debt Service" means, for any period, the sum of the
Borrower's and its Subsidiaries' Total Cash Interest Expense for
such period (exclusive of any Closing Costs), plus the amount
necessary to meet the regularly scheduled principal amortization on
the Loans, plus regularly scheduled payments on other Indebtedness
and Capitalized Lease Obligations of the Borrower and its
Subsidiaries for such period."
2. Principal Amortization.
(a) Section 2.1.2(b) of the Loan Agreement is amended, effective as of
January 1, 2000, by deleting the second sentence thereof and the
columns entitled "Repayment Dates" and "Percentage of Outstanding
Principal" and replacing same with the following language:
"On the Converted Loan Repayment Date the Borrower shall pay the
outstanding principal balance of the Converted Loan together with
all accrued and unpaid interest, fees and expenses thereon in full
and prior thereto the Borrower shall make the mandatory payments and
prepayments required by Section 2.7, as amended."
(b) Notwithstanding anything to the contrary contained in Section
2.7.1.2 of the Loan Agreement, the Borrower shall not be required to
make any principal payment with respect to its Excess Cash Flow for
its 1999 fiscal year.
(c) Notwithstanding anything to the contrary set forth in the Loan
Agreement, the paragraphs entitled "Principal Amortization" i.e.
paragraph 3(e) of Amendment No. 5 of the Loan Agreement and
paragraph 3 of Amendment No. 6 shall, for the periods commencing
January 1, 2000, be of no further force or effect and shall be
replaced in their entirety by the following paragraph:
Notwithstanding anything to the contrary set forth in the Loan
Agreement, the net cash proceeds (after reasonable expenses) of all Asset
Sales and System Asset Sales occurring after December 31, 1999 and (ii)
the net cash proceeds (after reasonable expenses) received by the
Borrower, GTI and/or LLC from any equity investment in or Indebtedness for
Borrowed Money incurred by any of the Borrower, GTI and/or LLC shall be
applied to repay on a pro rata basis (i) the Loans in the inverse order of
maturity and (ii) that certain $5,000,000 term loan to be funded on or
about April 3, 2000 to the Borrower by certain of the Lenders and secured
on a pari passu basis with the Loans by collateral for the Loans (the
"Other Loan"). Any amendment to or waiver of the terms of the foregoing
sentence shall be deemed to require the consent of all of the Lenders as
provided for under Section 9.5(ii) and (vii) of the Loan Agreement. The
Borrower, the Lenders and the Agent acknowledge and agree that the
Borrower has made all payments of principal required by Section 2.1.2(b)
and 2.7.1, as amended, through December 31, 1999 except for approximately
$475,000 of purchase price holdbacks which are in escrow and which will be
paid to the Agent upon release from escrow to be applied to the Loans and
the Other Loan as set forth above in this paragraph and the Borrower
acknowledges and agrees that all payments of principal made prior to the
date of this Amendment have been applied in accordance with the Loan
Agreement.
3. The Lenders hereby consent to the System Asset Sale described on
Exhibit A hereto; provided that (i) if the Other Loan is closed and funded on or
before April 3, 2000 a portion of the net proceeds thereof in the amount of at
least $2,400,000 is applied to repay the Loans and the Other loan on a pro rata
basis and the balance in the amount of approximately $1,000,000 is applied by
the Borrower to repay certain Capitalized Leases and (ii) if the Other Loan is
not closed and funded on or before April 3, 2000, net proceeds in the amount of
at least $3,400,000 are applied, to repay the Loans and the Other Loan on a pro
rata basis and provided further that in any event the net proceeds in the amount
of $3,400,000 are initially transferred to the Agent to be held subject to the
Agent's first Lien thereon for application as set forth above. The references to
"pro rata basis" in this paragraph and the immediately preceding paragraph shall
have the meaning set forth in paragraph 13, below.
4. Notwithstanding anything to the contrary set forth in the Loan
Agreement, paragraph 3(d) of Amendment No. 5 of the Loan Agreement is amended,
effective as of June 30, 1999 to read in its entirety as follows:
"(d) Conversion Date. Effective as of the date hereof, the defined term
"Conversion Date" set forth in the Loan Agreement is amended to read as
follows:
"Conversion Date" means June 30, 1999."
After the Conversion Date the Borrower shall not be permitted to
borrow Revolving Loans without the prior written consent of all of
the Lenders."
5. Section 2.3.1 of the Loan Agreement is amended, effective as of
December 31, 1999, by adding at the end thereof the following:
"Notwithstanding the foregoing provisions of this Section 2.3.1 or
any other provisions of this Agreement, effective(i) as to each
Prime Rate Loan, on March 31, 2000 and (ii) as to each Libor Loan
outstanding on March 31, 2000, the Interest Adjustment Date for such
Libor Loan and, in all such cases, until the close of business on
June 30, 2000, interest shall accrue and be paid on the outstanding
principal balances of the Loans at Effective Prime."
6. Financial Covenant Amendments. The sections of the Loan Agreement
identified below are hereby amended as set forth below:
(a) Section 5.1.10. Maximum Total Indebtedness and Maximum Senior
Indebtedness to Annualized Operating Cash Flow. Effective as of
December 31, 1999, Section 5.1.10 of the Loan Agreement is hereby
amended (i) by replacing the required ratio at December 31, 1999 and
for the period commencing January 1, 2000 and thereafter with the
periods set forth below and the ratios set forth below opposite such
period is:
Total Senior
Indebtedness
Indebtedness
Ratio Ratio
December 31, 1999 7.25:1.00 2.00:1.00
January 1, 2000 through 7.65:1.00 1.65:1.00
August 31, 2000
September 1, 2000 and thereafter 7.35:1.00 1.65:1.00
and (ii) by adding the following text at the end of said Section:
"The Borrower shall be in compliance with the foregoing covenant as of the last
day of each calendar month."
(b) Section 5.1.11. Maximum Senior Indebtedness to Basic Subscribers.
Effective as of December 31, 1999, Section 5.1.11 of the Loan
Agreement is hereby amended in its entirety to read as follows:
"Section 5.1.11. Total Indebtedness for Borrowed Money to Basic Subscribers."
Maintain at the last day of each calendar month a ratio of (i) total
Indebtedness for Borrowed money (in dollars) to the number of Basic Subscribers
of not greater than (A) $1,175:1:00 at December 31, 1999 and (B) $1,299:1:00
thereafter.
(c) Section 5.1.12. Minimum Ratio of Operating Cash Flow to Interest
Expense.
Effective as of December 31, 1999, Section 5.1.12 of the Loan
Agreement is hereby amended (i) by deleting the periods and ratios
set forth therein and replacing them with the following:
October 1, 1999 through 1.15:1.00
December 31, 1999
January 1, 2000 1.05:1.00
and thereafter
and (ii) by adding the following text at the end of said Section:
"The Borrower shall be in compliance with the foregoing covenant on an
annualized basis as of the last day of each calendar month so that Operating
Cash Flow, Total Cash Interest Expense and each component of each of said terms
are calculated for the calendar month in question and for the two immediately
preceding calendar months and the results of said calculation are multiplied by
four (4)."
(d) Section 5.1.14 of the Loan Agreement is amended, effective as of
December 31, 1999 in its entirety to read as follows:
"Section 5.1.14. Minimum Fixed Charge Coverage. Maintain at the
last day of each calendar month a Fixed Charge Coverage Ratio of not
less than 1.05:1.00."
(e) Section 5.1.13 and Section 5.1.15 of the Loan Agreement are
deleted as of December 31, 1999 and shall be of no further force or
effect.
(f) Section 5.2.8.5 of the Loan Agreement is deleted as of December 31,
1999, shall be of no further force or effect and any past failures
of the Borrower to be in compliance therewith are hereby waived and
shall not constitute Defaults or Events of Defaults.
7. Section 5.2.11. Dividends, Payments and Distributions. Section 5.2.11
is amended, effective as of December 31, 1999, by changing the Period "1998 and
thereafter" to "1998 and through June 30, 1999", adding immediately thereafter
the period "July 1, 1999 through June 30, 2000", inserting in the "Percentage of
Gross Revenues" column "3.00%" immediately opposite "July 1, 1999 through June
30, 2000" and adding the Period "July 1, 2000 and thereafter" and inserting in
the "Percentage of Gross Revenues" column "2.50%" immediately opposite "July 1,
2000 and thereafter".
8. Section 5.2.17. Capital Expenditures. Effective as of December 31,
1999, Section 5.2.17 of the Loan Agreement is hereby amended to provide that for
Borrower's fiscal year ending December 31, 1999, maximum permitted Capital
Expenditures shall be $13,700,000 and for Borrower's fiscal year ending December
31, 2000, maximum permitted Capital Expenditures shall be $8,000,000.
Notwithstanding anything to the contrary contained in the Loan Agreement, no
unexpended portion of the amounts of Capital Expenditures permitted to be made
pursuant to the foregoing in a fiscal year may be carried forward to any
succeeding fiscal year.
8.1. Section 5.3.2 of the Loan Agreement is amended, effective as of
December 31, 1999 by changing "...90 days..." to "... 105 days...".
9. Section 6.1 of the Loan Agreement is amended, effective as of March 31,
2000 by adding thereto Section 6.1.17 and 6.1.18 which shall read as follows:
"Section 6.1.17. A definitive agreement for the sale of the Borrower
and Galaxy Telecom L.P. II or System Asset Sales of substantially
all the Systems owned by the Borrower and Galaxy Telecom L.P. II has
not been executed and delivered on or before, or is not in full
force and effect on May 31, 2000 between the Borrower, Galaxy
Telecom L.P. II and/or the owners of each of said entities and an
unaffiliated third party buyer in form and substance reasonably
satisfactory in all respects to the Majority Lenders including
without limitation (i) that any such agreement and transaction shall
contain sufficient provision for repayment of the Loans and any
Indebtedness of Galaxy Telecom L.P. II to the Agent and each of the
Lenders and all interest, fees and expenses in connection therewith
in full and (ii) that any such agreement and any related documents,
instruments or agreements contain no contingencies allowing the
purchaser to terminate such agreement or any such related document,
instrument or agreement (a) arising from the failure of such
purchaser to obtain the financing necessary for such purchase, (b)
arising from the failure of such purchaser to obtain the approvals
necessary for such purchase other than approvals customarily not
obtained until after signing of such an agreement in like
transactions or (c) relating to the completion of any due diligence
review by such purchaser other than completion of reasonable due
diligence customarily to be completed in such transactions after
signing such an agreement; it shall also be considered "Event of
Default" hereunder if said purchase agreement fails to be in full
force and effect at any time after being entered into; or.
"Section 6.1.18." If the Borrower, GTLP, GTI, LLC or Capital Corp.
or any Subsidiary thereof shall, without the prior written consent
of all of the Lenders, become liable for Indebtedness for Borrowed
Money which the Borrower would not be permitted to have outstanding
under the terms of Section 5.2.8.
9.1 Section 9.5 of the Loan Agreement is amended, effective as of March
31, 2000, by adding immediately after clause (ix) thereof the following:
"...(x) waive, amend or terminate Section 6.1.17 or Section 6.1.18."
10. Exhibit 1.8 to the Loan Agreement is amended, effective as of March
31, 2000, in its entirety to read as set forth on Exhibit 1.8 to this Amendment.
11. On the date hereof, the Borrower shall be and remain unconditionally
liable for (a) an amendment fee in the amount of $125,000, to the Agent for the
pro rata accounts of the Lenders in accordance with their Pro Rata Shares, and
(b) reimbursement of the fees and out-of-pocket disbursements of legal counsel
to each Lender up to $1,500 per Lender which fees described in each of clause
(a) and clause (b) shall thereupon be fully earned and nonrefundable and shall
be paid in full on the first to occur of (i) repayment of the Loans in full and
(ii) acceleration of the maturity of the Loans.
12. The Lenders, the Agent and the Borrower each hereby consent to,
acknowledge and agree that the Other Loan may be secured by and
cross-collateralized with the Security Documents and the collateral for the
Obligations (other than, at this time, the Borrower's real estate) and that the
Agent and the Borrower are authorized and directed by the Lenders to enter into
such documents, instruments and agreements as may be necessary or desirable to
accomplish such cross-collateralization including without limitation amendments
and/or restatements of any of the Security Documents.
13. The Borrower, the Agent and the Lenders acknowledge and agree that the
Other Loan and the Obligations shall be secured on a pari passu basis by the
Security Documents, but that the Obligations and the Other Loan shall be treated
on a pari passu basis with respect to any payments, prepayments or proceeds of
the collateral for the Loans and the Other Loan so that any such amounts are
applied to the Loans and the Other Loan pro rata, i.e., in proportion to the
relative amounts of Indebtedness owing on the Loans and the Other Loan, so that,
for example, the amount to be applied to the Loans is equal to: total payment
received multiplied by a fraction, the numerator of which is the amount of
outstanding Indebtedness of the Loans and the denominator is the sum of the
numerator and the amount of outstanding Indebtedness of the Other Loan.
14. The Borrower represents and warrants that (i) prior to January 15,
2000, the Borrower listed substantially all of Borrower's assets for sale with
Communications Equity Associates, a nationally recognized seller's broker with
experience in transactions involving large rural cable television systems, (ii)
concurrently herewith the Borrower has provided the Agent with true copies of
all of Borrower's agreements with such broker, (iii) such agreements with said
broker are in full force and effect as of the date hereof and (iv) on the date
of this Amendment a letter of intent dated March 9, 2000 with Classic Cable,
Inc., a Delaware corporation, for the purchase of all outstanding general and
limited partnership interests of the Borrower and Galaxy Telecom L.P., II is in
full force and effect.
15. Conditions. This Amendment is subject to the provisions of Section
9.5 of the Loan Agreement, and shall become effective, as of the date first
above written, upon the satisfaction of the following conditions precedent:
(a) receipt by the Agent of counterparts of this Amendment executed by the
Borrower and the Lenders, and counterparts of the Consent appended hereto
executed by the Guarantors;
(b) receipt by the Agent of such other items or documents as may
be requested by the Agent or the Lenders; and
(c) the Borrower shall have paid to Messrs. Hinckley, Allen &
Snyder LLP, counsel to the Agent, all outstanding fees, costs
and expenses and all fees, costs and expenses incurred in
connection with the preparation, negotiation and execution of,
this Amendment and any and all agreements, instruments, and
other documents executed in connection herewith.
16. Miscellaneous. This Amendment shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts. All parts of the
Loan Agreement not affected by this Amendment are hereby ratified and affirmed
in all respects; provided that if any provision of the Loan Agreement shall
conflict or be inconsistent with this Amendment, the terms of this Amendment
shall supersede and prevail. Upon and after the date of this Amendment all
references to the Loan Agreement in that document, or in any Financing Document,
shall mean the Loan Agreement as amended by this Amendment. Except as expressly
provided in this Amendment, the execution and delivery of this Amendment does
not and will not amend, modify or supplement any provision of, or constitute a
consent to or waiver of any noncompliance with the provisions of the Loan
Agreement, and, except as specifically provided in this Amendment, the Loan
Agreement shall remain in full force and effect.
17. Representations and Warranties. The Borrower hereby represents and
warrants to the Lenders and the Agent that the representations and warranties
set forth in Section 4 of the Loan Agreement are true and correct in all
material respects as of the date hereof. The Borrower hereby agrees to indemnify
and hold the Lenders and the Agent harmless from and against any claim, cost,
damage (including without limitation consequential damages), expense (including
without limitation reasonable attorneys' fees and expenses), loss, liability, or
judgment now or hereafter arising as a result of any claim against the Borrower,
the Lenders and/or the Agent arising out of the transactions contemplated by
this Amendment. The provisions of this Section shall continue in effect and
shall survive (among other events) any termination of this Agreement,
foreclosure, a deed in lieu transaction, payment and satisfaction of the Notes
and other obligations of the Borrower hereunder, and release of any collateral
for the Loans.
18. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the
day and year first above written, under seal.
BORROWERS:
GALAXY TELECOM, L.P.
By: Galaxy Telecom, Inc., its general partner
By:____________________________
Name:
Title:
GALAXY TELECOM CAPITAL CORP.
By:_______________________
Name:
Title:
<PAGE>
LENDERS:
FLEET NATIONAL BANK, as Agent and as a Lender
By:____________________________
Name:
Title:
CITIZENS BANK OF MASSACHUSETTS (as assignee
of State Street Bank and Trust Company)
By:____________________________
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:____________________________
Name:
Title:
BANK ONE, N.A. (as successor to The First
National Bank of Chicago)
By:____________________________
Name:
Title:
v
030432:109398 #354844 v6
Loan Agreement
Fleet/Galaxy Telecom L.P.
