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 September 30, 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 Identification Number)
incorporation or organization)
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 SEPTEMBER 30, 1998
INDEX
PAGE
-------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Galaxy Telecom, L.P. ........................................3
Notes to Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................12
Item 3. Quantitative and qualitative disclosures
about market risk............................................20
PART II. Other Information...............................................21
Signatures .............................................................22
Exhibit Index .............................................................23
2
PART I. FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
------------- -------------
Cash and cash equivalents $ 1,628,576 $ 2,403,098
Subscriber receivables, net of allowance
for doubtful accounts of $119,639 and
$154,692, respectively 4,931,988 5,424,260
Systems and equipment, net 114,776,011 138,729,592
Intangible assets, net 46,869,918 57,193,102
Prepaids and other 2,199,138 3,297,573
------------- -------------
Total assets $ 170,405,631 $ 207,047,625
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued expenses $ 15,785,889 $ 17,152,286
Subscriber deposits and deferred revenue 4,641,112 5,434,097
Long-term debt and other obligations 163,544,472 179,250,312
------------- -------------
Total liabilities 183,971,473 201,836,695
------------- -------------
Commitments and contingencies
Partners' capital (deficit):
General partners (13,565,842) --
Limited partners -- 5,210,930
------------- -------------
Total partners' capital (deficit) (13,565,842) 5,210,930
------------- -------------
Total liabilities and partners' capital (deficit) $ 170,405,631 $ 207,047,625
============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
3
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
Revenues $ 16,852,423 $ 17,362,684 $ 51,655,423 $ 51,333,357
------------ ------------ ------------ ------------
Operating expenses:
Systems operations 7,925,228 8,069,528 24,120,258 23,420,184
Selling, general and administrative 2,069,006 2,189,666 6,254,961 5,980,386
Management fee to affiliate 761,759 781,321 2,325,880 2,310,119
Depreciation and amortization 6,010,057 6,198,209 18,357,303 18,473,534
------------ ------------ ------------ ------------
Total operating expenses 16,766,050 17,238,724 51,058,402 50,184,223
------------ ------------ ------------ ------------
Operating income 86,373 123,960 597,021 1,149,134
Interest expense (5,115,239) (5,285,888) (15,663,033) (15,635,671)
Gain (loss) on sale of assets (3,262,273) 48,489 (3,517,111) (93,955)
Interest income and other (56,973) (177,714) (193,649) (197,809)
------------ ------------ ------------ ------------
Net loss $ (8,348,112) $ (5,291,153) $(18,776,772) $(14,778,301)
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
4
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
--------------------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss $(18,776,772) $(14,778,301)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 15,501,517 15,394,589
Amortization expense 2,855,786 3,078,945
Amortization of debt issue costs 701,082 701,082
Provision for doubtful accounts receivable 928,393 1,496,115
Loss on sale of assets 3,517,111 93,954
Changes in assets and liabilities:
Subscriber receivables (436,121) (846,299)
Prepaids and other 1,098,435 (425,585)
Accounts payable and accrued expenses (1,366,397) 3,919,957
Subscriber deposits and deferred revenue (792,985) 259,780
------------ ------------
Net cash provided by operating activities 3,230,049 8,894,237
------------ ------------
Cash flows from investing activities:
Acquisition of cable systems (133,633) --
Capital expenditures (7,813,668) (13,620,486)
Proceeds from sale of assets 21,530,553 921,280
Other intangible assets (1,160,453) (343,189)
------------ ------------
Net cash provided by (used in) investing activities 12,422,799 (13,042,395)
------------ ------------
Cash flows from financing activities:
Borrowings under revolver 4,425,000 7,925,000
Payments on revolver (22,550,000) (801,377)
Borrowings on other debt 3,853,500 259,386
Payments on other debt (1,479,339) (63,004)
Debt issuance costs (676,531) --
------------ ------------
Net cash provided by (used in) financing activities (16,427,370) 7,320,005
------------ ------------
Net increase (decrease) in cash and cash equivalents (774,522) 3,171,847
Cash and cash equivalents, beginning of period 2,403,098 2,338,345
------------ ------------
Cash and cash equivalents, end of period $ 1,628,576 $ 5,510,192
============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
5
GALAXY TELECOM, L.P. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION 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 Article 10 of Regulation S-X 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 and nine month periods ended September 30, 1998 are not
necessarily indicative of the results to be expected for the entire 1998 fiscal
year. The accompanying consolidated financial statements should be read in
conjunction with Galaxy's Annual Report on Form 10-K/A for the year ended
December 31, 1997.
