UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 33-95298
GALAXY TELECOM, L.P._____
Exact name of Registrant as specified in its charter)
Delaware 43-1697125
-------------------------------- -------------------
(States or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1220 North Main, Sikeston, Missouri 63801
-------------------------------- -------------------
(Address of principal executive offices) (zip code)
Registrant telephone number, including area code: (573) 472-8200
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
previous 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
------------- ----------
GALAXY TELECOM, L.P.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PAGE
PART I. Financial Information
Item 1. Consolidated Financial Statements
Galaxy Telecom, L.P. .............................3
Notes to Consolidated Financial Statements.........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....10
PART II. Other Information...................................15
Signatures ..................................................16
Exhibit Index.................................................17
2
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
------------ -------------
Cash and cash equivalents $ 2,881,303 $ 2,403,098
Subscriber receivables, net of allowance
for doubtful accounts of $82,193 and
$154,692, respectively 4,749,480 5,424,260
Systems and equipment, net 133,675,214 138,729,592
Intangible assets, net 54,584,974 57,193,102
Prepaids and other 3,276,239 3,297,573
Total assets $199,167,210 $ 207,047,625
============ =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 18,230,865 $ 17,152,286
Subscriber deposits and deferred revenue 5,439,642 5,434,097
Long-term debt and other obligations 174,143,702 179,250,312
-------------- -------------
Total liabilities 197,814,209 201,836,695
-------------- -------------
Commitments and contingencies
Partners' Capital:
General partners - -
Limited partners 1,353,001 5,210,930
------------- ------------
Total partners' capital 1,353,001 5,210,930
------------- ------------
Total liabilities and partners' capital $ 199,167,210 $ 207,047,625
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
3
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended March 31,
---------------------------------
1998 1997
------------- -------------
Revenues $ 17,331,068 $ 16,665,838
------------- -------------
Operating expenses:
Systems operations 7,987,677 7,798,833
Selling, general and administrative 2,218,563 1,670,698
Management fee to affiliate 778,218 749,960
Depreciation and amortization 6,201,943 6,006,967
------------- -------------
Total operating expenses 17,186,401 16,226,458
------------- -------------
Operating income 144,667 439,380
Interest expense (5,204,463) (5,076,262)
Interest income and other 1,201,867 6,078
------------- -------------
Net loss $ (3,857,929) $ (4,630,804)
============= ==============
The accompanying notes are an integral part of the consolidated
financial statements.
4
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
Limited Partners
General ------------------------------------------------------
Partners Class B Class C Class D Class E Total Total
-------- -------- ------- ----------- --------- ------------ -----------
Balance at
January 1,
1998 - 744 309,634 4,751,689 148,863 5,210,930 5,210,930
Net loss
for period - (540) (229,239) (3,517,929) (110,221) (3,857,929) (3,857,929)
-------- -------- ------- ----------- --------- ------------ -----------
Balance at
March 31,
1998 $ - $ 204 $80,395 $1,233,760 $38,642 $1,353,001 $ 1,353,001
======== ======== ======== =========== ========= =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
5
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
------------------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $(3,857,929) $(4,630,804)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation expense 5,233,285 4,980,651
Amortization expense 968,658 1,026,316
Amortization of debt issue costs 233,693 233,693
Provision for doubtful accounts receivable 214,635 510,683
Gain on sale of assets (1,268,669) --
Changes in assets and liabilities:
Subscriber receivables 460,145 130,699
Prepaids and other 21,334 (632,577)
Accounts payable and accrued expense 1,078,579 3,512,588
Subscriber deposits and deferred revenues 5,545 317,523
----------- -----------
Net cash provided by operating activities 3,089,276 5,448,772
----------- -----------
Cash flows from investing activities:
Acquisition of cable systems (133,633) --
Proceeds from sale of assets 5,848,189 --
Capital expenditures (2,918,268) (4,351,961)
Other intangible assets (231,082) (407,805)
----------- -----------
Net cash provided by (used in)
investing activities 2,565,206 (4,759,766)
----------- -----------
Cash flows from financing activities:
Debt issuance costs (54,667) --
Borrowings under revolver -- 500,000
Payments on revolver (5,100,000) --
Payments on other debt (21,610) (22,833)
----------- -----------
Net cash provided by (used in)
financing activities (5,176,277) 477,167
----------- -----------
Net increase in cash 478,205 1,166,173
Cash and cash equivalents, beginning of period 2,403,098 2,338,345
----------- -----------
Cash and cash equivalents, end of period $ 2,881,303 $ 3,504,518
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
6
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
The attached unaudited interim consolidated financial statements of Galaxy
Telecom, L.P. and its subsidiary ("Galaxy" or the "Partnership") are presented
in accordance with the requirements of Form 10-Q and consequently do not include
all of the footnote disclosures required for audited financial statements by
generally accepted accounting principles. The results for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
the entire 1998 fiscal year. It is suggested that the accompanying consolidated
financial statements be read in conjunction with Galaxy's Annual Report on Form
10-K/A for the year ended December 31, 1997.