LOAN AGREEMENT
BY AND AMONG
GALAXY TELECOM, L.P.,
GALAXY TELECOM CAPITAL CORP.,
AND
FLEET NATIONAL BANK, AS AGENT AND LENDER
AND
THE OTHER FINANCIAL INSTITUTIONS NOW OR
HEREAFTER PARTIES HERETO
$5,000,000 TERM LOAN
March 31, 2000
<PAGE>
INDEX TO
LOAN AGREEMENT
Page
ARTICLE 1. DEFINITIONS AND ACCOUNTING AND OTHER TERMS 1
Section 1.1. Certain Defined Terms. 1
Section 1.2. Accounting Terms 12
Section 1.3. Other Terms 12
ARTICLE 2. AMOUNT AND TERMS OF THE LOANS 13
Section 2.1. The Loan 13
Section 2.1.1. The Loan 13
Section 2.1.2. Intentionally Omitted 13
Section 2.1.3. Intentionally Omitted 13
Section 2.2. Intentionally Omitted 13
Section 2.3. Interest and Fees on the Loan 13
Section 2.3.1. Interest 13
Section 2.3.2. Intentionally Omitted 13
Section 2.3.3. Fees 13
Section 2.3.4. Increased Costs - Capital 13
Section 2.4. Notations 14
Section 2.5. Computation of Interest and Fees 14
Section 2.6. Time of Payments and Prepayments in
Immediately Available Funds and Setoff 14
Section 2.6.1. Time 14
Section 2.6.2. Setoff, etc. 15
Section 2.6.3. Unconditional Obligations and No Deductions 16
Section 2.7. Prepayment and Certain Payments 16
Section 2.7.1. Mandatory Payments 16
Section 2.7.2. Voluntary Prepayments 16
Section 2.7.3. Intentionally Omitted 17
Section 2.7.4. Intentionally Omitted 17
Section 2.7.5. Intentionally Omitted 17
Section 2.8. Payment on Non-Business Days 17
Section 2.9. Use of Proceeds 17
ARTICLE 3. CONDITIONS OF LENDING 17
Section 3.1. Conditions Precedent to the Commitment and to the Loan 17
Section 3.1.1. The Commitment and the Loan 17
ARTICLE 4. REPRESENTATIONS AND WARRANTIES 19
Section 4.1. Representations and Warranties of the
Borrower 19
Section 4.1.1. Organization and Existence 19
Section 4.1.2. Authorization and Absence of Defaults 19
Section 4.1.3. Acquisition of Consents 19
Section 4.1.4. Validity and Enforceability 20
Section 4.1.5. Financial Information 20
Section 4.1.6. No Litigation 20
Section 4.1.7. Regulation U 20
Section 4.1.8. Absence of Adverse Agreements 21
Section 4.1.9. Taxes 21
Section 4.1.10. ERISA 21
Section 4.1.11. Ownership of Properties 22
Section 4.1.12. Accuracy of Representations and Warranties 22
Section 4.1.13. Senior Subordinated Note Representations
and Warranties 22
Section 4.1.14. No Investment Company 23
Section 4.1.15. Solvency, etc. 23
Section 4.1.16. Approvals 23
Section 4.1.17. Ownership Interests 23
Section 4.1.18. Licenses, Registrations, Compliance with
Laws, etc. 23
Section 4.1.19. Principal Place of Business; Books and
Records 24
Section 4.1.20. Subsidiaries 24
Section 4.1.21. Franchises, etc. 24
Section 4.1.22. Copyright 24
Section 4.1.23. Basic Subscribers 24
Section 4.1.24. Environmental Compliance 24
Section 4.1.25. Material Contracts 25
Section 4.1.26. Patents, Trademarks and Other Property
Rights 25
Section 4.1.27. Related Documents 25
Section 4.1.28. Transfer of Assets 25
ARTICLE 5. COVENANTS OF THE BORROWER 25
Section 5.1. Affirmative Covenants of the Borrower Other
than Reporting Requirements 25
Section 5.1.1. Payment of Taxes, etc. 26
Section 5.1.2. Maintenance of Insurance 26
Section 5.1.3. Preservation of Existence, etc. 26
Section 5.1.4. Compliance with Laws, etc. 26
Section 5.1.5. Visitation Rights 26
Section 5.1.6. Keeping of Records and Books of Account 27
Section 5.1.7. Maintenance of Properties, etc. 27
Section 5.1.8. Accounting System 27
Section 5.1.9. Other Documents, etc. 27
Section 5.1.10. Maximum Total Indebtedness and Maximum
Senior Indebtedness to Annualized Operating
Cash Flow 27
Section 5.1.11. Maximum Senior Indebtedness to Basic
Subscribers 27
Section 5.1.12. Minimum Ratio of Operating Cash Flow to
Interest Expense 27
Section 5.1.13. Intentionally Omitted 28
Section 5.1.14. Minimum Fixed Charge Coverage 28
Section 5.1.15. Intentionally Omitted 28
Section 5.1.16. Officer's Certificates and Requests 28
Section 5.1.17. Depository 28
Section 5.1.18. Chief Executive Officer 28
Section 5.1.19. Completion of Improvements 28
Section 5.1.20. Notice of Purchase of Real Estate and
Leases 28
Section 5.1.21. Additional Assurances 28
Section 5.1.22. Appraisals 29
Section 5.1.23. Environmental Compliance 29
Section 5.1.24. Remediation 29
Section 5.1.25. Site Assessments 29
Section 5.1.26. Indemnity 29
Section 5.1.27. Intentionally Omitted 29
Section 5.1.28. Intentionally Omitted 29
Section 5.2. Negative Covenants of the Borrower 29
Section 5.2.1. Liens, etc. 29
Section 5.2.2. Assumptions, Guaranties, etc. of
Indebtedness of Other Persons 31
Section 5.2.3. Sale of Assets Dissolution, etc. 31
Section 5.2.4. Change in Nature of Business 31
Section 5.2.5. Ownership 31
Section 5.2.6. Sale and Leaseback 31
Section 5.2.7. Sale of Accounts, etc. 31
Section 5.2.8. Indebtedness 32
Section 5.2.9. Other Agreements 32
Section 5.2.10. Payment or Prepayment of Equity 32
Section 5.2.11. Dividends, Payments and Distributions 32
Section 5.2.12. Investments in or to Other Persons 33
Section 5.2.13. Transactions with Affiliates 33
Section 5.2.14. Change of Fiscal Year 34
Section 5.2.15. Subordination of Claims 34
Section 5.2.16. Compliance with ERISA 34
Section 5.2.17. Capital Expenditures 34
Section 5.2.18. Hazardous Waste 34
Section 5.2.19. Payments on Senior Subordinated Notes 34
Section 5.3. Reporting Requirements 35
ARTICLE 6. EVENTS OF DEFAULT 37
Section 6.1. Events of Default 37
ARTICLE 7. REMEDIES OF LENDERS 41
ARTICLE 8. ADMINISTRATIVE AGENT 41
Section 8.1. Appointment 41
Section 8.2. Powers; General Immunity 42
Section 8.2.1. Duties Specified 42
Section 8.2.2. No Responsibility for Certain Matters 42
Section 8.2.3. Exculpatory Provisions 42
Section 8.2.4. Agent Entitled to Act as Lender 43
Section 8.3. Representations and Warranties; No
Responsibility for Appraisal of
Creditworthiness 43
Section 8.4. Right to Indemnity 43
Section 8.5. Payee of Note Treated as Owner 44
Section 8.6. Resignation by Agent 44
Section 8.7. Successor Agent 44
ARTICLE 9. MISCELLANEOUS 45
Section 9.1. Consent to Jurisdiction and Service of
Process 45
Section 9.2. Rights and Remedies Cumulative 45
Section 9.3. Delay or Omission Not Waiver 46
Section 9.4. Waiver of Stay or Extension Laws 46
Section 9.5. Amendments, etc. 46
Section 9.6. Addresses for Notices, etc. 47
Section 9.7. Costs, Expenses and Taxes 48
Section 9.8. Participations 48
Section 9.9. Binding Effect; Assignment 49
Section 9.10. Actual Knowledge 49
Section 9.11. Substitutions and Assignments 49
Section 9.12. Payments Pro Rata 51
Section 9.13. Governing Law 51
Section 9.14. Severability of Provisions 51
Section 9.15. Headings 51
Section 9.16. Counterparts 52
Section 9.17. Senior Indebtedness 52
Section 9.18. Joint and Several Obligations 52
Section 9.19. Pledge to Federal Reserve 52
Section 9.20. Replacement Documents 52
Section 9.21 Guaranty of Capital Corp. 52
<PAGE>
SCHEDULE OF EXHIBITS
1.2 Franchises
1.3 Ownership Interests
1.5 Form of Note
1.7 Permitted Encumbrances
1.8 Pro Rata Shares
1.9 Form of Borrowing Request
2.6.1 Lenders' Wire Transfer Instructions
3.1.1.3 Opinion of Borrower's Counsel and Borrower's FCC
Counsel
4.1.1 Jurisdictions of Incorporation, Foreign
Qualifications
4.1.6 Litigation
4.1.11 Real Property
4.1.18 Governmental Permits
4.1.21 Licenses, Franchises
4.1.22 Copyrights
4.1.24 Hazardous Waste
4.1.25 Material Contracts
4.1.26 Intellectual Property
4.1.28 GTI Assets Not Transferred
5.2.2 Guaranties
5.3.5 Form of Compliance Certificate
9.11.1 Form of Substitution Agreement
<PAGE>
Loan Agreement
Fleet/Galaxy $5 Million Term Loan
030432:109398 #354844 v6
Loan Agreement
Fleet/Galaxy $5 Million Term Loan
LOAN AGREEMENT
LOAN AGREEMENT dated as of March 31, 2000 by and among GALAXY TELECOM,
L.P., a Delaware limited partnership ("GTLP" and "Borrower"), and GALAXY TELECOM
CAPITAL CORP., a Delaware corporation ("Capital Corp."), each with a principal
place of business at 1220 North Main Street, Sikeston, Missouri 63801, the
financial institutions party hereto from time to time (the "Lenders") and FLEET
NATIONAL BANK, a national banking association organized under the laws of the
United States and having an office at One Federal Street, Boston, Massachusetts
02110 ("Fleet"), as agent for the Lenders (the "Agent") and as a Lender.
NOW THEREFORE, in consideration
of the premises and of the mutual covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING AND OTHER TERMS
Section 1.1. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Active Plant" shall mean coaxial and/or fiberoptic television cable
together with all amplifiers and electronics which has been connected to a
Headend, has been energized and is capable of carrying television signals to
Basic Subscribers with only the addition of a drop-line from such television
cable to the Unit in question.
"Affiliate" means singly and collectively, any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, the Borrower. For purposes of this definition,
a Person shall be deemed to be "controlled by" the Borrower if the Borrower
possesses, directly or indirectly, power either to (i) vote 10% or more of the
securities having ordinary voting power for the election of directors of such
Person or (ii) direct or cause the direction of the management and policies of
such Person whether by contract or otherwise, and the legal representative,
successor or assign of any such Person.
"Affiliate Subordination Agreement" means that certain Affiliate
Subordination Agreement between GTLP, GTI, LLC, the Manager, the Lenders, Tommy
L. Gleason, Jr., James M. Gleason, J. Keith Davidson, Vantage, Vista, and the
Investors dated as of December 23, 1994, and any other affiliate subordination
agreement executed from time to time by any Affiliate of the Borrower, as
amended or otherwise modified from time to time.
"Affiliate Subordinated Indebtedness" means Indebtedness of the Borrower,
GTI and/or LLC to Affiliates of the Borrower which has been subordinated to the
Obligations pursuant to terms and conditions satisfactory in all respects to the
Majority Lenders and which contains terms and conditions which are satisfactory
in all respects to the Majority Lenders.
"Agent" means Fleet or any other Person which is at the time in question
serving as the agent under the terms of Article 8 hereof.
"Agreement" means this Loan Agreement, as the same may from time to time be
amended or otherwise modified.
"Alternate Base Rate" means the greater of (i) the Prime Rate per annum and
(ii) the Federal Funds Rate plus 0.50% per annum.
"A.M." means a time from and including 12 o'clock midnight to and excluding
12 o'clock noon on any Business Day using Eastern Standard (Daylight Savings)
time.
"Annualized Operating Cash Flow" means Operating Cash Flow for the most
recently ended calendar month and for the two immediately preceding calendar
months based on the Borrower's accurate monthly financial statements provided to
the Lenders in accordance with Sections 5.3.3(a) and 5.3.7 for the calendar
months in question times four.
"Asset Sale" means any sale or other transfer by the Borrower, GTI or any
of the Borrower's Subsidiaries of any interest in any of the assets or rights of
the Borrower, GTI or the Borrower's Subsidiaries out of the ordinary course of
business having an aggregate value, when combined with all prior such sales
during the term of this Agreement in excess of $500,000, other than a System
Asset Sale and the sale of obsolete or worn out equipment no longer used or
usable in the business of the Borrower, GTI or applicable Subsidiary which the
Borrower, GTI or applicable Subsidiary does not substantially contemporaneously
replace.
"Basic Service" shall mean the simultaneous delivery by the Borrower to
television receivers (or any other suitable audio- video communication receiver)
of Basic Subscribers of the basic level full cable television service offered by
the Borrower.
"Basic Subscriber" shall mean a Person located in a Unit Passed which is
connected by a drop line to the Borrower's cable television system, who has
contracted to pay for the right to receive Basic Service over the Borrower's
cable television system, who has paid at least one regular monthly payment in
addition to any initial deposits, and whose account is not more than 60 days
past due.
"Borrowed Money" means any obligation to repay funded Indebtedness, any
Indebtedness evidenced by notes, bonds, debentures, guaranties or similar
obligations including without limitation the Loan and any obligation under a
conditional sale or other title retention agreement, the net aggregate rentals
under any Capitalized Lease Obligation or any lease which is the substantial
equivalent of the financing of the property so leased, any reimbursement
obligation for any letter of credit and any obligations in respect of banker's
and other acceptances or similar obligations.
"Borrower" has the meaning assigned in the first paragraph of this
Agreement.
"Borrowing Request" has the meaning specified in Section 2.2 hereof.
"Budget" has the meaning assigned to such term in Section 5.3.9.
"Business Day" means any day on which banks in Boston, Massachusetts or New
York, New York are not authorized or required to close.
"Capital Corp." has the meaning specified in the recitals hereto.
"Capital Expenditures" means all expenditures paid or incurred by the
Borrower or any of its Subsidiaries in respect of (i) the acquisition,
construction, improvement or replacement of land, buildings, machinery,
equipment or any other fixed assets or leaseholds, and (ii) to the extent
related to and not included in (i) above, materials, contract labor and direct
labor, which expenditures have been or should be, in accordance with GAAP,
capitalized on the books of the Borrower or such Subsidiary. Where a fixed asset
is acquired by a lease which is required to be capitalized pursuant to statement
of financial accounting standards number 13 or any successor thereto, the amount
required to be capitalized in accordance therewith shall be considered to be an
expenditure in the year such asset is first leased.
"Capitalized Lease Obligations" means all lease obligations which have been
or should be, in accordance with GAAP, capitalized on the books of the lessee.
"Cash Equivalent Investments" means any Investment in (i) direct
obligations of the United States or any agency, authority or instrumentality
thereof, or obligations guaranteed by the United States or any agency, authority
or instrumentality thereof, whether or not supported by the full faith and
credit of, a right to borrow from or the ability to be purchased by the United
States; (ii) commercial paper rated in the highest grade by a nationally
recognized statistical rating agency or which, if not rated, is issued or
guaranteed by any issuer with outstanding long-term debt rated A or better by
any nationally recognized statistical rating agency; (iii) demand and time
deposits with, and certificates of deposit and bankers acceptances issued by,
any office of the Agent or any other bank or trust company which is organized
under the laws of the United States or any state thereof and has capital,
surplus and undivided profits aggregating at least $500,000,000, the outstanding
long-term debt of which is rated A or better by any nationally recognized
statistical rating agency; (iv) any short-term note which has a rating of MIG-2
or better by Moody's Investors Service Inc. or a comparable rating from any
other nationally recognized statistical rating agency; (v) any municipal bond or
other governmental obligation (including without limitation any industrial
revenue bond or project note) which is rated A or better by any nationally
recognized statistical rating agency; (vi) any other obligation of any issuer,
the outstanding long-term debt of which is rated A or better by any nationally
recognized statistical rating agency; or (vii) any repurchase agreement with any
financial institution described in clause (iii) above, relating to any of the
foregoing instruments and fully collateralized by such instruments. Each Cash
Equivalent Investment shall have a maturity of less than one year at the time of
purchase; provided that the maturity of any repurchase agreement shall be deemed
to be the repurchase date and not the maturity of the subject security and that
the maturity of any variable or floating rate note subject to prepayment at the
option of the holder shall be the period remaining (including any notice period
remaining) before the holder is entitled to prepayment.
"Change of Control" means any one of the following events: (i) Tommy L.
Gleason, Jr., James C. Gleason and/or Tommy L. Gleason, Sr. own less than 51% of
the common equity interests in the Manager or Management LLC, respectively
(other than transfers to trusts for the benefit of their respective wives and/or
children for estate planning purposes so long as the transferor involved retains
effective control over the disposition and voting of such interests and other
than transfers to their respective executors and administrators following
death), (ii) Tommy L. Gleason, Jr., James C. Gleason and/or Tommy L. Gleason,
Sr. own less than 51% of the common equity interests in LLC which they hold as
of the date hereof (other than transfers to trusts for the benefit of their
respective wives and/or children for estate planning purposes so long as the
transferor involved retains effective control over the disposition and voting of
such interests and other than transfers to their respective executors and
administrators following death), or (iii) any change in the ownership of GTI or
LLC such that the Investors own, collectively, beneficially and of record less
than 51% of the voting equity interests in GTI or LLC and less than 51% of the
notes which LLC is issuing to them as of the date hereof. Notwithstanding the
foregoing, no Change of Control shall be deemed to occur hereunder upon any sale
of the equity securities of the Borrower in an offering registered with the
Securities and Exchange Commission under the Securities Act of 1933 provided
that the Borrower receives for its own use the net (after expenses) proceeds
thereof.
"Closing Costs" means the following costs incurred by the Borrower in
connection with the Loan: (i) the fees payable pursuant to Section 2.3.3 hereof,
(ii) all out-of-pocket expenses reimbursed to others by the Borrower in
connection with the closing of the Loan and (iii) any administrative fees
payable to the Agent in connection with the syndication of the Loan.
"Closing Date" means the date on which all of the conditions precedent set
forth in Section 3.1 of this Agreement have been satisfied.
"Code" means the Internal Revenue Code of 1986 as amended from time to
time.
"Commitment" means the Lenders' several commitments to make the Loan, as
set forth in Section 2.1.1 hereof.
"Commonly Controlled Entity" means a Person, whether or not incorporated,
which is under common control with the Borrower within the meaning of section
414(b) or (c) of the Code.
"Default" means an event or condition which with the giving of notice or
lapse of time or both would become an Event of Default.
"Discharged Rights and Obligations" shall have the meaning assigned to such
term in Section 9.11.4.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"Effective Rate" means, between the Closing Date and June 30, 2000, the
Alternate Base Rate plus 2% per annum and from July 1, 2000 through the
Repayment Date, the Alternate Base Rate plus 4% per annum
"Equity" means the investments by the Investors and the Management LLC in
GTI and LLC, and in turn by GTI and LLC in GTLP.
"Equity Documents" means, collectively, all material documents entered into
by the Borrower, any of its Subsidiaries, GTI, LLC, Management LLC and/or the
Investors in connection with the investment of the Equity or the Additional
Equity.
"ERISA" means the Employment Retirement Income Security Act of 1974 as
amended from time to time.
"Events of Default" has the meaning assigned to that term in Section 6.1 of
this Agreement.
"Exhibit" means, when followed by a letter, the exhibit attached to this
Agreement bearing that letter and by such reference fully incorporated in this
Agreement.
"FCC" shall mean the Federal Communications Commission and any successor
governmental agency performing functions similar to those performed by the
Federal Communications Commission on the date hereof.
"FCC License" means any license or permit issued by the FCC, including
without limitation licenses issued for the operation of community antenna
television systems, community antenna relay systems, microwave systems, earth
stations and business and other two-way radios.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/16th of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York, provided that (i) if such day is not a
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next succeeding Business Day as so published, and (ii) if no
such rate is so published on such next succeeding Business Day, the Federal
Funds Rate for such day shall be the average rate quoted to the Agent on such
day on such transactions as determined by the Agent in its discretion.
"Financeable Interest" shall have the meaning assigned to such term in
Section 2.3.2.
"Financing Documents" means, collectively, this Agreement, the Notes, the
Security Documents, and each other agreement, instrument or document now or
hereafter executed in connection herewith or therewith.
"Fixed Charge Covenant Ratio" means, as of the last day of each calendar
month, a fraction, the numerator of which shall be an amount equal to Operating
Cash Flow for such month and each of the two immediately preceding calendar
months times four less (a) Capital Expenditures made by the Borrower (other than
those Capital Expenditures paid for with (i) purchase money Indebtedness, (ii)
Loans, (iii) cash (except to the extent that the Borrower's cash balance at the
end of such calendar month is less than $1,500,000), or (iv) Capitalized Lease
Obligations permitted to exist under this Agreement) and its Subsidiaries times
four and (b) Permitted Restricted Payments paid during such three calendar month
period in each case times four, and the denominator of which shall be an amount
equal to Total Debt Service (exclusive of voluntary prepayments of principal on
the Loans and exclusive of Closing Costs) for such three calendar month period
times four.
"Franchise" means any franchise, permit, license, right of entry agreement,
other authorization or other right granted by any governmental unit or authority
or any private association, incorporated or otherwise, for the construction and
operation of a cable television system or the reception and transmission of
signals by microwave, including without limitation any FCC License.
"Franchise Agreement" means the ordinance, agreement, contract or other
documents stating the terms and conditions of any Franchise, including without
limitation all exhibits and schedules thereto, all amendments thereof and
consents, waivers and extensions issued thereunder, any documents incorporated
therein by reference and any application upon which such Franchise was granted.
"Franchise Area(s)" means the communities listed on Exhibit 4.1.21 hereto.
"GAAP" means generally accepted accounting principles in effect from time
to time in the United States of America.
"Gross Revenues" means all revenues derived directly or indirectly from the
operation or use of the Systems (other than revenues from a refinancing or sale
of all or part of the Systems), including, without limitation, revenue from
subscriber service fees, auxiliary service fees, installation and reconnection
fees, leased channel fees, converter rentals, studio rentals, late fees,
production equipment and personnel fees and advertising revenues; provided,
however, that "Gross Revenues" shall not include (a) any taxes on services
furnished by the Borrower imposed directly upon any subscriber or user by any
governmental unit and collected by the Borrower on behalf of said governmental
unit, or (b) the amount of any discounts or rebates relating to any such fees or
revenues, or (c) interest actually earned on any such fees or revenues.
"GTI" means Galaxy Telecom, Inc., a Delaware corporation which is the sole
managing general partner and a limited partner of the Borrower.