The following notes, insofar as they are applicable to the three months
and nine months ended September 30, 1998 and 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.
6
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000, for
the Partnership). SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
Management of the Partnership anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a significant
effect on the Partnership's results of operations or its financial position.
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 (Non-Cash Transactions)
During the first nine months of 1998, Galaxy traded four systems located
in and around Sheridan County, Nebraska, representing 853 subscribers, for one
system located in Jefferson County, Colorado representing approximately 800
subscribers.
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 $761,759 for the three months ended September 30, 1998
and $781,321 for the three months ended September 30, 1997. Management fees
totaled $2,325,880 for the nine months ended September 30, 1998 and $2,310,119
for the nine months ended September 30, 1997.
7
6. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, December 31,
1998 1997
------------ ------------
Revolving Credit Facility $41,100,000 $59,225,000
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (420,000) (465,000)
Other 2,864,472 490,312
------------ ------------
Total $163,544,472 $179,250,312
============ ============
In August 1998, Galaxy amended the Revolving Credit Facility (the
"Revolver"). The amendment allows the Partnership to borrow up to $55.9 million
until June 1999 when the outstanding balance converts to a term loan. Principal
payments are due in installments of 18 percent of the converted balance on
September 30, 1999, 4 percent of the converted balance on December 31, 1999 and
in subsequent quarterly installments escalating annually from 16 percent to 30
percent of the converted balance through December 2002. Net proceeds from any
system sale will be used to reduce the commitment available under the Revolver.
In April 1998, Galaxy borrowed approximately $3.0 million from a bank (the "Bank
Note"). The Bank Note carries interest at 8.25% for 3 years and is payable in
quarterly installments, the final installment to be paid in December 2000. The
Bank Note was used to finance the purchase of vehicles.
7. SALES, ACQUISITIONS AND TRADES
Galaxy believes its real opportunity lies in the development of its
properties in Nebraska, Kansas, Illinois, Kentucky and Mississippi (the "Core
Areas"). The Core Areas are considered such due to Galaxy's opportunity to be
the dominant operator in these areas and the ability to generate additional
revenue through its fiber network (see "Technology and Engineering" discussed
below). The properties that are not in the Core Areas are currently in the
process of being sold, traded or re-evaluated as being able to be converted to
Core Areas.
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, and recorded a gain on
sale of approximately $695,000. Galaxy used the proceeds from the Wyoming Sale
to pay down principal of the Revolver.
8
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 Revolver.
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 Revolver.
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, and recorded a loss on sale of
approximately $860,000.
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 systems located in and around
Sheridan County, Nebraska, representing 853 subscribers for one system located
in Jefferson County, Colorado, representing approximately 800 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 Revolver.
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 Revolver.
On June 30, 1998, Galaxy sold 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, and recorded a
loss on sale of approximately $196,000.
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, and recorded a loss on sale of approximately $1,300,000. Galaxy used
the proceeds from this sale to pay down principal of the Revolver.
9
On August 31, 1998, Galaxy sold nine cable television systems located in
Southwest Georgia, representing approximately 2,246 subscribers, for
approximately $2,760,000, or approximately $1,225 per subscriber, and recorded a
loss on sale of approximately $390,000. Galaxy used the proceeds from this sale
to pay down principal of the Revolver.
On August 31, 1998, Galaxy sold 23 cable television systems, 14 systems
located in Illinois and nine in Nebraska, representing approximately 3,450,
subscribers for approximately $2,758,000, or approximately $800 per subscriber,
and recorded a loss on sale of approximately $1,200,000. Galaxy used the
proceeds from this sale to pay down principal of the Revolver.