Galaxy Telecom Capital Corp. ("Capital Corp."), a Delaware corporation, was
formed July 26, 1995 and was funded August 1, 1995 as a wholly owned subsidiary
of Galaxy Telecom, L.P. Capital Corp. did not have any significant operations
for the three months ended March 31, 1998 or 1997.
The following notes, insofar as they are applicable to the three months
ended March 31, 1998 and March 31, 1997, are not audited. In management's
opinion, all adjustments, consisting of only normal recurring accruals
considered necessary for a fair presentation of such consolidated financial
statements are included.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those business
enterprises report information about operating segments in interim financial
statements issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for years beginning after
December 15, 1997.
Management does not believe the implementation of SFAS No. 131 will have a
material effect on its financial statements.
7
3. REPORTING COMPREHENSIVE INCOME
In 1998, Galaxy adopted SFAS No. 130 "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
loss was the same as net loss reported.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the three months ended March 31, 1998 was
approximately $1.5 million. Interest paid during the three months ended March
31, 1997 was approximately $2.1 million.
During the first quarter of 1998, Galaxy traded four systems located in and
around Sheridan County, Nebraska for one system around Boulder, Colorado.
5. RELATED PARTY TRANSACTIONS
Galaxy incurs management fees and expenses pursuant to the terms of a
management agreement with Galaxy Systems Management, Inc., an affiliate of a
general partner, under which it manages Galaxy's business. Management fees are
calculated at 4.5% of gross revenues as defined in the management agreement.
Management fees totaled $778,218 for the three months ended March 31, 1998 and
$749,960 for the three months ended March 31, 1997.
6. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1998 1997
------------ ------------
(Unaudited) (Unaudited)
Revolving Credit Facility $54,125,000 $59,225,000
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (450,000) (465,000)
Other 468,702 490,312
------------ ------------
Total $174,143,702 $179,250,312
============ ============
8
7. SALES, ACQUISITIONS AND TRADES
On January 15, 1998, Galaxy sold its cable television systems located in
Wyoming and Idaho (the "Wyoming Sale"), representing approximately 4,000
subscribers for $4.9 million or $1,225 per subscriber. Galaxy used the proceeds
from the Wyoming 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 250 subscribers for
approximately $190,000, or approximately $760 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. Galaxy used the proceeds from
this sale to pay down principal of the revolving note.
On March 31, 1998 Galaxy purchased five cable television systems located in
Brooks and Colquitt Counties in Georgia, representing approximately 300
subscribers from USA Cablevision for approximately $141,000, or approximately
$470 per subscriber.
On March 31, 1998, Galaxy traded four systems located in and around
Sheridan County, Nebraska representing 853 subscribers for one system owned by
High Country Cable located in Jefferson County, Colorado representing
approximately 800 subscribers.
8. PENDING DISPOSITION
On March 31, 1998 Galaxy signed an asset purchase agreement with Blackstone
Cable, L.L.C. to sell all of its cable television systems located in central
Georgia representing approximately 5,200 subscribers for approximately
$6,120,000, or approximately $1,177 per subscriber.
9. SUBSEQUENT EVENTS
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.
9
PART I. FINANCIAL INFORMATION
Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On January 15, 1998, Galaxy Telecom, L.P. and its subsidiary ("Galaxy" or
the "Partnership") sold its cable television systems located in Wyoming and
Idaho (the "Wyoming Sale"), representing approximately 4,000 subscribers for
$4.9 million or $1,225 per subscriber. Galaxy used the proceeds from the Wyoming
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 250 subscribers for
approximately $190,000, or approximately $760 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. Galaxy used the proceeds from
this sale to pay down principal of the revolving note.
On March 31, 1998 Galaxy purchased five cable television systems located in
Brooks and Colquitt Counties in Georgia, representing approximately 300
subscribers from USA Cablevision for approximately $141,000, or approximately
$470 per subscriber.