"Hazardous Material" shall mean any substance or material defined or
designated as a hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance, or other similar term, by any federal, state or local
environmental statute, regulation or ordinance.
"Headend" shall mean the antenna site, the tower and antenna, the microwave
communications equipment, the earth station and the head end facilities which
form a part of a cable television system.
"Indebtedness" means, for any Person, (i) all indebtedness or other
obligations of said Person for Borrowed Money or for the deferred purchase price
of property or services, (ii) all indebtedness or other obligations of any other
Person ("Other Person") for Borrowed Money or for the deferred purchase price of
property or services, the payment or collection of which said Person has
guaranteed (except by reason of endorsement for collection in the ordinary
course of business) or in respect of which said Person is liable, contingently
or otherwise, including, without limitation, liable by way of agreement to
purchase or lease, to provide funds for payment, to supply funds to purchase,
sell or lease property or services primarily to assure a creditor of such Other
Person against loss or otherwise to invest in or make a loan to the Other
Person, or otherwise to assure a creditor of such Other Person against loss,
(iii) all indebtedness or other obligations of any Person for Borrowed Money or
for the deferred purchase price of property or services secured by (or for which
the holder of such indebtedness has an existing right, contingent or otherwise,
to be secured by) any Lien upon or in any property owned by said Person, whether
or not said Person has assumed or become liable for the payment of such
indebtedness or obligations, (iv) Capitalized Lease Obligations of said Person,
(v) obligations of such Person under contracts pursuant to which such Person has
agreed to purchase interest rate protection or swap interest rate obligations
(including, without limitation, any such obligations purchased or maintained
under Section 2.7.5 hereof) and (vi) all other liabilities or obligations of
said Person which would, in accordance with GAAP, be classified as liabilities
of such a Person.
"Indenture" means that certain Indenture dated as of September 28, 1995 by
and among the Borrower and Capital Corp., as issuers, and Boatmen's Trust
Company, as trustee, pursuant to which the Senior Subordinated Notes were
issued.
"Interest Expense" means, with respect to any period, the aggregate amount
required to be paid in cash by the Borrower and its Subsidiaries for interest,
fees, charges and expenses, however characterized, on its Indebtedness,
including, without limitation, all such interest, fees, charges and expenses
accrued and required to be paid in cash with respect to Indebtedness under the
Financing Documents (but not including fees associated with the purchase of any
interest rate protection arrangement).
"Investment" means any investment in any Person whether by means of a
purchase of capital stock, notes, bonds, debentures or other evidences of
Indebtedness and/or by means of a capital or partnership contribution, loan,
deposit, advance or otherwise.
"Investors" means, collectively, the entities (other than Vantage, Vista
and Old Galaxy) listed on Exhibit 1.3 hereto.
"Lender" means any financial institution which is now a party to this
Agreement, or at any time hereafter becomes a party to this Agreement pursuant
to the terms of Section 9.11 hereof, each in their individual capacity, and
"Lenders" means each of such financial institutions.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other) or other security agreement
or preferential arrangement of any kind or nature whatsoever (including without
limitation any conditional sale or other title retention agreement and any
Capitalized Lease Obligation) having substantially the same economic effect as
any of the foregoing and the filing of any financing statement under the
applicable Uniform Commercial Code or comparable law of any jurisdiction in
respect of any of the foregoing.
"LLC" means Galaxy Telecom Investments, L.L.C., a Delaware limited
liability company which is a general and a limited partner of GTLP.
"Loan" means the term loan in the initial principal amount of $5,000,000
made by the Lenders pursuant to this Agreement.
"Loans" means, collectively, the Loan and the Loans, as such term is
defined in the 1995 Loan Agreement.
"Majority Lenders" means, when there are fewer than three Lenders, each of
the Lenders, and when there are three or more Lenders, Lenders holding an
aggregate Pro Rata Share of the outstanding principal balance of the Loan in an
amount equal to or in excess of 51% of the total outstanding principal balance
of the Loan but in no event less than three Lenders (or four Lenders if there
are seven or more Lenders).
"Management Agreement" means that certain Management Agreement dated
December 23, 1994 between GTLP and the Manager, in the form delivered to the
Lenders on or prior to the Closing Date.
"Management Fees" means the aggregate of all fees and other forms of
compensation paid or incurred by GTLP and/or any Subsidiary pursuant to the
Management Agreement.
"Management LLC" means Galaxy Telecom Management, L.L.C., a Texas limited
liability company.
"Manager" means Galaxy Systems Management, Inc., a Missouri corporation.
"Material Adverse Effect" shall have the meaning set forth in Section
4.1.1.
"Multiemployer Plan" means a multiemployer plan as defined in Title IV of
ERISA.
"Net Income" means, for any fiscal period, the net after tax income (loss)
of the Borrower and its Subsidiaries for such period determined on a combined
basis in accordance with GAAP.
"Note" means a Term Note of the Borrower payable to the order of a Lender
in the form of Exhibit 1.5 hereto evidencing the indebtedness of the Borrower to
such Lender with respect to the Loan, and "Notes" means all of the Notes,
collectively.
"Obligations" mean any and all Indebtedness, obligations and liabilities of
GTLP, GTI, LLC, Capital Corp. and/or any of their Subsidiaries to any one or
more of the Lenders and/or the Agent of every kind and description, absolute or
contingent, due or to become due, whether for payment or performance, now
existing or hereafter arising, including, without limitation, the Loan,
interest, taxes, fees, charges, and expenses under the Financing Documents,
fees, charges and expenses in connection with any interest protection
arrangement under Section 2.7.5 and attorneys' fees chargeable to GTLP, GTI,
LLC, Capital Corp. and/or any of their Subsidiaries or incurred by any of the
Lenders and/or the Agent hereunder or under any of the Financing Documents.
"Officer's Certificate" means a certificate signed by a duly authorized
officer of the Borrower, or signed by a duly authorized officer of the Manager
as duly authorized agent of the Borrower, and delivered to the Agent on behalf
of the Lenders.
"Old Galaxy" means Galaxy Cablevision, L.P., a Delaware limited partnership.
"Operating Cash Flow" means, for any fiscal period, the Borrower's Net
Income, plus Interest Expense for such fiscal period, plus the amount of
depreciation and amortization for such fiscal period, plus non-cash charges for
such fiscal period, plus any Subordinated Management Fees accrued and not paid
in cash during such fiscal period, minus the amount of extraordinary gains
during such fiscal period, plus the amount of extraordinary losses during such
fiscal period, plus the amount of Closing Costs for such fiscal period, in each
case to the extent deducted or (in the case of extraordinary gains) added in the
calculation of Net Income for such fiscal period and all determined on a
combined basis in accordance with GAAP; provided, however, that all operating
results attributable to any System sold during the fiscal period in question
shall be excluded from the calculation of Operating Cash Flow for such fiscal
period.
"Other Financing Documents" means, collectively, (i) that certain Amended
and Restated Loan Agreement dated as of September 28, 1995 among the Agent, the
Borrower and the therein defined Lenders, as amended from time to time (as
amended, the "1995 Loan Agreement") and (ii) the Financing Documents (as such
term is defined in the 1995 Loan Agreement).
"PBGC" means the Pension Benefit Guarantee Corporation established pursuant
to subtitle A of Title 4 of ERISA.
"P.M." means a time from and including 12 o'clock noon on any Business Day
to the end of such Business Day using Eastern Standard (Daylight Savings) time.
"Permitted Encumbrances" means those Liens, security interests and defects
in title listed on Exhibit 1.7 hereto.
"Permitted Restricted Payment" shall have the meaning set forth in Section
5.2.11 (i).
"Person" means an individual, corporation, partnership, joint venture,
trust, or unincorporated organization, or a government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for
employees of the Borrower or any Commonly Controlled Entity and covered by Title
IV of ERISA.
"Pledge and Assignment Agreement" means the Pledge and Assignment Agreement
dated as of September 28, 1995 among GTLP, Capital Corp. and Boatmen's Trust
Company, as trustee.
"Premises" has the meaning assigned to such term in Section 4.1.24.1.
"Prime Rate" means the floating rate of interest per annum designated from
time to time by the Agent as being its "prime rate" of interest, such interest
rate to be adjusted on the effective date of any change thereof by the Agent, it
being understood that such rate of interest may not be the lowest rate of
interest from time to time charged by the Agent.
"Pro Rata Share" means (i) with respect to the Commitment, each Lender's
percentage share of the Commitment as set forth immediately opposite such
Lender's name on Exhibit 1.8, and (ii) with respect to the Loan, each Lender's
percentage share of the aggregate outstanding principal balance of the Loan.
"Projections" means Borrower's written projections of its one-year future
performance dated March 23, 2000 delivered to the Agent and the Lenders prior to
the Closing Date and certified by the Borrower on the Closing Date as being the
Projections.
"Related Documents" means the Indenture, the Pledge and Assignment
Agreement, and any other documents executed in connection with the Senior
Subordinated Notes.
"Request" means a written request for the Loan in the form of Exhibit 1.9,
received by the Agent on behalf of the Lenders from the Borrower in accordance
with this Agreement, specifying the date on which the Borrower desires the Loan
and the disbursement instructions of the Borrower with respect thereto.
"Repayment Date" means the earlier to occur of (i) December 31, 2000, or
(ii) such earlier date on which the Obligations become immediately due and
payable pursuant to the terms hereof.
"Reportable Event" shall have the meaning assigned to that term in Title IV
of ERISA.
"Section" means, when followed by a number, the section or subsection of
this Agreement bearing that number.
"Security Documents" means any and all documents, instruments and
agreements now or hereafter providing security for the Loan and any other
Indebtedness of GTLP, GTI, LLC Capital Corp. or any of the Borrower's
Subsidiaries to the Lenders and/or the Agent, including without limitation the
following: (i) any mortgages on and collateral assignments of real property
interests (fee, leasehold and easement) of the Borrower and its Subsidiaries and
GTI granting first Liens thereon; (ii) security agreements granting first Liens
on all GTLP's, its Subsidiaries', GTI's, LLC's, and Capital Corp.'s fixtures and
tangible and intangible personal property; (iii) a collateral assignment of
Borrower's, its Subsidiaries' and GTI's contracts, licenses, permits and
Franchises; (iv) those certain partnership interest pledge agreements between
the Agent and Vantage, GTI and LLC; (v) the Affiliate Subordination Agreement;
(vi) those certain limited liability company interest pledge agreements between
the Investors, Management LLC and the Agent; (vii) that certain Stock Pledge
Agreement regarding the shares of GTI between the shareholders of GTI and the
Agent; (viii) those certain Unlimited Guaranties of GTI, LLC, and Capital Corp.
in favor of the Agent; (ix) title and casualty insurance policies providing
coverage to the Agent; and (x) UCC-1 financing statements or similar filings
perfecting the above-referenced security interests, all as executed, delivered
to and accepted by the Agent either in connection with the Original Loan
Agreement or on or prior to the Closing Date, as same may be amended or
otherwise modified from time to time in writing by the Agent (with the authority
of the requisite Lenders) and the parties thereto.
"Selling Lender" shall have the meaning assigned to such term in Section
9.11.1.
"Senior Indebtedness" means all Indebtedness of the Borrower to the Lenders
and/or the Agent from time to time outstanding including, without limitation,
the aggregate outstanding principal amount of the Notes and any accrued and
unpaid principal, interest, fees and other charges due under other Financing
Documents, plus the net aggregate rentals under any Capitalized Lease
Obligation.
"Senior Subordinated Notes" means the 12.375% Senior Subordinated Notes due
2005 issued by GTLP and Capital Corp. pursuant to the Indenture.
"Single Employer Plan" means any Plan which is not a Multiemployer Plan.
"Subordinated Management Fees" shall have the meaning assigned to such term
in Section 5.2.11 hereof.
"Subsidiary" means any corporation, if any, of which more than 50% of the
outstanding capital stock having ordinary voting power to elect a majority of
the board of directors or other managers of such entity (irrespective of whether
or not at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by the Borrower or by
the Borrower and/or one or more Subsidiaries or the management of which
corporation is under control of the Borrower and/or any other Subsidiary,
directly or indirectly through one or more Persons and any other Person which,
under GAAP, should at any time for financial reporting purposes be consolidated
or combined with the Borrower and/or any other Subsidiary.
"Substituted Lender" has the meaning set forth in Section 9.11 hereof.
"Substitution Agreement" has the meaning assigned to such term in Section
9.11.1.
"Systems" means (i) the cable television systems owned by the Borrower, and
"System" means any one of them.
"System Asset Sale" means the sale by the Borrower, GTI or one of their
Subsidiaries to a third party which is not an Affiliate of the Borrower of one
or more Franchises and the assets related to such Franchise.
"Total Cash Interest Expense" means, with respect to any period, Interest
Expense for such period.
"Total Debt Service" means, for any period, the sum of the Borrower's and
its Subsidiaries' Total Cash Interest Expense for such period (exclusive of any
Closing Costs), plus the amount necessary to meet the regularly scheduled
principal amortization on the Loans, plus regularly scheduled payments on other
Indebtedness and Capitalized Lease Obligations of the Borrower and its
Subsidiaries for such period.
"Unit" means a single residential dwelling or commercial building which can
be connected by a single drop line. In the case of multiple residential
dwellings, such as apartment houses, mobile home parks and multi-family homes,
which do not obtain reduced bulk service rates, each separate dwelling unit
shall be counted as one Unit. The number of Units in a multiple residential
dwelling which does obtain a reduced bulk service rate shall be obtained by
dividing (x) the aggregate dollar amount of monthly subscriber's fees paid by
all individual subscribers within such dwelling for Basic Service by (y) the
maximum monthly subscriber's fee charged by the Borrower to a single residential
dwelling connected by a single drop line for Basic Service. The term "Passed" as
applied to a Unit shall mean a Unit which can be connected by a single drop line
from Active Plant.
"Vantage" means Vantage Cable Associates, L.P., an Iowa limited partnership.
"Vista" means Vista Communications Limited Partnership III, a Delaware
limited partnership.
Section 1.2. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, calculations of
amounts for the purposes of calculating any financial covenants or ratios
hereunder shall be made in accordance with GAAP applied on a basis consistent
with those used in the prior financial statements delivered by the Borrower to
the Agent in connection with the Other Financing Documents (other than
departures therefrom not material in their impact), and all financial data
submitted pursuant to this Agreement shall be prepared in accordance with GAAP,
including, without limitation, that items of trade or barter shall be excluded.
Section 1.3. Other Terms. The words "hereof," "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
ARTICLE 2
AMOUNT AND TERMS OF THE LOAN
Section 2.1. The Loan.
Section 2.1.1. The Loan. Each of the Lenders agrees to make, subject
to the terms and conditions of this Agreement, a term loan to the Borrower in
the amount of their respective Pro Rata Share of $5,000,000. In addition to
payments of interest due pursuant to Section 2.3.1 below, the outstanding
balance of principal, interest and fees due in connection with the Loan shall be
repaid on the Repayment Date.
Section 2.1.2. Intentionally Omitted.
Section 2.1.3. Intentionally Omitted.
Section 2.2. Intentionally Omitted.
Section 2.3. Interest and Fees on the Loan.
Section 2.3.1. Interest. Interest shall accrue and be paid currently
on the principal balances of the Loan at the Effective Rate, subject to and in
accordance with the terms and conditions of this Agreement and the Notes. The
Borrower shall pay such interest to the Agent for the pro rata account of each
Lender in arrears on the Loan outstanding from time to time after the date
hereof monthly on the last Business Day of each month of each year commencing
April 30, 2000.
Section 2.3.2. Intentionally Omitted.
Section 2.3.3. Fees. The Borrower shall pay to the Agent, on the
earlier of (i) the date upon which the Loan is repaid in full or (ii) the
Repayment Date, for the pro rata account of each Lender, a facility fee equal to
$800,000; provided, however, that such fee shall be reduced to $400,000 if the
Loans are repaid in full on or before June 30, 2000; and provided further that
such fee shall be reduced to $600,000 in the event that the Loans are not repaid
in full by June 30, 2000 but are repaid in full by September 15, 2000. This
facility fee shall be deemed earned in full upon the Closing Date.
Section 2.3.4. Increased Costs - Capital. If, after the date hereof,
any Lender shall have reasonably determined that the adoption after the date
hereof of any applicable law, governmental rule, regulation or order regarding
capital adequacy of banks or bank holding companies, or any change therein, or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Lender with any policy, guideline,
directive or request regarding capital adequacy (whether or not having the force
of law and whether or not failure to comply therewith would be unlawful) of any
such authority, central bank or comparable agency, has or would have the effect
of reducing the rate of return on the capital of such Lender as a consequence of
the obligations hereunder of such Lender to a level below that which such Lender
could have achieved but for such adoption, change or compliance (taking into
consideration the policies of such Lender with respect to capital adequacy
immediately before such adoption, change or compliance and assuming that the
capital of such Lender was fully utilized prior to such adoption, change or
compliance) by an amount reasonably deemed by such Lender to be material, then
such Lender shall notify the Agent and the Borrower thereof and the Borrower
shall pay to the Agent for the account of such Lender from time to time as
specified by such Lender such additional amounts as shall be sufficient to
compensate such Lender for such reduced return, each such payment to be made by
the Borrower within five Business Days after each demand by such Lender,
provided that the liability of the Borrower to pay such costs shall only accrue
with respect to costs accruing from and after the 90th day prior to the date of
each such demand. A certificate in reasonable detail of one of the officers of
such Lender describing the event giving rise to such reduction and setting forth
the amount to be paid to such Lender hereunder shall accompany any such demand
and shall, in the absence of manifest error, be presumed correct. In determining
such amount, such Lender may use any reasonable averaging and attribution
methods.
Section 2.4. Notations. At the time of (i) the making of the Loan evidenced
by any of the Notes; and (ii) each payment or prepayment of any of the Notes,
each Lender may enter upon its records an appropriate notation evidencing (a)
such Lender's Pro Rata Share of the Loan or (b) such payment or prepayment of
principal and (c) in the case of payments or prepayments of principal, the
portion of the Loan which was paid or prepaid. No failure to make any such
notation shall affect the Borrower's unconditional obligations to repay the Loan
and all interest, fees and other sums due in connection with this Agreement
and/or any of the Notes in full, nor shall any such failure, standing alone,
constitute grounds for disproving a payment of principal by the Borrower.
However, in the absence of manifest error, such notations and each Lender's
records containing such notations shall constitute presumptive evidence of the
facts stated therein, including, without limitation, the outstanding amount of
such Lender's Pro Rata Share of the Loan and all amounts due and owing to such
Lender at any time. Any such notations and such Lender's records containing such
notations may be introduced in evidence in any judicial or administrative
proceeding relating to this Agreement, the Loan or any of the Notes.
Section 2.5. Computation of Interest and Fees. Interest and fees due under
this Agreement and under the Notes shall be computed on the basis of a year of
360 days for the actual number of days elapsed.
Section 2.6. Time of Payments and Prepayments in Immediately Available
Funds and Setoff.