8. COMMITMENTS AND CONTINGENCIES
YEAR 2000
The year 2000 ("Y2K") issue concerns the inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000.
Many of Galaxy's systems are Y2K compliant. During 1998, Galaxy has put a
program in place designed to bring information systems and software into Y2K
compliance in time to minimize any significant detrimental effects on
operations. The program covers information systems infrastructure, financial and
administrative systems, process control and cable television systems. Our
program recognizes that date sensitive systems may fail at different points in
time depending on their function. Galaxy is utilizing internal personnel,
contract programmers and vendors to identify Y2K issues, modify code and test
the modifications. In some cases, non-compliant software and hardware will be
replaced. The steps Galaxy has taken in this program include (1) planning and
awareness, (2) identification of where failures may occur, (3) resolution
including repair, upgrade, etc. and (4) deployment of compliant systems. The
first two steps, planning and awareness and identification are largely
completed.
Galaxy classifies as critical those suppliers of products or services
consumed on an ongoing basis that, if interrupted, would materially disrupt
Galaxy's ability to conduct operations. Those suppliers include programming
suppliers and utility companies. Galaxy is conducting on site reviews of these
suppliers for purposes of assessing their Y2K plans and their progress toward
implementation.
10
Galaxy expects the total incremental cost of the Y2K issue to be
approximately $100,000. This estimated cost does not include any normal ongoing
costs for computer hardware or software that would be replaced even without the
presence of the Y2K issue. The majority of these costs are expected to be
incurred during 1999.
Galaxy will begin preparing contingency plans relating specifically to
identified Y2K risks, and cost estimates of these plans during the first half of
1999. Once developed, Y2K contingency plans and related cost estimates will be
continually refined as additional information becomes available.
Despite Galaxy's efforts in solving the Y2K issue, there can be no
assurance that partial or total systems interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon
Galaxy's business, financial condition, results of operations and business
prospects.
Litigation
The Partnership 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, results of operations or cash flows.
11
Item 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
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, and recorded a gain on
sale of approximately $695,000. Galaxy used the proceeds from the Wyoming Sale
to pay down principal of the Revolver.
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 Revolver.
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 Revolver.
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, and recorded a loss on sale of
approximately $860,000.
12
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 systems located in and around
Sheridan County, Nebraska, representing 853 subscribers for one system located
in Jefferson County, Colorado, representing approximately 800 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 Revolver.
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 Revolver.
On June 30, 1998, Galaxy sold 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, and recorded a
loss on sale of approximately $196,000.
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, and recorded a loss on sale of approximately $1,400,000. Galaxy used
the proceeds from this sale to pay down principal of the Revolver.
On August 31, 1998, Galaxy sold nine cable television systems located in
Southwest Georgia, representing approximately 2,246 subscribers, for
approximately $2,760,000, or approximately $1,225 per subscriber, and recorded a
loss on sale of approximately $390,000. Galaxy used the proceeds from this sale
to pay down principal of the Revolver.
On August 31, 1998, Galaxy sold 23 cable television systems, 14 systems
located in Illinois and nine in Nebraska, representing approximately 3,450,
subscribers for approximately $2,758,000, or approximately $800 per subscriber,
and recorded a loss on sale of approximately $1,200,000. Galaxy used the
proceeds from this sale to pay down principal of the Revolver.
13
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of selected
income statement items as a percentage of revenues for the three months and nine
months ended September 30, 1998 and September 30, 1997. Amounts shown are in
thousands.