On March 31, 1998, Galaxy traded four systems located in and around
Sheridan County, Nebraska representing 853 subscribers for one system owned by
High Country Cable located in Jefferson County, Colorado representing
approximately 800 subscribers.
10
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of selected
income statement items as a percent of revenues for the three months ended March
31, 1998 and March 31, 1997. Amounts shown are in thousands.
March 31, 1998 March 31, 1997
---------------- ----------------
Amount %age Amount %age
-------- -------- --------- -------
Subscription service revenue $17,331 100.0% $16,666 100.0%
-------- -------- --------- -------
Operating expenses:
System operations 7,988 46.1% 7,799 46.8%
Selling, general and administrative 2,218 12.8% 1,671 10.0%
Management fees 778 4.5% 750 4.5%
Depreciation and amortization 6,202 35.8% 6,007 36.0%
------- ------- ------ ------
Total operating expenses 17,186 99.2% 16,227 97.4%
-------- ------- ------ ------
Operating income (loss) 145 0.8% 439 2.6%
Interest expense (5,204) (30.0%) (5,076) (30.4%)
Other income (expense) 1,201 6.9% 6 0.0%
-------- ------- ------ ------
Net loss $(3,858) (22.3%) $(4,631) (27.8%)
======== ======= ======== =======
The following table sets forth demographic information as of June 30, 1997,
September 30, 1997, December 31, 1997 and March 31, 1998. Information prior to
these dates are not comparable.
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
------- ------ ------- -------
Homes Passed 283,948 289,531 298,984 292,112
Basic Subscribers 177,708 177,057 177,296 170,967
Basic Penetration 62.58% 60.81% 59.30% 58.53%
Revenue per Subscriber $32.82 $32.88 $32.85 $33.79
Premium Subscribers 84,854 84,322 84,252 82,477
Premium Penetration 47.75% 47.89% 47.52% 48.24%
Galaxy generated revenues in the amount of $17,331,068 and $16,665,838 for
the three month periods ended March 31, 1998 and March 31, 1997, respectively.
Galaxy was able to realize additional revenue by increasing basic and premium
rates in certain systems during 1997 and during the first quarter of 1998,
therefore average revenue per subscriber increased from $32.06 at March 31, 1997
to $33.79 at March 31, 1998.
For the three months ended March 31, 1998 and March 31, 1997 system
operating expenses consisting of subscriber costs, technician costs and system
maintenance costs were $7,987,677, or 46.1% of revenue, and $7,798,833, or 46.8%
of revenue, respectively. The $188,844 increase in these expenses are a result
of an increase in programming fees charged to Galaxy offset partially by a
reduction in costs due to a decrease in the number of subscribers.
11
Selling, general and administrative expenses, which includes office rents
and maintenance, marketing costs and corporate expenses, increased from
$1,670,698 to $2,218,563 for the three months ended March 31, 1997 and March 31,
1998, respectively. For the three month period ended March 31, these expenses
increased as a percentage of revenue from 10.0% in 1997 to 12.8% in 1998. This
increase is attributable to an increase in regional administrative expenses in
an effort to provide quality customer service within existing systems and an
increase in marketing expenses due to a reduction in the amount reimbursed from
programmers.
For the three months ended March 31, 1998 and March 31, 1997, depreciation
and amortization expense was $6,201,943, or 35.8% of revenues, and $6,006,967,
or 36.0% of revenues, respectively. The increase in depreciation and
amortization expense is attributable to Galaxy utilizing a fixed asset computer
program to more accurately calculate these expenses.
For the three months ended March 31, 1998 and March 31, 1997, interest
expense was $5,204,463 and $5,076,262, respectively. The increase of $128,201
was a result of additional borrowings. Other income increased from $6,078 for
the three months ended March 31, 1997, to $1,201,867 for the three months ended
March 31, 1998, respectively. This increase is mainly due to a gain on sale of
assets during the first quarter of 1998 of $1,268,669.
Galaxy 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 partners of Galaxy as specified in Galaxy's
limited partnership agreement.
LIQUIDITY AND CAPITAL RESOURCES:
As of March 31, 1998, Galaxy had $2,881,303 in cash and cash equivalents.
As of such date, total current liabilities (other than notes payable) exceeded
cash and cash equivalents by $20,789,204. Galaxy expects to fund this deficiency
through its operating cash flows and the Revolving Credit Facility.