Section 2.6.1. Time. All payments and prepayments of principal, fees,
interest and any other amounts owed from time to time under this Agreement
and/or under any of the Notes shall be made to the Agent for the pro rata
account of each Lender at the address referred to in Section 9.6 in Dollars and
in immediately available funds prior to 12:00 o'clock P.M. on the Business Day
that such payment is due, provided that the Borrower hereby authorizes and
instructs the Agent to charge against the Borrower's accounts with the Agent on
each date on which a payment is due hereunder and/or under any of the Notes an
amount up to the principal, interest and fees due and payable to the Lenders,
the Agent or any Lender hereunder and/or under any of the Notes and such charge
shall be deemed payment hereunder and under the Notes in question to the extent
that immediately available funds are then in such accounts. In addition, the
Borrower hereby irrevocably authorizes the Agent, if and to the extent payment
of any installment of principal, interest and/or fees hereunder and/or under any
of the Notes is not made when due, to charge against the Borrower's accounts
with the Agent an amount equal to the amount thereof not paid when due. Any such
payment or prepayment which is received by the Agent in Dollars and in
immediately available funds after 12 o'clock P.M. on a Business Day shall be
deemed received for all purposes of this Agreement on the next succeeding
Business Day except that solely for the purpose of determining whether a Default
has occurred under Section 6.1.1, any such payment or prepayment if received by
the Agent prior to the close of the Agent's business on a Business Day shall be
deemed received on such Business Day. All payments of principal, interest, fees
and any other amounts which are owing to any or all of the Lenders or the Agent
hereunder and/or under any of the Notes that are received by the Agent in
immediately available Dollars prior to 12:00 o'clock P.M. on any Business Day
shall, to the extent owing to the Lenders other than the Agent, be sent by wire
transfer by the Agent (in each case, without deduction for any claim, defense or
offset of any type) before 3:00 o'clock P.M. on the same Business Day. Each such
wire transfer shall be addressed to each Lender in accordance with the wire
instructions set forth in Exhibit 2.6.1 hereto. The amount of each payment wired
by the Agent to each such Lender shall be such amount as shall be necessary to
provide such Lender with its Pro Rata Share of such payment (without
consideration or use of any contra accounts of any Lender), or with such other
amount as may be owing to such Lender in accordance with this Agreement (in each
case, without deduction for any claim, defense or offset of any type). Each such
wire transfer shall be sent by the Agent only after the Agent has received
immediately available Dollars from or on behalf of the Borrower and each such
wire transfer shall provide each Lender receiving same with immediately
available Dollars on receipt by such Lender. Any such payments of immediately
available Dollars received by the Agent after 12:00 o'clock P.M. and before 3:00
o'clock P.M. on any Business Day shall be forwarded in the same manner by the
Agent to such Lenders as soon as practicable on said Business Day, and if any
such payments of immediately available Dollars are received by the Agent after
3:00 o'clock P.M. on a Business Day, the Agent shall so forward same to such
Lenders before 10:00 o'clock A.M. on the immediately succeeding Business Day.
Section 2.6.2. Setoff, etc. Upon the occurrence and during the
continuance of any Event of Default, each Lender and the Agent is hereby
authorized at any time and from time to time, without notice to the Borrower
(any such notice being expressly waived by the Borrower), to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and any other Indebtedness at any time owing by such Lender to
or for the credit or the account of the Borrower against any and all of the
Obligations of the Borrower irrespective of whether or not such Lender shall
have made any demand under this Agreement or any of its Notes and although such
obligations may be unmatured. Each such Lender agrees to promptly notify the
Borrower and the Agent after any such setoff and application; provided that the
failure to give such notice shall not affect the validity of such setoff and
application. Promptly following any notice of setoff received by the Agent from
a Lender pursuant to the foregoing, the Agent shall notify each other Lender
thereof. The rights of each Lender under this Section 2.6.2 are in addition to
all other rights and remedies (including, without limitation, other rights of
setoff) which such Lender may have and are subject to Section 9.12.
Section 2.6.3. Unconditional Obligations and No Deductions. The
Borrower's obligation to make all payments provided for in this Agreement and
the other Financing Documents shall be unconditional. Each such payment shall be
made without deduction for any claim, defense or offset of any type, including
without limitation any withholdings and other deductions on account of income or
other taxes and regardless of whether any claims, defenses or offsets of any
type exist.
Section 2.7. Prepayment and Certain Payments.
Section 2.7.1. Mandatory Payments.
Section 2.7.1.1. In addition to each other principal payment
required hereunder, the outstanding principal balance of the Loan shall be
repaid on the Repayment Date.
Section 2.7.1.2. Intentionally Omitted.
Section 2.7.1.3. Simultaneously with the receipt by the
Borrower of the cash proceeds of any Asset Sale or any System Asset Sale, the
Borrower shall prepay to the Agent for the pro rata accounts of the Lenders the
outstanding principal balance of the Loans on a pari passu basis (as hereinafter
described) in an amount equal to the net (after reasonable expenses) cash
proceeds thereof. The Borrower, the Agent and the Lenders acknowledge and agree
that the Loans shall be treated on a pari passu basis with respect to any
payments, prepayments or proceeds of the collateral for the Loans so that any
such amounts are applied to the Loan, i.e., in proportion to the relative
amounts of Indebtedness owing on the Loan, so that, for example, the amount to
be applied to the Loan is equal to: total payment received multiplied by a
fraction, the numerator of which is the amount of outstanding Indebtedness of
the Loan and the denominator is the sum of the numerator and the amount of
outstanding Indebtedness of the Loans.
Section 2.7.1.4. In the event that the Borrower, GTI, or any of
their Subsidiaries receives, collectively, proceeds from any insurance policies
maintained by any of them (including, without limitation, casualty policies and
key man policies), which proceeds are in an aggregate amount during the terms of
this Agreement or of the 1995 Loan Agreement in excess of $500,000, the Borrower
shall prepay the Loans on a pari passu basis (as described in Section 2.7.1.3
above) in an amount equal to such proceeds.
Section 2.7.2. Voluntary Prepayments. All or any portion of the
unpaid principal balance of the Loan may be prepaid at any time, without premium
or penalty, by a payment to the Agent for the account of each Lender of such
prepayment in immediately available Dollars by the Borrower; provided that each
such partial payment or prepayment of principal of the Loan shall be in a
principal amount of at least $100,000 or an integral multiple of $100,000 in
excess thereof.
Section 2.7.3. Intentionally Omitted.
Section 2.7.4. Intentionally Omitted.
Section 2.7.5. Intentionally Omitted.
Section 2.8. Payment on Non-Business Days. Whenever any payment to be made
hereunder or under one of the Notes shall be stated to be due on a day other
than a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of payment of fees, if any, and interest under this Agreement and
under such Note.
Section 2.9. Use of Proceeds. The Borrower shall use the proceeds of the
Loan solely to partially fund the April 1, 2000 interest payment due in
connection with the Senior Subordinated Notes.
ARTICLE 3
CONDITIONS OF LENDING
Section 3.1. Conditions Precedent to the Commitment and to the Loan.
Section 3.1.1. The Commitment and the Loan. The effectiveness of this
Agreement and the obligations hereunder of the Lenders to make the Loan are
subject to performance by the Borrower of all of its obligations under this
Agreement, and to the satisfaction of the conditions precedent that all legal
matters incident to the transactions contemplated hereby or incidental to the
Loan shall be satisfactory to counsel for the Agent, and the Lenders shall have
received on or before the Closing Date all of the following, each dated the
Closing Date or another date acceptable to the Lenders and each to be in form
and substance satisfactory to the Agent in the Agent's sole and complete
discretion:
Section 3.1.1.1. The Notes, the Security Documents, and each of
the other Financing Documents, including, without limitation, those hereinafter
set forth.
Section 3.1.1.2. Certificates from GTI, LLC and Capital Corp.
certifying as to the resolutions authorizing and approving such of the Financing
Documents to which GTLP, LLC, GTI or Capital Corp. is a party and other matters
contemplated hereby and certifying as to the names and signatures of each
officer and manager of GTI, LLC and Capital Corp. authorized to sign each
Financing Document to be executed and delivered by or on behalf of GTLP, LLC,
GTI or Capital Corp. The Lenders may conclusively rely on each such certificate
until the Lenders shall receive a further certificate of GTI, LLC and Capital
Corp. canceling or amending the prior certificate and submitting the signatures
of the officers named in such further certificate.
Section 3.1.1.3. Favorable opinions of Messrs. Thompson Coburn
LLP and Goodwin, Procter & Hoar LLP, counsel for the Borrower, substantially in
the forms of Exhibit 3.1.1.3 hereto.
Section 3.1.1.4. An Officer's Certificate stating that:
(a) The
representations and warranties contained in Section 4.1 are correct on and as of
the Closing Date as though made on and as of such date; and
(b) No Default or Event of Default has occurred and is
continuing, or would result from the making of the Loan.
Section 3.1.1.5. Certificates of good standing of the
Secretaries of State of all states listed on Exhibit 4.1.1, dated reasonably
near the Closing Date.
Section 3.1.1.6. Receipt by the Agent of a deposit by the
Borrower of $2,425,000, which, when combined with the proceeds of the Loan, will
be sufficient to pay the April 1, 2000 interest payment due in connection with
the Senior Subordinated Notes, along with written instructions, including wire
transfer instructions, instructing the Agent to make such interest payment on
behalf of the Borrower.
Section 3.1.1.7. A completed Borrowing Request.
Section 3.1.1.8. Payment to the Agent and the Lenders of the
fees specified in this Agreement as being payable on the Closing Date and all
reasonable out-of-pocket costs and expenses incurred by the Agent in connection
with the transactions contemplated hereby, including, but not limited to,
outside legal expenses, accounting fees, auditing fees, appraisal fees, and
other fees associated with any independent analyses of the Borrower.
Section 3.1.1.9. Such other information about the Borrower
and/or its assets, business and/or financial condition as the Lenders may
request.
Section 3.1.1.10. Certificates of fire, liability and extended
coverage insurance policies, each such policy to name the Agent as mortgagee and
loss payee and as additional insured on all liability policies.
Section 3.1.1.11. True descriptions of any pending or
threatened litigation against or by the Borrower.
Section 3.1.1.12. Evidence that all necessary third party
consents have been obtained.
Section 3.1.1.13. The fact that the representations and
warranties of the Borrower contained in Article 4, infra, are true and correct
in all material respects on and as of the date of the Loan except as altered
hereafter by actions not prohibited hereunder. The Borrower's delivery of the
Notes to the Lenders and the Borrower's Borrowing Request shall be deemed to be
a representation and warranty by the Borrower as of the date thereof to such
effect.
Section 3.1.1.14. That there has been no enactment of any law
by any governmental authority having jurisdiction over any Lender which would
make it unlawful in any respect for such Lender to make its Pro Rata Share of
the Loan.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties of the Borrower. The Borrower
represents and warrants to the Lenders that, after giving effect to the Loan and
the application of the proceeds thereof (which representations and warranties
shall survive the making of the Loan):
Section 4.1.1. Organization and Existence. GTLP, GTI, LLC, Capital
Corp. and each Subsidiary is a limited partnership, corporation or limited
liability company, duly organized, validly existing and in good standing under
the laws of the state of its incorporation or organization and is duly qualified
to do business in all jurisdictions in which such qualification is required, all
as noted on Exhibit 4.1.1, except where failure to so qualify would not have a
material adverse effect on the financial condition or business of the Borrower
and its Subsidiaries, on a combined basis (a "Material Adverse Effect"), and has
all requisite power and authority to conduct its business, to own its properties
and to execute and deliver, and to perform all of its obligations under the
Financing Documents.
Section 4.1.2. Authorization and Absence of Defaults. The execution,
delivery to the Lenders and performance by GTLP, GTI, LLC, Capital Corp. and any
Subsidiaries of the Financing Documents have been duly authorized by all
necessary corporate, partnership, limited liability company and governmental
action and do not and will not (i) require any consent or approval of the
partners, shareholders, members or board of directors of the Borrower or any
Subsidiary which has not been obtained, (ii) violate any provision of any law,
rule, regulation (including, without limitation, Regulations U and X of the
Board of Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower and/or any Subsidiary and/or the Certificates and
Agreements of Limited Partnership, operating agreements, articles of
incorporation or by-laws, where applicable, of GTLP, GTI, LLC, Capital Corp.
and/or any Subsidiary, (iii) result in a material breach of or constitute a
material default under any indenture or loan or credit agreement or any other
agreement, lease or instrument to which GTLP, GTI, LLC, Capital Corp. and/or any
Subsidiary is or are a party or parties or by which it or they or its or their
properties may be bound or affected; or (iv) result in, or require, the creation
or imposition of any Lien on any of its or their respective properties or
revenues other than Liens granted to the Agent by the Security Documents
securing the Obligations. Each of GTLP, GTI, LLC, Capital Corp. and its
Subsidiaries are in compliance with any such law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any such indenture,
agreement, lease or instrument, except where the failure to be in compliance
would not have a Material Adverse Effect.
Section 4.1.3. Acquisition of Consents. No authorization, consent,
approval, license, exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, other than those which have been obtained, is or will be
necessary to the valid execution and delivery to the Lenders or performance by
GTLP, GTI, LLC, Capital Corp. or any Subsidiary of any Financing Documents.
Section 4.1.4. Validity and Enforceability. Each of the Financing
Documents when delivered hereunder will constitute the legal, valid and binding
obligations of GTLP, GTI, LLC, Capital Corp. and the Subsidiaries enforceable
against such Persons in accordance with their respective terms.
Section 4.1.5. Financial Information. The following information
with respect to the Borrower has heretofore been furnished to the Lenders:
Section 4.1.5.1. Audited Financials. Audited annual financial
statements of the Borrower for the period ended December 31, 1998;
Section 4.1.5.2. Unaudited Financials. Unaudited internally
prepared financial statements of the Borrower for the fiscal period ended
December 31, 1999.
Section 4.1.5.3. The Projections. Each of the financial
statements referred to above in Sections 4.1.5.1 and 4.1.5.2 was prepared in
accordance with GAAP (subject, in the case of Section 4.1.5.2, to the absence of
footnotes and normal year-end adjustments) applied on a consistent basis, except
as stated therein. The financial statements referred to above in Sections
4.1.5.1 and 4.1.5.2 fairly present the financial condition of the Borrower on at
such dates and are complete and correct in all material respects and no Material
Adverse Effect has occurred since the date thereof. The Projections have been
prepared by the Borrower in light of the past business of the Borrower, based on
certain assumptions, those assumptions believed by the Borrower to be material
being attached to the Projections. The Borrower believes that those assumptions
are reasonable in all material respects as of the Closing Date. The Projections
have been prepared in good faith and represent the best opinion of the Borrower
as of the Closing Date as to the most probable course of Borrower's businesses.
The Projections were prepared in accordance with practices usually followed in
the preparation of accounting projections in good faith and the regular course
of an ongoing business.
Section 4.1.6. No Litigation. There are no actions, suits or
proceedings pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower, any Affiliate and/or any Subsidiary or any of their
properties before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which if determined
adversely to the Borrower, any Affiliate and/or any Subsidiary would draw into
question the legal existence of the Borrower and/or any such Subsidiary and/or
the validity, authorization and/or enforceability of the Financing Documents
and/or any provision thereof and/or could reasonably be expected to have a
Material Adverse Effect, except those matters, if any, described on Exhibit
4.1.6 none of which, in Borrower's good faith opinion, will have such a Material
Adverse Effect.
Section 4.1.7. Regulation U. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying "margin
stock" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System (12 CFR Part 221), does not own and has no present
intention of acquiring any such margin stock or a "margin security" within the
meaning of Regulation G of the Board of Governors of the Federal Reserve System
(12 CFR, Part 207). None of the proceeds of the Loan will be used directly or
indirectly by the Borrower for the purpose of purchasing or carrying, or for the
purpose of reducing or retiring any Indebtedness which was originally incurred
to purchase or carry, any such margin security or margin stock or for any other
purpose which might constitute the transaction contemplated hereby a "purpose
credit" within the meaning of said Regulation G or Regulation U, or cause this
Agreement to violate any other regulation of the Board of Governors of the
Federal Reserve System or the Securities and Exchange Act of 1934, as amended,
or any rules or regulations promulgated under either said statute.
Section 4.1.8. Absence of Adverse Agreements. Neither the Borrower
nor any Subsidiary is a party to any indenture, loan or credit agreement or any
lease or other agreement or instrument (other than the Equity Documents) or
subject to any corporate, limited liability company or partnership restriction
which would have a Material Adverse Effect on the ability of the Borrower or any
Subsidiary to carry out its obligations under the Financing Documents.
Section 4.1.9. Taxes. The Borrower and each Subsidiary has filed all
tax returns (federal, state and local) required to be filed and paid all taxes
shown thereon to be due, including interest and penalties, or provided adequate
reserves for payment thereof.
Section 4.1.10. ERISA. The Borrower and any Commonly Controlled
Entity do not maintain or contribute to any Single Employer Plan which is not in
substantial compliance with ERISA and Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1986, as amended, or which has incurred any accumulated
funding deficiency within the meaning of section 412 and 418 of the Code, or
which has applied for or obtained a waiver from the Internal Revenue Service of
any minimum funding requirement under section 412 of the Code. The Borrower and
any Commonly Controlled Entity have not incurred any liability to the PBGC in
connection with any Plan covering any employees of The Borrower or any Commonly
Controlled Entity in amount exceeding $50,000 in the aggregate or ceased
operations at any facility or withdrawn from any Plan in a manner which could
subject any of them to liability under section 4062(e), 4063 or 4064 of ERISA in
amount exceeding $50,000 in the aggregate, and know of no facts or circumstance
which might give rise to any liability of the Borrower or any Commonly
Controlled Entity to the PBGC under Title IV of ERISA in amount exceeding
$50,000 in the aggregate. The Borrower and any Commonly Controlled Entity have
not incurred any withdrawal liability in amount exceeding $50,000 in the
aggregate (including but not limited to any contingent or secondary withdrawal
liability) within the meaning of sections 4201 and 4202 of ERISA, to any
Multiemployer Plan, and no event has occurred, and there exists no condition or
set of circumstances, which presents a risk of the occurrence of any withdrawal
from or the partition, termination, reorganization or insolvency of any
Multiemployer Plan which could result in any liability to a Multiemployer Plan
in amount exceeding $50,000 in the aggregate.
Except for payments for which the minimum funding requirement has
been waived under section 412 of the code, full payment has been made of all
amounts which the Borrower and any Commonly Controlled Entity are required to
have paid as contributions to any Plan under applicable law or under any Plan or
any agreement relating to any Plan to which the Borrower or any Commonly
Controlled Entity is a party. The Borrower and each Commonly Controlled Entity
have made adequate provision for reserves to meet contributions that have not
been made because they are not yet due under the terms of any Plan or related
agreements.
Neither the Borrower nor any Commonly Controlled Entity has any
knowledge, nor do any of them have any reason to believe that any Reportable
Event which could result in a liability or liabilities of $50,000 or more in the
aggregate has occurred with respect to any Plan.
Section 4.1.11. Ownership of Properties.
Section 4.1.11.1. Except for Permitted Encumbrances and Liens
permitted under Section 5.2.1 hereof, each of the Borrower, GTI and each
Subsidiary has good title to all of their respective properties and assets free
and clear of all mortgages, security interests, restrictions, Liens and
encumbrances of any kind.
Section 4.1.11.2. Exhibit 4.1.11 accurately and completely
lists the location of all real property owned or leased by the Borrower, GTI or
any Subsidiary. The Borrower, GTI and each Subsidiary enjoys quiet possession
under all material leases to which it is a party as a lessee, and all of such
leases are valid, subsisting in full force and effect. No other such leases
contain any provision restricting the incurrence of indebtedness by the lessee.
Section 4.1.11.3. To the Borrower's knowledge, except as
specified in Exhibit 4.1.11, none of the real property owned by the Borrower,
GTI or any Subsidiary is located within any federal, state or municipal flood
plain zone.
Section 4.1.11.4. Except as set forth in Exhibit 4.1.11, all of
the material properties used in the conduct of the Borrower's, GTI's and each
Subsidiary's business (i) are in good repair, working order and condition
(reasonable wear and tear accepted) and suitable for use in the operation of the
Borrower's, GTI's and each Subsidiary's business; and (ii) are currently
operated and maintained, in all material respects, in accordance with the
requirements of the National Electrical Safety Code on Engineering and the FCC
and other standards generally accepted in the cable television industry.
Section 4.1.12. Accuracy of Representations and Warranties. None of
the Borrower's representations or warranties set forth in this Agreement or in
any document or certificate taken together with any related document or
certificate furnished pursuant to this Agreement or in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact necessary to
make any statement of fact contained herein or therein, in light of the
circumstances under which it was made, not misleading; except that unless
provided otherwise any such document or certificate which is dated speaks as of
the date stated and not the present.
Section 4.1.13. Senior Subordinated Note Representations and
Warranties. No default or event of default exists under any of the Senior
Subordinated Notes or the Related Documents, and no default or event of default
will be caused by the Borrower entering into or performing or obligations
hereunder or under any of the other Financing Documents. The Borrower further
represents and warrants that the entire principal balance of the Loan qualifies
as "Permitted Indebtedness" under subpart (i) of the definition of the term
Permitted Indebtedness in Section 1.01 of the Indenture, and that the entire
principal balance of Loan qualifies as "Senior Indebtedness", as such term is
defined in Section 12.02 of the Indenture.
Section 4.1.14. No Investment Company. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company" as such terms are defined in the Investment Company Act of
1940, as amended, which is required to register thereunder.
Section 4.1.15. Solvency, etc. After giving effect to the
consummation of the Loan to be made under this Agreement as of the time this
representation and warranty is given, the Borrower (a) will be able to pay its
debts as they become due, (b) will have funds and capital sufficient to carry on
its business and all businesses in which it is about to engage, and (c) will own
property having a value both at fair valuation and at fair saleable value in the
ordinary course of the Borrower's business greater than the amount required to
pay its Indebtedness, including for this purpose unliquidated and disputed
claims. The Borrower will not be rendered insolvent by the execution and
delivery of this Agreement and the consummation of any transactions contemplated
herein.
Section 4.1.16. Approvals. All approvals required from all Persons
including without limitation all governmental authorities with respect to the
Financing Documents have been obtained.
Section 4.1.17. Ownership Interests. The schedule of ownership
interests in the Borrower and its Subsidiaries set forth in Exhibit 1.3 is true,
accurate and complete and the Investments to be made for all ownership interests
disclosed therein have in fact been fully paid in immediately available Dollars.
Section 4.1.18. Licenses, Registrations, Compliance with Laws, etc.
Exhibit 4.1.18 accurately and completely describes all permits, governmental
licenses, registrations and approvals, material to carrying out of the
Borrower's and each of the Subsidiaries' businesses as presently conducted and
as required by law or the rules and regulations of any federal, foreign
governmental, state, county or local association, corporation or governmental
agency, body, instrumentality or commission having jurisdiction over the
Borrower or any of the Subsidiaries, including but not limited to the FCC, the
United States Environmental Protection Agency, the United States Department of
Labor, the United States Occupational Safety and Health Administration, the
United States Equal Employment Opportunity Commission, the Federal Trade
Commission and the United States Department of Justice and analogous and related
state and foreign agencies and each community which has granted the Borrower a
Franchise, each of which is listed on Exhibit 1.2 hereto. There is no material
violation or material failure of compliance or, to the Borrower's knowledge,
allegation of such violation or failure of compliance on the part of the
Borrower or any of the Subsidiaries with any of the foregoing permits, licenses,
registrations, approvals, rules or regulations and there is no action,
proceeding or investigation pending or to the knowledge of the Borrower
threatened nor has the Borrower or any Subsidiary received any notice of such
which might result in the termination or suspension of any such permit, license,
registration or approval which in any case could have a Material Adverse Effect.
Section 4.1.19. Principal Place of Business; Books and Records. The
Borrower's chief executive office is located at Borrower's address set forth in
Section 9.6. All of the Borrower's books and records are kept at one or more of
its addresses set forth in Section 9.6.
Section 4.1.20. Subsidiaries. GTLP has no Subsidiaries other than
Capital Corp. Capital Corp. has no Subsidiaries.
Section 4.1.21. Franchises, etc. Exhibit 4.1.21 attached hereto
accurately and completely lists all material authorizations, licenses, permits
and Franchises granted or assigned to the Borrower by the FCC or any other
public or governmental agency or regulatory body, including all material
authorizations, licenses, permits and Franchises for the construction,
installation or operation of cable television systems in the Franchise Areas,
the same constitute the only material licenses, permits or Franchises or other
authorizations of any public or governmental agency or regulatory body required
or advisable in connection with the conduct by the Borrower of its business as
presently conducted or proposed to be conducted. Except as disclosed on Exhibit
4.1.21, all existing Franchises are in full force and effect, are duly issued in
the name of, or validly assigned to, GTI, the Borrower or one of its
Subsidiaries and the Borrower or one of its Subsidiaries has full power and
authority to operate thereunder. Except as set forth in Exhibit 1.2, no cable
television Franchise issued with respect to a Franchise Area has a term which
will expire prior to the scheduled maturity of the Notes. Exhibit 1.2 also
accurately and completely lists all material agreements, if any, which are
presently in effect for the use of public utility facilities in connection with
the Systems.
Section 4.1.22. Copyright. The Borrower has not violated any of the
provisions of the Copyright Act of 1976, 17 U.S.C. 101, et seq. The Borrower has
filed all notices and statements of account with United States Copyright Office
and has made all payments to the United States Copyright Office that are
required in connection with the secondary transmission by the Borrower of any
broadcast television, radio or other signals. Exhibit 4.1.22 accurately and
completely sets forth all copyrights held by the Borrower or any of the
Subsidiaries.
Section 4.1.23. Basic Subscribers. As of December 31, 1999, the
Borrower had not less than 125,500 Basic Subscribers, and Operating Cash Flow
for the fiscal year ended December 31, 1999 of not less than $21,000,000.
Section 4.1.24. Environmental Compliance. Neither the Borrower nor,
to the best knowledge of the Borrower after due inquiry, any other Person:
Section 4.1.24.1. has ever caused, permitted, or suffered to
exist any Hazardous Material to be spilled, placed, held, located or disposed of
on, under, or about, nor are any now existing on, under, or about, the
Borrower's facilities (the "Premises"), or into the atmosphere, any body of
water, any wetlands, or on any other real property legally or beneficially owned
by any Borrower, other than as disclosed on Exhibit 4.1.24, or in respect of
Hazardous Material used or disposed of in compliance with law,
Section 4.1.24.2. has any knowledge after due inquiry that
either the Premises or any other real property legally or beneficially owned by
the Borrower has ever been used (whether by the Borrower or, to the best
knowledge of the Borrower after due inquiry, by any other Person) as a
treatment, storage (except for its own material in the ordinary course of
business) or disposal (whether permanent or temporary) site for any Hazardous
Material, and
Section 4.1.24.3. has any knowledge after due inquiry of any
notice of violation, lien or other notice issued by any governmental agency with
respect to the environmental condition of the Premises, any other property owned
by the Borrower, or any other property which was included in the property
description of the Premises or such other real property within the preceding
three years.
Section 4.1.25. Material Contracts. Exhibit 4.1.25 attached hereto
accurately and completely lists all material agreements to which the Borrower
and any of the Subsidiaries are a party including, without limitation, all
Franchises and all material construction, programming, engineering, consulting,
employment, management, operating and related agreements, if any, which are
presently in effect. All of the foregoing agreements, including without
limitation the Franchises, are legally valid, binding, subsisting and in full
force and effect and neither the Borrower, any of the Subsidiaries nor any other
parties are in material default thereunder.
Section 4.1.26. Patents, Trademarks and Other Property Rights. Except
as set forth in Exhibit 4.1.26 attached hereto, each of the Borrower and the
Subsidiaries own, possess, or have licenses to use all the patents, trademarks,
service marks, tradenames, copyrights and non-governmental licenses, and all
rights with respect to the foregoing, necessary for the conduct of their
respective businesses as now conducted, without any conflict with the rights of
others with respect thereto.
Section 4.1.27. Related Documents. The Borrower has, prior to the
date hereof, delivered to the Lenders true copies of the Related Documents and
each and every amendment or modification thereto.
Section 4.1.28. Transfer of Assets. Except as set forth in Exhibit
4.1.28, GTI has transferred all assets related to cable television systems
(including but not limited to any Franchise) to the Borrower.
ARTICLE 5
COVENANTS OF THE BORROWER
Section 5.1. Affirmative Covenants of the Borrower Other than Reporting
Requirements. From the date hereof and thereafter for so long as any portion of
the Commitment is outstanding or the Borrower is indebted to any Lender and/or
the Agent under any of the Financing Documents, the Borrower will, with respect
to itself and, unless noted otherwise below, with respect to each of its
Subsidiaries, ensure that each Subsidiary will, unless the Majority Lenders
shall otherwise consent in writing:
Section 5.1.1. Payment of Taxes, etc. Pay and discharge all taxes and
assessments and governmental charges or levies imposed upon it or upon its
income or profits, or upon any properties belonging to it, prior to the date on
which penalties attach thereto, and all lawful claims for the same which, if
unpaid, might become a Lien upon any of its properties; provided that (unless
and until foreclosure, restraint, sale or any similar proceeding shall have been
commenced) the Borrower shall not be required to pay any such tax, assessment,
charge, levy or claim which is being contested in good faith and by proper
proceedings and for which proper reserve or other provision has been made in
accordance with GAAP, unless failure to pay is not material.
Section 5.1.2. Maintenance of Insurance. Maintain insurance in
accordance with the Security Documents, including without limitation, liability
insurance reasonably acceptable to the Lenders and, to the extent not covered by
any of the Security Documents, with responsible and reputable insurance
companies or associations in such amounts and covering such risks as is usually
carried by companies engaged in similar businesses and owning similar properties
and in accordance with the requirements of any governmental agency having
jurisdiction over the Borrower and/or any Subsidiary. The Borrower shall provide
the Lenders with such evidence as the Agent may request from time to time as to
the maintenance of all such insurance.
Section 5.1.3. Preservation of Existence, etc. Preserve and maintain
in full force and effect its legal existence, rights, Franchises and privileges
in the jurisdiction of its organization, preserve and maintain all licenses,
governmental approvals, trademarks, patents, trade secrets, copyrights and trade
names owned or possessed by it and which are necessary or, in its reasonable
business judgment, desirable in view of its business and operations or the
ownership of its properties and qualify or remain qualified as a foreign
corporation or partnership in each jurisdiction in which such qualification is
necessary or, in its reasonable business judgment, desirable in view of its
business and operations and ownership of the properties.
Section 5.1.4. Compliance with Laws, etc. Comply with the
requirements of all present and future applicable laws, rules, regulations and
orders of any governmental authority having jurisdiction over it and/or its
business, except where the failure to comply would not have a Material Adverse
Effect.
Section 5.1.5. Visitation Rights. Permit, during normal business
hours, and, prior to the occurrence of a Default or an Event of Default, upon
prior notice, the Lenders or any agents or representatives thereof, to examine
and make copies of and abstracts from the records and books of account of, and
visit the properties of the Borrower and any Subsidiary to discuss the affairs,
finances and accounts of the Borrower or any Subsidiary with any or their
partners, officers or employees and/or any independent certified public
accountant of the Borrower and/or any Subsidiary.
Section 5.1.6. Keeping of Records and Books of Account. Keep adequate
records and books of account, in which complete entries will be made in
accordance with GAAP and with applicable requirements of any governmental
authority having jurisdiction over the Borrower and/or any Subsidiary in
question, reflecting all financial transactions.
Section 5.1.7. Maintenance of Properties, etc. Maintain and preserve
all of its properties necessary or useful in the proper conduct of its business,
in good working order and condition, ordinary wear and tear excepted, and in
accordance with each of the Security Documents.
Section 5.1.8. Accounting System. Maintain a standard system of
accounting in accordance with GAAP and in accordance with the requirements of
any governmental authority having jurisdiction over the Borrower and/or any
Subsidiary.
Section 5.1.9. Other Documents, etc. Except as otherwise required by
this Agreement, pay, perform and fulfill all of its obligations and covenants
under each material document, instrument or agreement to which it is a party
including, without limitation, the Related Documents, the Equity Documents and
the Affiliate Subordination Agreement.
Section 5.1.10. Maximum Total Indebtedness and Maximum Senior
Indebtedness to Annualized Operating Cash Flow. Maintain at all times ratios of
(i) total Indebtedness for Borrowed Money to Annualized Operating Cash Flow and
(ii) total Senior Indebtedness to Annualized Operating Cash Flow of not greater
than the respective ratio set forth below for each period set forth below:
Total Senior
Indebtedness Indebtedness
Period Ratio
Ratio____
Closing Date through 7.65:1.001.65:1.00
August 30, 2000
September 1, 2000 and thereafter 7.35:1.00 1.65:1.00
The Borrower shall be in compliance with the foregoing covenant as of the
last day of each calendar month.
Section 5.1.11. Maximum Senior Indebtedness to Basic Subscribers.
Maintain at the last day of each calendar month a ratio of (i) total
Indebtedness for Borrowed Money (in dollars) to (ii) the number of Basic
Subscribers of not greater than $1,299:1.
Section 5.1.12. Minimum Ratio of Operating Cash Flow to Interest
Expense. Maintain at all times a ratio of (i) Operating Cash Flow to (ii) Total
Cash Interest Expense (exclusive of Closing Costs) of not less than 1.05:1.00.
The Borrower shall be in compliance with the foregoing covenant on an annualized
basis as of the last day of each calendar month so that Operating Cash Flow,
Total Cash Interest Expense and each component of each of said terms are
calculated for the calendar month in question and for the two immediately
preceding calendar months and the results of said calculation are multiplied by
four.
Section 5.1.13. Intentionally Omitted.
Section 5.1.14. Minimum Fixed Charge Coverage. Maintain at the last
day of each calendar month a Fixed Charge Coverage for such fiscal quarter of
not less than 1.05:1.00.
Section 5.1.15. Intentionally Omitted.
Section 5.1.16. Officer's Certificates and Requests. Provide each
Officer's Certificate required under this Agreement and each Request so that the
statements contained therein are accurate and complete in all respects.
Section 5.1.17. Depository. Use the Agent as a depository of the
Borrower's funds.
Section 5.1.18. Chief Executive Officer. Maintain Tommy L. Gleason,
Jr. and/or James M. Gleason as the Person with principal executive, operating
and management responsibility for the Systems or obtain a replacement of
comparable experience and training in the cable television industry reasonably
satisfactory to the Majority Lenders within 90 days of his ceasing to act in
such capacity.
Section 5.1.19. Completion of Improvements. Complete all improvements
by such date as may be necessary to comply with applicable Franchise and other
regulatory or contractual requirements, and, within 30 days after the request of
the Majority Lenders, supply the Lenders with such documentation as the Majority
Lenders shall reasonably request evidencing such completion.
Section 5.1.20. Notice of Purchase of Real Estate and Leases.
Promptly notify the Lenders in the event that the Borrower shall purchase any
real estate or enter into any lease of real estate or of equipment material to
the operation of the Systems, supply the Lenders with a copy of the related
purchase agreement or of such lease, as the case may be, and if requested by the
Lenders, execute and deliver, or cause to be executed and delivered, to the
Agent for the benefit of the Lenders a deed of trust or mortgage or assignment,
together with landlord consents, in the case of leased property, satisfactory in
form and substance to the Agent, granting a valid first Lien (subject to any
Liens permitted under Section 5.2.1 hereof) on such real property or leasehold
as security for the Financing Documents.
Section 5.1.21. Additional Assurances. From time to time hereafter,
execute and deliver or cause to be executed and delivered, such additional
instruments, certificates and documents, and take all such actions, as the Agent
shall reasonably request for the purpose of implementing or effectuating the
provisions of the Financing Documents, and upon the exercise by the Agent of any
power, right, privilege or remedy pursuant to the Financing Documents which
requires any consent, approval, registration, qualification or authorization of
any governmental authority or instrumentality, exercise and deliver all
applications, certifications, instruments and other documents and papers that
the Agent may be so required to obtain.
Section 5.1.22. Appraisals. Permit the Agent and its agents, at any
time and in the sole discretion of the Agent or at the request of the Majority
Lenders, to conduct appraisals of the Systems, the cost of which appraisals
shall be borne by the Borrower following a Default or Event of Default.
Section 5.1.23. Environmental Compliance. Comply strictly and in all
respects with the requirements of all federal, state, and local environmental
laws; notify the Lenders promptly in the event of any spill, Hazardous Material
affecting the premises occupied by the Borrower from time to time; forward to
the Lenders promptly any notices relating to such matters received from any
governmental agency; and pay promptly when due any uncontested fine or
assessment against the Premises.
Section 5.1.24. Remediation. Immediately contain and remove any
Hazardous Material found on the Premises in compliance with applicable laws and
at the Borrower's expense, subject however, to the right of the Agent, at the
Agent's option but at the Borrower's expense, to have an environmental engineer
or other representative review the work being done.
Section 5.1.25. Site Assessments. Promptly upon the request of the
Agent, based upon the Agent's reasonable belief that a material hazardous waste
or other environmental problem exists with respect to the Premises, provide the
Agent with an environmental site assessment report or an update of any existing
report, all in scope, form and content and performed by such company as may be
reasonably satisfactory to the Agent.
Section 5.1.26. Indemnity. Indemnify, defend, and hold each of the
Lenders and the Agent harmless from and against any claim, cost, damage
(including without limitation consequential damages), expense (including without
limitation reasonable attorneys' fees and expenses), loss, liability, or
judgment now or hereafter arising as a result of any claim for environmental
cleanup costs, any resulting damage to the environment and any other
environmental claims against the Borrower, the Lenders and/or the Agent arising
out of the transactions contemplated by this Agreement, or the Premises. The
provisions of this Section shall continue in effect and shall survive (among
other events) any termination of this Agreement, foreclosure, a deed in lieu
transaction, payment and satisfaction of the Note and other obligations of the
Borrower hereunder, and release of any collateral for the Loan.
Section 5.1.27. Intentionally Omitted.
Section 5.1.28. Intentionally Omitted.
Section 5.2. Negative Covenants of the Borrower. From the date hereof and
thereafter for so long as any portion of the Commitment is outstanding or the
Borrower is indebted to any Lender and/or the Agent under any of the Financing
Documents, each of the Borrower and GTI will not, with respect to itself and,
unless noted otherwise below, with respect to each of its Subsidiaries, will
ensure that each such Subsidiary will not, without the prior written consent of
the Majority Lenders:
Section 5.2.1. Liens, etc. Create, incur, assume or suffer to exist
any Lien of any nature, upon or with respect to any of its properties, now owned
or hereafter acquired, or assign as collateral or otherwise convey as
collateral, any right to receive income, except that the foregoing restrictions
shall not apply to any Liens:
Section 5.2.1.1. For taxes, assessments or governmental charges
or levies on property if the same shall not at the time be delinquent or
thereafter can be paid without penalty or interest, or (if foreclosure,
distraint, sale or other similar proceedings shall not have been commenced) are
being contested in good faith and by appropriate proceedings diligently
conducted and for which proper reserve or other provision has been made in
accordance with GAAP;
Section 5.2.1.2. Imposed by law, such as carriers',
warehousemen's and mechanics' liens, bankers' set off rights and other similar
liens arising in the ordinary course of business for sums not yet due or being
contested in good faith and by appropriate proceedings diligently conducted and
for which proper reserve or other provision has been made in accordance with
GAAP;
Section 5.2.1.3. Arising in the ordinary course of business out
of pledges or deposits under worker's compensation laws, unemployment insurance,
old age pensions, or other social security or retirement benefits, or similar
legislation;
Section 5.2.1.4. Arising from or upon any judgment or award,
provided that such judgment or award is being contested in good faith by proper
appeal proceedings and only so long as execution thereon shall be stayed;
Section 5.2.1.5. Set forth on Exhibit 1.7;
Section 5.2.1.6. Now or hereafter granted pursuant to the
Security Documents or otherwise now or hereafter granted to the Agent for the
benefit of the Lenders as collateral for the Loan and/or the Borrower's other
Obligations arising in connection with or under this Agreement or the Other
Financing Documents;
Section 5.2.1.7. Consisting of deposits to secure the
performance of bids, trade contracts (other than for borrowed money), leases,
statutory obligations, surety bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of the Borrower's or any
Subsidiary's business;
Section 5.2.1.8. Consisting of easements, rights of way,
restrictions and other similar encumbrances incurred in the ordinary course of
business which, in the aggregate, are not substantial in amount, and which do
not in any case materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of business by the Borrower or
any Subsidiary;
Section 5.2.1.9. Securing Indebtedness permitted to exist
under Section 5.2.8.5 hereof; and
Section 5.2.1.10. Granted pursuant to the Pledge and Assignment
Agreement for the sole purpose of securing the obligations of the Borrower under
Section 11.01(b) of the Indenture.