Due to the results of operations discussed above, Galaxy generated
operating cash flows, defined as earnings before interest, depreciation and
amortization expense, of $7,548,477, or 43.6% of operating revenues and
$6,452,425, or 38.7% of operating revenues for the three months ended March 31,
1998 and 1997, respectively.
12
Galaxy had aggregate indebtedness of approximately $174.1 million as of
March 31, 1998, representing $120 million of 12.375% Senior Subordinated Notes
due in 2005 (the "Notes") and $54.1 million of bank debt. The Revolving Credit
Facility has been periodically amended, with the latest amendment occurring in
December 1997 which allows the Partnership to borrow up to $63 million until
December 1998 when the outstanding balance converts to a term loan payable in
quarterly installments escalating annually from 6 percent to 30 percent of the
converted balance through December 2002. The Revolving Credit Facility requires
Galaxy to maintain compliance with certain financial ratios and other covenants.
The financial covenants in the Revolving Credit Facility may limit Galaxy's
ability to borrow under the Revolving Credit Facility. Galaxy presently intends
to utilize the Revolving Credit Facility to fund capital expenditures, repay the
term loan and acquire additional cable systems.
As of March 31, 1998, Galaxy had $133.6 million in systems and equipment
consisting of $125.5 million of cable television systems and $8.1 million of
vehicles, equipment, buildings and office equipment, all net of accumulated
depreciation. Galaxy had capital expenditures (exclusive of system acquisitions)
of $2.9 million for the three months ended March 31, 1998. For the three months
ended March 31, 1997, Galaxy had capital expenditures (exclusive of system
acquisitions) of $4.3 million. These capital expenditures were financed mainly
through the Revolving Credit Facility and cash flows from operations. During the
first three months of 1998, Galaxy's capital expenditures were primarily used to
add channels, eliminate headends by interconnecting adjacent systems with
fiber-optic cable, and construct wide-area networks for distance learning and
data services.
Galaxy's cash flows have been sufficient to meet its debt service, working
capital and capital expenditure requirements. Galaxy expects that it will be
able to meet its short-term and long-term requirements for debt service, working
capital and capital expenditures and to fund future cable system acquisitions
through its operating cash flows and borrowings under the Revolving Credit
Facility, and its access to additional capital in the public and private debt
markets.
13
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the Form 10-Q relating to Galaxy's operating
results, and plans and objectives of management for future operations, including
plans or objectives relating to Galaxy's products and services, constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results of Galaxy may differ materially
from those in the forward looking statements and may be affected by a number of
factors including the receipt of regulatory approvals, the success of Galaxy's
implementation of digital technology, subscriber equipment availability, tower
space availability, and the absence of interference, as well as other factors
contained herein and in Galaxy's securities filings.
Galaxy's future revenues and profitability are difficult to predict due to
a variety of risks and uncertainties, including (i) business conditions and
growth in Galaxy's existing markets, (ii) the successful launch of systems and
technologies in new and existing markets, (iii) Galaxy's existing indebtedness
and the need for additional financing to fund subscriber growth and system and
technological development, (iv) government regulation, including Federal
Communications Commission regulations, (v) Galaxy's dependence on channel
leases, (vi) the successful integration of future acquisitions and (vii)
numerous competitive factors, including alternative methods of distributing and
receiving video transmissions.
Galaxy expects to continue its subscriber growth and launch additional
systems. Moderate increases in revenues and subscribers are anticipated in 1998;
however, the rate of increase cannot be estimated with precision or certainty.
Galaxy believes that general and administrative expenses and depreciation and
amortization expense will continue to increase to support overall growth.
Because of the foregoing uncertainties affecting Galaxy's future operating
results, past performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical results or trends as
determinative of Galaxy's future performance. In addition, Galaxy's
participation in a developing industry employing rapidly changing technology
will result in significant volatility in the market value of the Senior
Subordinated Notes.
In addition to the matters noted above, certain other statements made in
this Form 10-Q 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-Q are
cautioned not to place undue reliance on the forward looking statements made in
this Form 10-Q or in Galaxy's other securities filings.
For information on the impact of recent accounting pronouncements, see Note
2 to the consolidated financial statements, appearing elsewhere herein.
14
PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are included or
incorporated by reference below.
27. Financial Data Schedule
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the quarter
ended March 31, 1998.
15
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
Date: May 15, 1998 __________________________________
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
16
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
17