Section 5.2.2. Assumptions, Guaranties, etc. of Indebtedness of
Other Persons. Assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligation or Indebtedness of any
other Person, except:
Section 5.2.2.1. Guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
Section 5.2.2.2. Assumptions, guaranties, endorsements and
contingent liabilities within the definition of Indebtedness and permitted by
Section 5.2.8; and
Section 5.2.2.3. Those set forth on Exhibit 5.2.2.
Section 5.2.3. Sale of Assets, Dissolution, etc. Dissolve, liquidate,
wind up, merge or consolidate or combine with another Person or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or a substantial part of its assets (whether now owned or
hereafter acquired), or any of GTI's, the Borrower's or any Subsidiary's
interests in real property other than (i) Asset Sales involving assets having an
aggregate fair salable value of less than $500,000 during the term of this
Agreement, (ii) Asset Sales having an aggregate fair salable value in excess of
$500,000 during the term of this Agreement and as to which all of the Lenders
have given their prior written consent, and (iii) System Asset Sales in
accordance with Section 2.6.1.3.
Section 5.2.4. Change in Nature of Business. Make any material
change in the nature of its business.
Section 5.2.5. Ownership. Cause or permit (i) the occurrence of any
Change in Control, or (ii) any change in the ownership interests of the Borrower
which would cause GTI or LLC to cease to be the managing general partner of the
Borrower holding at least a 1% ownership interest in the Borrower.
Section 5.2.6. Sale and Leaseback. Enter into any sale and leaseback
arrangement with any lender or investor, or enter into any leases except in the
normal course of business at reasonable rents comparable to those paid for
similar leasehold interests in the area.
Section 5.2.7. Sale of Accounts, etc. Sell, assign, discount or
dispose in any way of any accounts receivable, promissory notes or trade
acceptances held by the Borrower or any Subsidiary, with or without recourse,
except in the ordinary course of the Borrower's or any Subsidiary's business.
Section 5.2.8. Indebtedness. Incur, create, become or be liable
directly or indirectly in any manner with respect to or permit to exist any
Indebtedness except:
Section 5.2.8.1. Indebtedness under the Financing Documents or
the Other Financing Documents;
Section 5.2.8.2. Indebtedness with respect to trade obligations
and other normal accruals and customer deposits in the ordinary course of
business not yet due and payable in accordance with customary trade terms or
with respect to which the Borrower or any Subsidiary is contesting in good faith
the amount or validity thereof by appropriate proceedings and then only to the
extent such Person has set aside on its books adequate reserves therefor;
Section 5.2.8.3. Intentionally Omitted.
Section 5.2.8.4. Any Affiliate Subordinated Indebtedness from
time to time outstanding, all upon terms and conditions satisfactory to the
Majority Lenders, and provided that the Majority Lenders, in their sole
discretion, have consented to the incurrence thereof;
Section 5.2.8.5. Intentionally Omitted;
Section 5.2.8.6. Indebtedness with respect to interest rate
protection obligations under Section 2.7.5.
Section 5.2.8.7. Indebtedness with respect to the Senior
Subordinated Notes and the Related Documents not exceeding $120,000,000 in the
aggregate.
Section 5.2.9. Other Agreements. Amend any of the terms or conditions
of the documents evidencing the Related Documents, the Equity Documents, the
Affiliate Subordination Agreement, or any material term of the Management
Agreement, or any indenture, agreement, document, note or other instrument
evidencing, securing or relating to any other Indebtedness permitted under
Section 5.2.8.
Section 5.2.10. Payment or Prepayment of Equity. Except for Permitted
Restricted Payments, make any payment or prepayment of any principal of or
interest on or any payment, prepayment, redemption, defeasance, sinking fund
payment, other repayment of principal or deposit for the purpose of any of the
foregoing on or in connection with the Equity.
Section 5.2.11. Dividends, Payments and Distributions. Declare or pay
any dividends, management fees or like fees or make any other distribution of
cash or property or both to any of the Manager, GTI or LLC or use any of its
assets for payment, purchase, retention, acquisition or retirement of any
beneficial interest in the Borrower or GTI or LLC or set aside or reserve assets
for sinking or like funds for any of the foregoing purposes, make any other
distribution by reduction of capital or otherwise in respect of any beneficial
interest in the Borrower or GTI or LLC or permit any Subsidiary which is not a
wholly-owned Subsidiary so to do; provided, that the Borrower (i) may make
distributions (A) to GTI and LLC (but only so long as no Default or Event of
Default then exists or would be created thereby) not more frequently than once
per Borrower fiscal year to enable GTI, LLC and its members to pay federal and
state income taxes payable by GTI, LLC and its members as a result of the
taxable income of the Borrower for federal income tax purposes to the extent
that such taxable income cannot be offset by previously generated taxable losses
of the Borrower, and (B) to LLC in an aggregate annual amount not to exceed
$45,000 to enable LLC to pay managers' fees to the managers appointed by the
Investors (collectively, the "Permitted Restricted Payments"), and (ii) may pay
Management Fees to the Manager only in accordance with and subject to the
Management Agreement and the Affiliate Subordination Agreement, as those
agreements are in effect on the date hereof, but in no event may the amount of
Management Fees paid with respect to any fiscal quarter of the Borrower ending
in any of the periods set forth below exceed an amount equal to the percentage
of the Gross Revenues of the Borrower (other than from the sale or other
disposition of a capital asset) for any fiscal quarter ending during the period
set forth below opposite each such percentage.
Period Percentage of Gross Revenues
January 1, 2000 through 3.00%
June 30, 2000
July 1, 2000 and thereafter 2.50%
The Management Fees shall be fully subordinated to the payment of the
Obligations pursuant to the terms of the Affiliate Subordination Agreement.
Notwithstanding anything to the contrary set forth herein or in the Management
Agreement, during the existence of a Default or an Event of Default, Management
Fees shall accrue at the percentages permitted above, but no amount of
Management Fees shall be permitted to be paid in excess of 40% of the amount
which would otherwise be permitted to be paid pursuant to the terms of this
Section (any such Management Fees accruing but not permitted to be paid pursuant
to this sentence being herein referred to as "Subordinated Management Fees"). No
Subordinated Management Fees may be paid until one day following the Repayment
Date and Subordinated Management Fees shall not bear interest.
Section 5.2.12. Investments in or to Other Persons. (a) Make or
commit to make any Investment in or to any other Person (including without
limitation any Subsidiary) other than (i) advances to employees for business
expenses not to exceed $10,000 in the aggregate outstanding for any one employee
and not to exceed $25,000 in the aggregate outstanding at any one time to all
such employees, (ii) Cash Equivalent Investments and (iii) Investments in
accounts, contract rights and chattel paper (as defined in the Uniform
Commercial Code) and notes receivable, arising or acquired in the ordinary
course of business.
Section 5.2.13. Transactions with Affiliates. Except as contemplated
by the Equity Documents, engage in any transaction or enter into any agreement
with an Affiliate, or in the case of Affiliates or Subsidiaries, with the
Borrower or another Affiliate or Subsidiary, on other than an arm's length
basis.
Section 5.2.14. Change of Fiscal Year. Change its fiscal year.
Section 5.2.15. Subordination of Claims. Subordinate or permit to be
subordinated any present or future claim against or obligation of another
Person, except as ordered in a bankruptcy or similar creditors' remedy
proceeding of such other Person.
Section 5.2.16. Compliance with ERISA. With respect to Borrower and
any Commonly Controlled Entity (a) terminate, or cease to have an obligation to
contribute to, any Multiemployer Plan so as to result in any material liability
of the Borrower or any Commonly Controlled Entity to PBGC or to any
Multiemployer Plan, (b) engage in any "prohibited transaction" (as defined in
section 4975 of the Code) involving any Plan which would result in a material
liability of the Borrower or any Commonly Controlled Entity for an excise tax or
civil penalty in connection therewith, (c) except for any deficiency caused by a
waiver of the minimum funding requirement under section 412 of the code, as
described above, incur or suffer to exist any material "accumulated funding
deficiency" (as defined in section 302 of ERISA and sections 412 and/or 418 of
the Code) of the Borrower or any Commonly Controlled Entity, whether or not
waived, involving any Single Employer Plan, (d) incur or suffer to exist any
Reportable Event or the appointment of a trustee or institution of proceedings
for appointment of a trustee for any Single Employer Plan if, in the case of a
Reportable Event, same continues unremedied for 10 days after notice of such
Reportable Event pursuant to section 4043(a), (c) or (d) of ERISA is given, if
in the reasonable opinion of the Lenders any of the foregoing is likely to
result in a material liability of the Borrower or any Commonly Controlled
Entity. The assets held under these Plans being sufficient to protect all
accrued benefits, (e) allow or suffer to exist any event or condition, which
presents a material risk of incurring a material liability of the Borrower or
any Commonly Controlled Entity to PBGC by reason of termination of any such Plan
or (f) cause or permit any Plan maintained by Borrower and/or any Commonly
Controlled Entity to be out of compliance with ERISA and/or Title X of the
Consolidated Omnibus Budget Reconciliation Act of 1986, as amended. For purposes
of this Section 5.2.16 "material liability" shall be deemed to mean any
liability of $50,000 or more in the aggregate.
Section 5.2.17. Capital Expenditures. Incur or make Capital
Expenditures during any fiscal year of the Borrower set forth below in an amount
in excess of the amount set forth below opposite the fiscal year of the Borrower
ending at the date set forth below:
Fiscal Year Ending Maximum Capital Expenditure
December 31, 2000 $ 8,000,000
Section 5.2.18. Hazardous Waste. Become involved, or permit any
tenant of its real property to become involved, in any operations at such real
property generating, storing, disposing, or handling Hazardous Material or any
other activity that could lead to the imposition on the Borrower or the Agent or
any Lender, or any such real property of any material liability or Lien under
any environmental laws.
Section 5.2.19. Payments on Senior Subordinated Notes. Make any
payment or prepayment of any principal of, interest on or fees and other charges
with respect to, or any payment, prepayment, redemption, defeasance, sinking
fund payment, other repayment of principal or deposit (including, without
limitation, any deposit under the terms of the Pledge and Assignment Agreement
other than the deposit of the initial net proceeds of the Senior Subordinated
Notes) for the purpose of any of the foregoing on or in connection with the
Senior Subordinated Notes, except for payments permitted to be made to the
holders of the Senior Subordinated Notes under the terms of Article 12 of the
Indenture, provided that in no event may the Borrower exercise its right to
make, or make defeasance payments under Article 4 of the Indenture or make any
optional or discretionary payment or prepayment of any principal of, interest
on, or fees and other charges with respect to, the Senior Subordinates Notes or
any payment, prepayment, redemption, defeasance, sinking fund payment, repayment
of principal or deposit (including, without limitation, any deposit under the
terms of the Pledge and Assignment Agreement other than the deposit of the
initial net proceeds of the Senior Subordinated Notes) for the purpose of the
foregoing on or with respect to the Senior Subordinated Notes.
Section 5.3. Reporting Requirements. From the date hereof and thereafter
for so long as any portion of the Commitment is outstanding or the Borrower is
indebted to any Lender and/or the Agent under any of the Financing Documents,
the Borrower will, unless the Majority Lenders shall otherwise consent in
writing, furnish or cause to be furnished to the Agent for distribution to the
Lenders:
Section 5.3.1. As soon as possible and in any event upon acquiring
knowledge of an Event of Default or Default, continuing on the date of such
statement, the written statement of an officer of the Borrower setting forth
details of such Event of Default or Default and the action which the Borrower
proposes to take with respect thereto;
Section 5.3.2. As soon as practicable after the end of each fiscal
year of Borrower and in any event within 105 days after the end of each fiscal
year of the Borrower, a balance sheet of the Borrower and each of its
Subsidiaries as at the end of such year, and a statement of income and cash
flows and partners' capital of the Borrower and each of its Subsidiaries for
such year setting forth in each case the corresponding figures for the preceding
fiscal year, such statements to be certified by a firm of independent certified
public accountants selected by Borrower and reasonably acceptable to the
Majority Lenders, and to contain a statement to the effect that such accountants
have examined Sections 5.1.10 through 5.1.14 and 5.2.17 and that in the scope of
their review nothing has come to their attention to indicate that a Default or
Event of Default exists on account of Borrower's failure to have been in
compliance therewith on the date of such statements;
Section 5.3.3. As soon as is practicable after the end of each of
each fiscal quarter of each Borrower fiscal year and in any event within 45 days
thereafter, a balance sheet of the Borrower and the Subsidiaries as of the end
of such period and a statement of income and cash flows of the Borrower and the
Subsidiaries for such period and the fiscal year to that date, subject to
changes resulting from year-end adjustments, together with a comparison to the
Budget for the applicable period, such balance sheet to be prepared and
certified by GTI in an Officer's Certificate as having been prepared in
accordance with GAAP except for footnotes and year-end adjustments, and to be in
form satisfactory to the Agent;
Section 5.3.3A. As soon as is practicable after the end of each of
each month of each Borrower fiscal year and in any event within 30 days
thereafter, a balance sheet of the Borrower and the Subsidiaries as of the end
of such month and a statement of income and cash flows of the Borrower and the
Subsidiaries for such period and the fiscal year to that date, subject to
changes resulting from year-end adjustments, together with a comparison to the
Budget for the applicable period, such balance sheet to be prepared and
certified by GTI in an Officer's Certificate as having been prepared in
accordance with GAAP except for footnotes and year-end adjustments, and to be in
form satisfactory to the Agent;
Section 5.3.4. As soon as practicable after the end of each fiscal
year the management letter for the Borrower and the Subsidiaries (when and if
issued) prepared with respect to such fiscal year by the certified public
accounting firm which certified the financial statements in question;
Section 5.3.5. Simultaneously with the furnishing of each of the
year-end financial statements of the Borrower and the Subsidiaries to be
delivered pursuant to Section 5.3.2 and each of the monthly statements of the
Borrower and the Subsidiaries to be delivered pursuant to Section 5.3.3 an
Officer's Certificate of an officer of GTI which shall contain a statement in
the form of Exhibit 5.3.5 to the effect that no Event of Default or Default has
occurred, without having been waived in writing, or if there shall have been an
Event of Default not previously waived in writing pursuant to the provisions
hereof, or a Default, such Officer's Certificate shall disclose the nature
thereof. Each such Officer's Certificate shall also calculate, set forth and
certify to the accuracy of the amounts required to be calculated in the
financial covenants of the Borrower contained in this Agreement and described in
Exhibit 5.3.5;
Section 5.3.6. Promptly after the commencement thereof, notice of all
material actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, affecting the Borrower, GTI and/or any Subsidiary;
Section 5.3.7. As soon as reasonably possible and in any event within
30 days after the end of each month, a certificate of an authorized
representative of the Borrower setting forth in reasonable detail and compared
to Budget, as to each of the Systems, (i) the numbers and types of Basic
Subscribers and other subscribers (including tier and pay subscribers) as at the
end of such month, (ii) changes in numbers of each such category of subscribers
(including numbers of disconnects and connects within each such category), (iii)
the numbers and types of Basic Subscribers more than 60 days delinquent measured
from the date of original billing, and (iv) the average basic and pay rates;
Section 5.3.8. On or before January 31 of each fiscal year of the
Borrower commencing hereafter, an updated proposed budget, prepared on a monthly
basis, and updated financial projections (together, the "Budget") for the next
four fiscal years, setting forth in detail reasonably satisfactory to the Agent
the projected results of operations of the Borrower, including without
limitation, projected revenues and expenses, detailed Capital Expenditures plan
and subscriber levels, stating underlying assumptions and, if required by the
Lender, accompanied by a written statement of an authorized representative of
the Borrower certifying as to the approval of such Budget by GTI;
Section 5.3.9. Such other information respecting the business,
properties or the condition or operations, financial or otherwise, of the
Borrower, GTI or any of their Subsidiaries as any Lender may from time to time
reasonably request;
Section 5.3.10. Written notice of the fact and of the details of any
sale or transfer of any ownership interest in GTI, or any ownership interest
owned by the Borrower, GTI or LLC in the Borrower or any Subsidiary or by the
Investors, Old Galaxy, Vista, Vantage or Management LLC in GTI or LLC given
promptly after Borrower acquires knowledge thereof except that notice with
regard to sales or transfers of Limited Partner's interests may be provided
annually within 30 days after preparation of Borrower's limited partnership
federal tax return; provided, however, that this clause shall not be deemed to
constitute or imply any consent to any such sale or transfer;
Section 5.3.11. Prompt written notice of loss of any key personnel,
termination of or default under the Management Agreement or any material adverse
change in the Borrower's, GTI's, Manager's or any Subsidiary's condition,
financial or otherwise, and an explanation thereof and of the actions the
Borrower, GTI, LLC, the Manager and/or such Subsidiary propose to take with
respect thereto; and
Section 5.3.12. Written notice of the following events, as soon as
possible and in any event within 15 days after the Borrower knows or has reason
to know thereof: (i) the occurrence or expected occurrence of any Reportable
Event with respect to any Plan, or (ii) the institution of proceedings or the
taking or expected taking of any other action by PBGC or the Borrower or any
Commonly Controlled Entity to terminate, withdraw or partially withdraw from any
Plan and, with respect to any Multiemployer Plan, the Reorganization (as defined
in Section 4241 of ERISA) or Insolvency (as defined in Section 4245 of ERISA) of
such Plan and in addition to such notice, deliver to the Lender whichever of the
following may be applicable: (a) an Officer's Certificate setting forth details
as to such Reportable Event and the action that the Borrower or Commonly
Controlled Entity proposes to take with respect thereto, together with a copy of
any notice of such Reportable Event that may be required to be filed with PBGC,
or (b) any notice delivered by PBGC evidencing its intent to institute such
proceedings or any notice to PBGC that such Plan is to be terminated, as the
case may be.
ARTICLE 6
EVENTS OF DEFAULT
Section 6.1. Events of Default. The Borrower shall be in default under each
of the Financing Documents, upon the occurrence of any one or more of the
following events ("Events of Default"):
Section 6.1.1. If Borrower shall fail to make due and punctual
payment of any principal, fees, interest and/or other amounts payable under this
Agreement as provided in any of the Notes and/or in this Agreement when the same
is due and payable, whether at the due date thereof or at a date fixed for
prepayment or if Borrower shall fail to make any such payment of fees, interest,
principal and/or any other amount under this Agreement and/or under any of the
Notes on the date when such payment becomes due and payable by acceleration;
Section 6.1.2. If GTLP, GTI, LLC, Capital Corp., Management LLC, the
Manager or any Subsidiary shall make an assignment for the benefit of creditors,
or shall fail generally to pay its or their debts as they become due, or shall
admit in writing its or their inability to pay its debts as they become due or
shall file a voluntary petition in bankruptcy, or shall file any petition or
answer seeking any reorganization, arrangement, composition, adjustment,
liquidation, dissolution or similar relief under the present or any future
federal bankruptcy laws or other applicable federal, state or other statute, law
or regulation, or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of it or of all or any substantial part of
its properties, or if partnership or corporate action shall be taken for the
purpose of effecting any of the foregoing; or
Section 6.1.3. To the extent not described in Section 6.1.2, (i) if
GTLP, GTI, LLC, Capital Corp., Management LLC, the Manager or any Subsidiary
shall be the subject of a bankruptcy proceeding, or (ii) if any proceeding
against any of them seeking any reorganization, arrangement, composition,
adjustment, liquidation, dissolution, or similar relief under the present or any
future federal bankruptcy law or other applicable federal, foreign, state or
other statute, law or regulation shall be commenced, or (iii) if any trustee,
receiver or liquidator of any of them or of all or any substantial part of any
or all of their properties shall be appointed without their consent or
acquiescence; provided that in any of the cases described above in this Section
6.1.3, such proceeding or appointment shall not be an Event of Default if GTI,
GTLP, LLC, Capital Corp., Management LLC, the Manager or the Subsidiary in
question shall cause such proceeding or appointment to be discharged, vacated,
dismissed or stayed within 30 days after commencement thereof; or
Section 6.1.4. If final judgment or judgments aggregating more than
$100,000 shall be rendered against GTLP, GTI, LLC, Capital Corp., Management
LLC, the Manager or any Subsidiary and shall remain undischarged, unstayed or
unpaid for an aggregate of 30 days (whether or not consecutive) after entry
thereof; or
Section 6.1.5. If GTLP, GTI, LLC, Capital Corp., Management LLC, the
Manager or any Subsidiary shall default (after giving effect to any applicable
grace period) in the due and punctual payment of the principal of or interest on
any Indebtedness exceeding in the aggregate $250,000 (other than the Loan), or
if any default shall have occurred and be continuing after any applicable grace
period under any mortgage, note or other agreement evidencing, securing or
providing for the creation of such Indebtedness, which results in the
acceleration of such Indebtedness or which permits, or with the giving of notice
would permit, any holder or holders of any such Indebtedness to accelerate the
stated maturity thereof; or
Section 6.1.6. If there shall be a default in the performance of the
Borrower's obligations under Section 5.1.3 (insofar as such Section requires the
preservation of the limited partnership or limited liability company existence
of the Borrower or the corporate existence of any Subsidiaries), Sections
5.1.10, 5.1.11, 5.1.12, 5.1.14, or 5.1.27 or Section 5.2 of this Agreement; or
Section 6.1.7. If there shall be any default in the performance of
any covenant or condition contained in this Agreement or in any of the other
Financing Documents to be observed or performed pursuant to the terms hereof or
any Financing Document, as the case may be, other than a covenant or condition
referred to in any other subsection of this Section 6.1 and such default shall
continue unremedied or unwaived, (i) in the case of any covenant or condition
contained in Section 5.3, for 20 Business Days, or (ii) in the case of any other
covenant or condition for which no other grace period is provided, for 30 days,
or (iii) if any of the representations and warranties made or deemed made by
Borrower to the Lenders pursuant to this Agreement proves to have been false or
misleading in any material respect when made; or
Section 6.1.8. If there shall be any attachment of any deposits or
other property of GTLP, GTI, LLC, Capital Corp., Management LLC, the Manager
and/or any Subsidiary in the possession of any Lender or any attachment of any
other property of GTLP, GTI, LLC, Capital Corp., Management LLC, the Manager
and/or any Subsidiary in an amount exceeding $50,000, which shall not be
discharged within 30 days of the date of such attachment; or
Section 6.1.9. Any certification of the financial statements,
furnished to the Agent pursuant to Section 5.3.2, shall contain any
qualification; provided, however, that such qualifications will not be deemed an
Event of Default if in each case (i) such certification shall state that the
examination of the financial statements covered thereby was conducted in
accordance with generally accepted auditing standards, including but not limited
to all such tests of the accounting records as are considered necessary in the
circumstances by the independent certified public accountants preparing such
statements, (ii) such financial statements were prepared in accordance with GAAP
and (iii) such qualification does not involve the "going concern" status of the
entity being reported upon; or
Section 6.1.10. The on-the-air cable television operations affecting
more than 10% of the Basic Subscribers of the Borrower shall be interrupted at
any time for more than 10 consecutive days or more than 15 days in a 12-month
period unless such interruptions are covered by business interruption insurance;
or
Section 6.1.11. (i) the Borrower or GTI shall lose, fail to keep in
force, suffer the termination, suspension or revocation of or terminate, forfeit
or suffer an amendment to any Franchise or group of Franchises at any time held
by it covering 10% or more of the Basic Subscribers of the Borrower or which
would have a Material Adverse Effect, which circumstance shall continue for a
period of 30 days after the Borrower or GTI discovers such circumstance; (ii)
any governmental regulatory authority shall schedule or conduct a hearing on the
renewal of any Franchise held by the Borrower and the Majority Lenders shall
reasonably believe that the result thereof shall be the termination, revocation,
suspension, or material amendment of such Franchise and that such event would be
likely to have a material adverse effect on the Borrower; (iii) any governmental
regulatory authority shall commence an action or proceeding seeking the
termination, suspension, revocation or material adverse amendment of any
Franchise held by the Borrower or GTI or any such termination, revocation,
suspension or amendment which is reasonably likely to result in a reduction of
Gross Revenues on an annual basis in excess of 5% of the Gross Revenues of the
Borrower for the most recent fiscal year; or (iv) any governmental or regulatory
authority shall order a refund or rollback in Borrower's cable television rates
which will reduce Borrower's Projected Gross Revenues by 2.5% or more; or
Section 6.1.12. For any reason (i) Tommy L. Gleason, Jr. and/or James
M. Gleason shall cease to actively serve in his present management capacity with
the Borrower or shall be released from such obligations, unless a successor with
comparable experience and training in the cable television industry reasonably
satisfactory to the Majority Lenders is appointed within 90 days after such
cessation, or (ii) GTI shall cease to be a general partner of the Borrower; or
Section 6.1.13. The termination, for any reason, of the Management
Agreement or the occurrence of a material default by the Manager thereunder
unless a successor with comparable experience and training in the cable
television industry reasonably satisfactory to the Majority Lenders is appointed
pursuant to the terms of a management agreement satisfactory to the Majority
Lenders within 90 days after such termination or the occurrence of such Default;
or
Section 6.1.14. The occurrence of a Change of Control; or
Section 6.1.15. The dissolution or termination of existence of GTI,
LLC or GTLP, Capital Corp., the revocation by GTI or LLC of its Unlimited
Guaranty in favor of the Agent of even date herewith or withdrawal by GTI or LLC
as a General Partner of the Borrower; or
Section 6.1.16. The occurrence of a default or event of default
under the Related Documents, the Equity Documents or the Other Financing
Documents;
Section 6.1.17. A definitive agreement for the sale of the Borrower
and Galaxy Telecom L.P. II or System Asset Sales of substantially all the
Systems owned by the Borrower and Galaxy Telecom L.P. II has not been executed
and delivered on or before, or is not in full force and effect on May 31, 2000
between the Borrower, Galaxy Telecom L.P. II and/or the owners of each of said
entities and an unaffiliated third party buyer in form and substance reasonably
satisfactory in all respects to the Majority Lenders including without
limitation (i) that any such agreement and transaction shall contain sufficient
provision for repayment of the Loans and any Indebtedness of Galaxy Telecom L.P.
II to the Agent and each of the Lenders and all interest, fees and expenses in
connection therewith in full and (ii) that any such agreement and any related
documents, instruments or agreements contain no contingencies allowing the
purchaser to terminate such agreement or any such related document, instrument
or agreement (a) arising from the failure of such purchaser to obtain the
financing necessary for such purchase, (b) arising from the failure of such
purchaser to obtain the approvals necessary for such purchase other than
approvals customarily not obtained until after signing of such agreement in like
transactions or (c) relating to the completion of any due diligence review by
such purchaser other than completion of reasonable due diligence customarily to
be completed in such transactions after signing such an agreement; it shall also
be considered "Event of Default" hereunder if said purchase agreement fails to
be in full force and effect at any time after being entered into; or
Section 6.1.18. If the Borrower, GTLP, GTI, LLC or Capital Corp. or
any Subsidiary thereof shall, without the prior written consent of all of the
Lenders, become liable for Indebtedness for Borrowed Money which the Borrower
would not be permitted to have outstanding under the terms of Section 5.2.8.
ARTICLE 7
REMEDIES OF LENDERS
Upon the occurrence of any one or more of the Events of Default, the Agent,
at the request of the Majority Lenders, shall, by notice to the Borrower,
declare the obligation of the Lenders to make the Loan to be terminated,
whereupon the same and the Commitment shall forthwith terminate, and the Agent,
at the request of the Majority Lenders, shall, by notice to the Borrower,
declare the entire unpaid principal amount of the Notes and all fees and
interest accrued and unpaid thereon and/or under this Agreement, and/or any of
the Security Documents and any and all other Indebtedness under this Agreement,
the Notes and/or any of the Security Documents of GTLP, LLC GTI or Capital Corp.
and/or any Subsidiary to any of the Lenders and/or to any holder of all or any
portion of each Note to be forthwith due and payable, whereupon all such Notes,
and all such accrued fees and interest and other such Indebtedness shall become
and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Borrower; provided, however that upon the occurrence of an Event of Default
under Section 6.1.2 or 6.1.3, all of the unpaid principal amounts of the Notes,
all fees and interest accrued and unpaid thereon and/or under this Agreement
and/or under the Security Documents and any and all other such Indebtedness of
the Borrower to any of the Lenders and/or to any such holder shall thereupon be
due and payable in full without any need for the Agent and/or any Lender to make
any such declaration or take any action and the Lenders' obligations to make the
Loan shall simultaneously terminate. The Agent shall, in accordance with the
votes of the Majority Lenders, exercise all remedies on behalf of and for the
account of each Lender and on behalf of its respective Pro Rata Share of the
Loan, its Note and Indebtedness of the Borrower owing to it or any of the
foregoing, including without limitation all remedies available under or as a
result of this Agreement, the Notes or any of the Security Documents or any
other document, instrument or agreement now or hereafter securing any of the
Notes without any such exercise being deemed to modify in any way the fact that
each Lender shall be deemed a separate creditor of the Borrower to the extent of
its Note and Pro Rata Share of the Loan and any other amounts payable to such
Lender under this Agreement and/or the Security Documents and the Agent shall be
deemed a separate creditor of the Borrower to the extent of any amounts owed by
the Borrower to the Agent.
ARTICLE 8
ADMINISTRATIVE AGENT
Section 8.1. Appointment. The Agent is hereby appointed as agent hereunder
and each Lender hereby authorizes the Agent to act hereunder and under the
Security Documents as its agent hereunder and thereunder. The Agent agrees to
act as such upon the express conditions contained in this Article 8. The
provisions of this Article 8 are solely for the benefit of the Agent, and
neither the Borrower nor any third party shall have any rights as a third party
beneficiary of any of the provisions hereof. In performing its functions and
duties under this Agreement, the Agent shall act solely as agent of the Lenders
and does not assume and shall not be deemed to have assumed any obligation
towards or relationship of agency or trust with or for the Borrower.
Section 8.2. Powers; General Immunity.
Section 8.2.1. Duties Specified. Each Lender irrevocably authorizes
the Agent to take such action on such Lender's behalf, including, without
limitation, to execute and deliver the Security Documents to which the Agent is
a party and to exercise such powers hereunder and under the Security Documents
and other instruments and agreements referred to herein as are specifically
delegated to the Agent by the terms hereof and thereof, together with such
powers as are reasonably incidental thereto. The Agent shall have only those
duties and responsibilities which are expressly specified in this Agreement or
in any of the Security Documents and it may perform such duties by or through
its agents or employees. The duties of the Agent shall be mechanical and
administrative in nature; and the Agent shall not have by reason of this
Agreement or any of the Security Documents a fiduciary relationship in respect
of any Lender; and nothing in this Agreement or any of the Security Documents,
expressed or implied, is intended to or shall be so construed as to impose upon
the Agent any obligations in respect of this Agreement or any of the Security
Documents or the other instruments and agreements referred to herein except as
expressly set forth herein or therein.
Section 8.2.2. No Responsibility for Certain Matters. The Agent shall
not be responsible to any Lender for the execution, effectiveness, genuineness,
validity, enforceability, collectibility or sufficiency of this Agreement, the
Notes, the Security Documents or any other document, instrument or agreement now
or hereafter executed in connection herewith or therewith, or for any
representations, warranties, recitals or statements made herein or therein or
made in any written or oral statement or in any financial or other statements,
instruments, reports, certificates or any other documents in connection herewith
or therewith by or on behalf of the Borrower and/or any Subsidiary to the Agent
or any Lender, or be required to ascertain or inquire as to the performance or
observance of any of the terms, conditions, provisions, covenants or agreements
contained herein or therein or as to the use of the proceeds of the Loan or of
the existence or possible existence of any Default or Event of Default.
Section 8.2.3. Exculpatory Provisions. Neither the Agent nor any of
its officers, directors, employees or agents shall be liable to any Lender for
any action taken or omitted hereunder or in connection herewith unless caused by
its or their gross negligence or willful misconduct. If the Agent shall request
instructions from Lenders with respect to any act or action (including the
failure to take an action) in connection with any of the Financing Documents,
the Agent shall be entitled to refrain from such act or taking such action
unless and until the Agent shall have received instructions from the Majority
Lenders (or all of the Lenders if the action requires their consent). Without
prejudice to the generality of the foregoing, (i) the Agent shall be entitled to
rely, and shall be fully protected in relying, upon any communication,
instrument or document believed by it to be genuine and correct and to have been
signed or sent by the proper person or persons, and shall be entitled to rely
and shall be protected in relying on opinions and judgments of attorneys (who
may be attorneys for the Borrower), accountants, experts and other professional
advisors selected by it; and (ii) no Lender shall have any right of action
whatsoever against the Agent as a result of the Agent acting or (where so
instructed) refraining from acting under this Agreement or the other instruments
and agreements referred to herein in accordance with the instructions of the
Majority Lenders (or all of the Lenders if the action requires their consent).
The Agent shall be entitled to refrain from exercising any power, discretion or
authority vested in it under this Agreement or the other instruments and
agreements referred to herein unless and until it has obtained the instructions
of the Majority Lenders (or all of the Lenders if the action requires their
consent).
Section 8.2.4. Agent Entitled to Act as Lender. The agency hereby
created shall in no way impair or affect any of the rights and powers of, or
impose any duties or obligations upon, Fleet in its individual capacity as a
Lender hereunder. With respect to its participation in the Loan and the
Commitment, Fleet shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not performing the duties and
functions delegated to it hereunder, and the term "Lender" or "Lenders" or any
similar term shall, unless the context clearly otherwise indicates, include
Fleet in its individual capacity. The Agent and its affiliates may accept
deposits from, lend money to and generally engage in any kind of banking, trust,
financial advisory or other business with the Borrower or any Affiliate or
Subsidiary as if it were not performing the duties specified herein, and may
accept fees and other consideration from the Borrower for services in connection
with this Agreement and otherwise without having to account for the same to
Lenders.
Section 8.3. Representations and Warranties; No Responsibility for
Appraisal of Creditworthiness. Each Lender represents and warrants that it has
made its own independent investigation of the financial condition and affairs of
the Borrower, GTI, the Manager and any Subsidiaries of any of them in connection
with the making of the Loan hereunder and has made and shall continue to make
its own appraisal of the creditworthiness of the Borrower and the Subsidiaries.
The Agent shall not have any duty or responsibility either initially or on a
continuing basis to make any such investigation or any such appraisal on behalf
of Lenders or to provide any Lender with any credit or other information with
respect thereto whether coming into its possession before the making of any Loan
or any time or times thereafter (except for information received by the Agent
under Section 5.3 hereof which the Agent will promptly forward to the Lenders),
and the Agent shall further not have any responsibility with respect to the
accuracy of or the completeness of the information provided to Lenders.
Section 8.4. Right to Indemnity. Each Lender severally agrees to indemnify
the Agent proportionately to its Pro Rata Share of the Loan, to the extent the
Agent shall not have been reimbursed by the Borrower, GTI and/or any Subsidiary,
for and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses (including, without
limitation, counsel fees and disbursements) or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in performing its duties hereunder or in any way relating to or arising
out of this Agreement and/or any of the other Financing Documents; provided that
no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent's gross negligence or willful misconduct.
If any indemnity furnished to the Agent for any purpose shall, in the opinion of
the Agent, be insufficient or become impaired, the Agent may call for additional
indemnity and cease, or not commence, to do the acts indemnified against until
such additional indemnity is furnished.
Section 8.5. Payee of Note Treated as Owner. The Agent may deem and treat
the payee of any Note as the owner thereof for all purposes hereof unless and
until a written notice of the assignment or transfer thereof shall have been
filed with the Agent. Any request, authority or consent of any person or entity
who, at the time of making such request or giving such authority or consent, is
the holder of any Note shall be conclusive and binding on any subsequent holder,
transferee or assignee of that Note or of any Note or Notes issued in exchange
for such Note.
Section 8.6. Resignation by Agent.
Section 8.6.1. The Agent may resign from the performance of all its
functions and duties hereunder at any time by giving 30 days' prior written
notice to the Borrower and each of the Lenders. Such resignation shall take
effect upon the acceptance by a successor Agent of appointment pursuant to
clauses 8.6.2 and 8.6.3 below or as otherwise provided below.
Section 8.6.2. Upon any such notice of resignation, the Majority
Lenders shall appoint a successor agent who shall be a Lender and who shall be
satisfactory to the Borrower and shall be an incorporated bank or trust company
with a combined surplus and undivided capital of at least $400,000,000.
Section 8.6.3. If a successor agent shall not have been so appointed
within said 30 day period, the resigning agent, with the consent of the
Borrower, shall then appoint a successor agent who shall be a Lender and who
shall serve as the Agent until such time, if any, as the Majority Lenders, with
the consent of the Borrower, appoint a successor agent as provided above.
Section 8.6.4. If no successor agent has been appointed pursuant to
clause 8.6.2 or 8.6.3 by the 40th day after the date such notice of resignation
was given by the resigning agent, the resigning agent's resignation shall become
effective and the Majority Lenders shall thereafter perform all the duties of
the resigning agent hereunder until such time, if any, as the Majority Lenders,
with the consent of the Borrower, appoint a successor agent as provided above.
Section 8.7. Successor Agent. The Agent may resign at any time as provided
in Section 8.6. Upon any such notice of resignation, the Majority Lenders shall
have the right, upon five days notice to and the approval of (which approval
shall not be unreasonably withheld) the Borrower, to appoint a successor agent.
Upon the acceptance of any appointment as the agent hereunder by a successor
agent, that successor agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring agent, and the
retiring agent shall be discharged from its duties and obligations as the agent
under this Agreement. After any retiring agent's resignation hereunder as the
agent the provisions of this Article 8 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was the agent under this
Agreement.
ARTICLE 9
MISCELLANEOUS
Section 9.1. Consent to Jurisdiction and Service of Process.
Section 9.1.1. Except to the extent prohibited by applicable law, the
Borrower irrevocably:
Section 9.1.1.1. agrees that any suit, action, or other legal
proceeding arising out of this Agreement or the Loan may be brought in the
courts of record of the State of Rhode Island or New York or the Commonwealth of
Massachusetts or the courts of the United States located in the States of Rhode
Island or New York or the Commonwealth of Massachusetts;
Section 9.1.1.2. consents to the jurisdiction of each such
court in any such suit, action or proceeding; and
Section 9.1.1.3. waives any objection which it may have to the
laying of venue of such suit, action or proceeding and/or any claim of
inconvenient forum in any of such courts.
Section 9.1.2. For such time as any of the Indebtedness of the
Borrower to any Lender shall be unpaid in whole or in part and/or the Commitment
is in effect, the Borrower irrevocably designates Goodwin, Procter & Hoar LLP as
its agent to accept and acknowledge on its behalf service of any and all process
in any such suit, action or proceeding brought in any such court, and agrees and
consents that any such service of process upon such agent and written notice of
such service to the Borrower by registered or certified mail shall be taken and
held to be valid personal service upon the Borrower regardless of where the
Borrower shall then be doing business and that any such service of process shall
be of the same force and validity as if service were made upon it according to
the laws governing the validity and requirements of such service in each such
state and waives any claim of lack of personal service or other error by reason
of any such service. Any notice, process, pleadings or other papers served upon
the aforesaid designated agent shall, within three Business Days after such
service, be sent by certified or registered mail to the Borrower at its address
set forth in this Agreement.
The Borrower, the Agent and the Lenders mutually hereby knowingly,
voluntarily and intentionally waive the right to a trial by jury in respect of
any claim based hereon, arising out of, under or in connection with this
Agreement, any Note or any of the other Financing Documents or any course of
conduct, course of dealings, statements (whether verbal or written) or actions
of any party. This waiver constitutes a material inducement for the Agent and
the Lenders to accept the Notes and make the Loan.
Section 9.2. Rights and Remedies Cumulative. No right or remedy conferred
upon or reserved to the Lenders in this Agreement is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given under this Agreement or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy under this
Agreement, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section 9.3. Delay or Omission Not Waiver. No delay in exercising or
failure to exercise by the Lenders of any right or remedy accruing upon any
Event of Default shall impair any such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein. Every right and remedy
given by this Agreement or by law to the Lenders may be exercised from time to
time, and as often as may be deemed expedient, by the Lenders.
Section 9.4. Waiver of Stay or Extension Laws. The Borrower covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
or plead or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Agreement; and
the Borrower (to the extent that it may lawfully do so) hereby expressly waives
all benefit and advantage of any such law and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Lenders, but
will suffer and permit the execution of every such power as though no such law
had been enacted.
Section 9.5. Amendments, etc. No amendment, modification, termination, or
waiver of any provision of this Agreement or of the Notes nor consent to any
departure by the Borrower therefrom shall in any event be effective unless the
same shall be in a written notice given to the Borrower by the Agent and
consented to in writing by the Majority Lenders (or by the Agent acting alone if
any specific provision of this Agreement provides that the Agent may grant such
amendment, modification, termination, waiver or departure) and the Agent shall
give any such notice if the Majority Lenders so consent or direct Agent to do
so; provided, however, that any such amendment, modification, termination,
waiver or consent shall require a written notice given to the Borrower by the
Agent and consented to in writing by all of the Lenders if the effect thereof is
to (i) change any of the provisions affecting the interest rate on the Loan or
the fees set forth in Section 2.3 or amend, modify or waive any of the
provisions of Sections 2.7 or 2.1, (ii) extend or modify the Commitment, (iii)
discharge or release the Borrower from its obligation to repay any or all
principal or interest due under the Loan or any indemnity or reimbursement
payable to any Lender hereunder or release any collateral or guaranty for the
Loan, (iv) change any Lender's Pro Rata Share of the Commitment or the Loan
(except in connection with assignments thereof), (v) modify this Section 9.5 of
this Agreement, (vi) change the definition of Majority Lenders, (vii) extend any
due date for payment of principal, interest or fees, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given, (viii) modify, amend or terminate any material
agreement or any Franchise, (ix) approve or consent to the amendment of any
change in the subordination provisions of the Related Documents, (x) waive,
amend or depart from the provisions of Section 6.1.12, (xi) waive, amend or
depart from the provisions of Section 6.1.17 or (xii) waive, amend or depart
from the provisions of Section 6.1.18. Any amendment or modification of this
Agreement must be signed by the Borrower, the Agent and at least all of the
Lenders consenting thereto who shall then hold the Pro Rata Shares of the Loan
required for such amendment or modification under this Section 9.5 and the Agent
shall sign any such amendment if such Lenders so consent or direct the Agent to
do so; provided that any Lender dissenting therefrom shall be given an
opportunity to sign any such amendment or modification. No notice to or demand
on the Borrower and no consent, waiver or departure from the terms of this
Agreement granted by the Lenders in any case shall entitle the Borrower to any
other or further notice or demand in similar or other circumstances.
Section 9.6. Addresses for Notices, etc. All notices, requests, demands and
other communications provided for hereunder (other than those which, under the
terms of this agreement, may be given by telephone, which shall be effective
when received verbally) shall be in writing (including telegraphic, telexed or
telecopied communication) and mailed, telegraphed, telexed, telecopied or
delivered to the applicable party at the addresses indicated below:
If to the Borrower:
1220 North Main Street
Sikeston, Missouri 63801
Attention: Tommy L. Gleason, Jr.
Telephone: (573) 472-8245
Facsimile: (573) 471-7281
With copies to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attention: Kevin M. Dennis, Esq.
Telephone: (617) 570-1000
Facsimile: (617) 523-1231
and
Thompson Coburn LLP
One Mercantile Center
St. Louis, Missouri 63101
Attention: Robert M. LaRose
Telephone: (314) 552-6000
Facsimile: (314) 552-7000
If to the Agent:
Fleet National Bank
Media & Communications
One Federal Street
Mail Stop: MA OF D03D
Boston, Massachusetts 02110
Attention: Jeffrey J. McLaughlin
Telephone: 617-346-4373
Facsimile: 617-346-4346
With copies to:
Hinckley, Allen & Snyder LLP
28 State Street
Boston, Massachusetts 02109-1775
Attention: Malcolm Farmer III
James O. Reavis
Telephone: 617-345-9000
Facsimile: 617-345-9020
Section 9.7. Costs, Expenses and Taxes. The Borrower agrees to pay on
demand the reasonable fees and out-of-pocket expenses of Messrs. Hinckley, Allen
& Snyder LLP, counsel for the Agent, and the Lenders in connection with the
preparation, execution and delivery of the Financing Documents and the Loan. The
Borrower agrees to pay on demand up to $10,000 of reasonable costs and expenses
(including without limitation reasonable attorneys' fees) incurred by the Agent
in connection with assignments made by Lenders pursuant to Section 9.11. The
Borrower agrees to pay on demand all reasonable costs and expenses (including
without limitation reasonable attorneys' fees) incurred by the Agent in
connection with any amendment hereto or to any of the Financing Documents. The
Borrower agrees to pay on demand all reasonable costs and expenses (including
without limitation reasonable attorneys' fees) incurred by the Agent and any
Lender, upon or after an Event of Default, if any, in connection with the
enforcement of any of the Financing Documents. The Borrower agrees to pay on
demand all reasonable costs and expenses (including without limitation
reasonable attorneys' fees of one law firm representing the Agent and of a
second law firm representing the Lenders as a group) incurred by the Agent and
the Lenders upon or within the occurrence of an Event of Default, if any, in
connection with any amendment, waiver or consent with respect thereto. In
addition, the Borrower shall pay on demand any and all stamp and other taxes and
fees payable or determined to be payable in connection with the execution and
delivery of the Financing Documents, and agrees to save the Lenders and the
Agent harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes or fees, except
those resulting from the Lenders' gross negligence or willful misconduct.
Section 9.8. Participations. Any Lender may sell participations in all or
part of the Loan made by it and/or its Commitment or any other interest herein,
in which event the participant shall not have any rights under any Financing
Document (the participant's rights against such Lender in respect of that
participation to be those set forth in the agreement executed by such Lender in
favor of the participant relating thereto) and all amounts payable by the
Borrower hereunder or thereunder shall be determined as if such Lender had not
sold such participation. Such Lender may furnish any information concerning the
Borrower and any Subsidiary in the possession of such Lender from time to time
to participants (including prospective participants).
Section 9.9. Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the Borrower, the Agent and the Lenders and
their respective successors and assigns, except that the Borrower shall not have
the right to assign its rights hereunder or any interest herein without the
prior written consent of the Majority Lenders. This Agreement and all covenants,
representations and warranties made herein and/or in any of the other Financing
Documents shall survive the making of the Loan, the execution and delivery of
the Financing Documents and shall continue in effect so long as any amounts
payable under or in connection with any of the Financing Documents or any other
Indebtedness of the Borrower to any Lender remains unpaid or the Commitment
remains outstanding; provided, however, that Sections 2.3.4 and 9.7 shall
survive and remain in full force and effect after expiration of the Commitment
and for 90 days following repayment in full of all amounts payable under or in
connection with all of the Financing Documents and any other such Indebtedness.
Section 9.10. Actual Knowledge. For purposes of this Agreement, no Lender
shall be deemed to have actual knowledge of any fact or state of facts unless
the senior loan officer or any other officer responsible for the Borrower's
account established pursuant to this Agreement at such Lender, shall, in fact,
have actual knowledge of such fact or state of facts or unless written notice of
such fact shall have been received by such Lender in accordance with Section
9.6.
Section 9.11. Substitutions and Assignments. Upon the request of any
Lender, the Agent and such Lender may, subject to the terms and conditions
hereinafter set forth, take the actions set forth below to substitute one or
more financial institutions (a "Substituted Lender") as a Lender or Lenders
hereunder having an amount of the Loan as specified in the relevant Substitution
Agreement executed in connection therewith.
Section 9.11.1. In connection with any such substitution the
Substituted Lender and the Agent shall enter into a Substitution Agreement in
the form of Exhibit 9.11.1 hereto (a "Substitution Agreement") pursuant to which
such Substituted Lender shall be substituted for the Lender requesting the
substitution in question (any such Lender being hereinafter referred to as a
"Selling Lender") to the extent of the reduction in the Selling Lender's portion
of the Loan specified therein. In addition, to that extent such Substituted
Lender shall assume such of the obligations of each Selling Lender under this
Agreement, the Security Documents and the Notes as may be specified therein and
this Agreement shall be amended by execution and delivery of each Substitution
Agreement to include such Substituted Lender as a Lender for all purposes under
this Agreement, the Security Documents and the Notes, and to substitute for the
then existing Exhibit 1.8 to this Agreement a new Exhibit 1.8 in the form of
Schedule A to such Substitution Agreement setting forth the portion of the Loan
belonging to each Lender following execution thereof. Each Lender and the
Borrower hereby appoint the Agent as agent on its behalf to countersign and
accept delivery of each Substitution Agreement and, to the extent applicable,
the provisions of Article 8 hereof shall apply mutatis mutandis with respect to
such appointment and anything done or omitted to be done by the Agent in
pursuance thereof.
Section 9.11.2. Without prejudice to any other provision of this
Agreement, each Substituted Lender shall, by its execution of a Substitution
Agreement, agree that neither the Agent nor any Lender is any way responsible
for or makes any representation or warranty as to: (a) the accuracy and/or
completeness of any information supplied to such Substituted Lender in
connection therewith, (b) the financial condition, creditworthiness, affairs,
status or nature of the Borrower and/or any of the Subsidiaries or the
observance by the Borrower, or any other party of any of its obligations under
this Agreement, any of the Notes or any of the Security Documents or (c) the
legality, validity, effectiveness, adequacy or enforceability of this Agreement,
any of the Notes or any of the other Security Documents.
Section 9.11.3. The Agent shall be entitled to rely on any
Substitution Agreement delivered to it pursuant to this Section 9.11 which is
complete and regular on its face as to its contents and appears to be signed on
behalf of the Substituted Lender which is a party thereto, and the Agent shall
have no liability or responsibility to any party as a consequence of relying
thereon and acting in accordance with and countersigning any such Substitution
Agreement. The effective date of each Substitution Agreement shall be the date
specified as such therein and each Lender prior to such effective date shall,
for all purposes hereunder, be deemed to have and possess all of their
respective rights and obligations hereunder up to 12:00 o'clock P.M. on the
effective date thereof.
Section 9.11.4. Upon delivery to the Agent of any Substitution
Agreement pursuant to and in accordance with this Section 9.11 and acceptance
thereof by the Agent (which delivery shall be evidenced and accepted exclusively
and conclusively by the Agent's countersignature thereon pursuant to the terms
hereof without which such Substitution Agreement shall be ineffective): (i)
except as provided hereunder, the respective rights of each Selling Lender and
the Borrower against each other under this Agreement, the Notes and the Security
Documents with respect to the portion of the Loan being assigned or delegated
shall be terminated and each Selling Lender and the Borrower shall each be
released from all further obligations to the other hereunder with respect
thereto (all such rights and obligations to be so terminated or released being
referred to in this Section 9.11 as "Discharged Rights and Obligations"); and
(ii) the Borrower and the Substituted Lender shall each acquire rights against
each other and assume obligations towards each other which differ from the
Discharged Rights and Obligations only in so far as the Borrower and the
Substituted Lender have assumed and/or acquired the same in place of the Selling
Lender in question; and (iii) the Agent, the Substituted Lender and the other
Lenders shall acquire the same rights and assume the same obligations between
themselves as they would have acquired and assumed had such Substituted Lender
been an original party to this Agreement as a Lender possessing the Discharged
Rights and Obligations acquired and/or assumed by it in consequence of the
delivery of such Substitution Agreement to the Agent.
Section 9.11.5. Discharged Rights and Obligations shall not include,
and there shall be no termination or release pursuant to this Section 9.11 of
(i) any rights or obligations arising pursuant to this Agreement in respect of
the period or in respect of payments hereunder made during the period prior to
the effective date of the relevant Substitution Agreement, (ii) any rights or
obligations relating to the payment of any amount which has fallen due and not
been paid hereunder prior to such effective date or rights or obligations for
the payment of interest, damages or other amounts becoming due hereunder as a
result of such nonpayment, any rights or claims of the Borrower against the
Seller hereunder arising prior to the effective date of the Substitution
Agreement.
Section 9.11.6. With respect to any substitution of a Substituted
Lender taking place after the Closing Date, the Borrower shall issue to such
Substituted Lender and to such Selling Lender, new Notes reflecting the
inclusion of such Substituted Lender as a Lender and the reduction in the
respective portion of the Loan of such Selling Lender, such new Notes to be
issued against receipt by the Borrower of the existing Notes of such Selling
Lender. The Selling Lender or the Substituted Lender shall pay to the Agent for
its own account an assignment fee in the amount of $4,000 for each assignment
hereunder, which shall be payable at or before the effective date of the
assignment.
Section 9.11.7. Each Lender may furnish to any financial institution
which such Lender proposes to make a Substituted Lender or to a Substituted
Lender any information concerning such Lender, the Borrower and any Subsidiary
in the possession of that Lender from time to time; provided that any Lender
providing any confidential information about the Borrower and/or any Subsidiary
to any such financial institution shall obtain such financial institution's
agreement to keep confidential any such confidential information.
Section 9.12. Payments Pro Rata. The Agent agrees that promptly after its
receipt of each payment from or on behalf of the Borrower in respect of any
Obligations of the Borrower hereunder it shall distribute such payment to the
Lenders pro rata based upon their respective Pro Rata Shares, if any, of the
Obligations with respect to which such payment was received. Each of the Lenders
agrees that, if it should receive any amount hereunder (whether by voluntary
payment, by realization upon security, by the exercise of the right of setoff or
banker's lien, by counterclaim or cross action, by the enforcement of any right
under the Financing Documents, or otherwise), which is applicable to the payment
of the Obligations of a sum which with respect to the related sum or sums
received by other Lenders is in a greater proportion than the total amount of
such Obligation then owed and due to such Lender bears to the total amount of
such Obligation then owed and due to all of the Lenders immediately prior to
such receipt, except for any amounts received pursuant to Section 2.3.3, then
such Lender receiving such excess payment shall purchase for cash without
recourse or warranty from the other Lenders an interest in the Obligations of
the Borrower to such Lenders in such amount as shall result in a proportional
participation by all the Lenders in such amount; provided, however, that if all
or any portion of such excess amount is thereafter recovered from such Lender,
such purchase shall be rescinded and the purchase price restored to the extent
of such recovery, but without interest.
Section 9.13. Governing Law. This Agreement and the Notes shall be
governed by, and construed in accordance with, the laws of The Commonwealth of
Massachusetts.
Section 9.14. Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 9.15. Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 9.16. Counterparts. This Agreement may be executed and delivered in
any number of counterparts each of which shall be deemed an original, and this
Agreement shall be effective when at least one counterpart hereof has been
executed by each of the parties hereto. Delivery of an executed counterpart of a
signature page to this Agreement by telecopier shall be effective as delivery of
a manually executed counterpart of this Agreement.
Section 9.17. Senior Indebtedness. The parties hereto agree that the
Indebtedness under this Agreement shall be "Senior Indebtedness" as that term is
defined in the Indenture.
Section 9.18. Joint and Several Obligations. The Obligations of GTLP and
Capital Corp. are joint and several.
Section 9.19. Pledge to Federal Reserve. Each Lender may at any time
pledge all or any portion of its rights under the Financing Documents including
any portion of its Note to any of the 12 Federal Reserve Banks organized under
Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or
enforcement thereof shall release such Lender from its obligations under any of
the Financing Documents.
Section 9.20. Replacement Documents. Upon receipt of an affidavit of an
officer of the Agent or any Lender as to the loss, theft, destruction or
mutilation of this Agreement, any Note or any other Financing Document which is
not of public record, and, in the case of any such loss, theft, destruction or
mutilation, upon cancellation of such Agreement, Note or other Financing
Document, the Borrower will issue, in lieu thereof, a replacement Agreement,
Note or other Financing Document in the same principal amount thereof and
otherwise of like tenor.
{TC "Section 9.21. Guaranty of Capital Corp."}Section 9.21. Guaranty of
Capital Corp. Capital Corp. hereby guarantees to the Lenders and the Agent the
full and punctual payment when due (whether at maturity, by acceleration or
otherwise) and the performance of all of the Obligations. This guaranty is an
absolute, unconditional and continuing guaranty of the full and punctual payment
and performance of the Obligations and not of their collectibility only and is
in no way conditioned upon any requirement that the Lenders and/or the Agent
first attempt to collect any of the Obligations from the Borrower or resort to
any security or other means of obtaining their payment. Should the Borrower
default in the payment or performance of any of the Obligations, or in the event
that the Borrower or any one or more of the guarantors of the Obligations shall
(a) apply for or consent to the appointment of a receiver, trustee or liquidator
of its or any of its or their property, (b) admit in writing its or their
inability to pay or fail generally to pay its or their debts as they mature, (c)
make a general assignment for the benefit of creditors, (d) be adjudicated a
bankrupt or (e) file a voluntary petition in bankruptcy or a petition or an
answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debts, dissolution or liquidation statute, or an answer
admitting the material allegations of a petition filed against it or any of them
in a proceeding under any such law, the obligations of Capital Corp. hereunder
shall become immediately due and payable to the Lenders and the Agent, without
demand or notice of any nature, all of which are expressly waived by Capital
Corp. Payments by Capital Corp. hereunder may be required by the Agent on any
number of occasions.
Signatures Appear on Next Page
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument by their respective officers thereunto duly
authorized, as of the date first above written.
In the presence of: GALAXY TELECOM, L.P.
_________________________ By:
General Partner
_________________________ By:
Name:
Title:
In the presence of: GALAXY TELECOM CAPITAL CORP.
_________________________ By:
Name:
Title:
In the presence of: FLEET NATIONAL BANK, as Agent and
as a Lender
_________________________ By:
Jeffrey J. McLaughlin
Senior Vice President
In the presence of: CITIZENS BANKOF MASSACHUSETTS (as
assignee of State Street Bank and Trust
Company)
_________________________ By:
Diane I. Rooney, Senior Vice President
Address: 100 Summer Street, 13th Floor
Boston, Massachusetts 02110
Attn: Diane I. Rooney
Tel: 617-422-8422
Fax: 617-422-8542
In the presence of: UNION BANK OF CALIFORNIA, N.A.
_________________________ By:
Bryan Petermann, Vice President
Address: 445 South Figueroa Street
16th Floor
Los Angeles, CA 90071
Attn: Bryan Petermann
Tel: 213-236-5813
Fax: 213-236-5747
In the presence of: BANK ONE, NA (as successor to The First
National Bank of Chicago)
_________________________ By:
Lori J. Thomas, Vice President
Address: 1 Bank One Plaza
Mail Suite: IL1-0363
Chicago, Illinois 60670
Attn: Lori Thomas
Tel: 312-732-2003
Fax: 312-732-8587