For the three months ended September 30, For the nine months ended September 30,
--------------------------------------- ---------------------------------------
1998 1997 1998 1997
----------------- ------------------ ------------------ -----------------
Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- -----
Revenues $ 16,852 100.0% $ 17,362 100.0% $ 51,655 100.0% $ 51,333 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
System operations 7,925 47.0% 8,069 46.5% 24,120 46.7% 23,420 45.6%
Selling, general and administrative 2,069 12.3% 2,190 12.6% 6,255 12.1% 5,980
11.7%
Management fees to affiliate 762 4.5% 781 4.5% 2,326 4.5% 2,310 4.5%
Depreciation and amortization 6,010 35.7% 6,198 35.7% 18,357 35.5% 18,474 36.0%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 16,766 99.5% 17,238 99.3% 51,058 98.8% 50,184 97.8%
-------- ----- -------- ----- -------- ----- -------- -----
Operating income 86 0.5% 124 0.7% 597 1.2% 1,149 2.2%
Interest expense (5,115) (30.3%) (5,286) (30.5%) (15,663) (30.4%) (15,636) (30.4%)
Other income (expense) (3,319) (19.7%) (129) (0.7%) (3,711) (7.2%) (291) (0.6%)
-------- ----- -------- ----- -------- ----- -------- -----
Net loss $ (8,348) (49.5%) $ (5,291) (30.5%) $(18,777) (36.4%) $(14,778) (28.8%)
======== ===== ======== ===== ======== ===== ======== =====
The following table sets forth demographic information as of December 31,
1997, March 31, 1998, June 30, 1998 and September 30, 1998.
December 31, March 31, June 30, September 30,
1997(1) 1998(1) 1998 (1) 1998
-------- -------- -------- --------
Homes Passed 298,984 292,112 286,196 259,012
Basic Subscribers 177,296 170,967 168,386 152,395
Basic Penetration 59.30% 58.53% 58.84% 58.84%
Revenue per Subscriber $32.85 $33.79 $34.32 $35.62
Premium Subscribers 84,252 82,477 80,355 72,185
Premium Penetration 47.52% 48.24% 47.72% 47.37%
(1) Includes the demographic information of the Central Georgia systems sold
effective June 30, 1998.
Galaxy generated revenues in the amount of $16,852,423 and $51,655,423 for
the three-month and nine-month periods ended September 30, 1998, respectively.
For the three-month and nine-month periods ended September 30, 1997, Galaxy
generated revenues in the amount of $17,362,684 and $51,333,357, respectively.
Galaxy was able to realize additional revenue by increasing basic rates in
certain systems, offset by the sale of some systems as described above. As a
result, average revenues per subscriber increased from $32.85 for the three
months ended September 30, 1997, to $35.62 for the three months ended September
30, 1998.
14
For the three months ended September 30, 1998 and 1997, system operating
expenses, consisting of subscriber costs, technician costs and system
maintenance costs, were $7,925,228 and $8,069,528, respectively. As a percentage
of revenues, these expenses increased from 46.5% for the three months ended
September 30, 1997, to 47.0% in the comparable period of 1998. For the nine
months ended September 30, 1998 and 1997, system operating expenses were
$24,120,258 and $23,420,184, respectively, and, as a percentage of revenues,
increased from 45.6% for the nine months ended September 30, 1997, to 46.7% in
the comparable period of 1998. The increase in these expenses was primarily the
result of increased programming costs to Galaxy, offset by decreases primarily
in direct technician labor and bad debt expense.
Selling, general and administrative expenses, which include office rents
and maintenance, marketing costs and corporate expenses, decreased from
$2,189,666 to $2,069,006 for the three months ended September 30, 1998, as
compared to the three months ended September 30, 1997, and increased from
$5,980,386 to $6,254,961 for the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997. For the three-month period
ended September 30, these expenses decreased as a percentage of revenue from
12.6% in 1997, to 12.3% in 1998. This decrease was attributable to an effort to
control costs associated with local service and call center operations. For the
nine-month period ended September 30, these expenses increased from 11.7% in
1997, to 12.1% in 1998, due to a decrease in the amount of reimbursements from
programmers, primarily in the first quarter of 1998 as compared to the first
quarter of 1997.
For the three months ended September 30, 1998 and 1997, depreciation and
amortization expense was $6,010,057, or 35.7% of revenues, and $6,198,209, or
35.7% of revenues, respectively. For the nine months ended September 30, 1998
and 1997, depreciation and amortization expense was $18,357,303, or 35.5% of
revenues, and $18,473,534, or 36.0% of revenues, respectively. The slight
decrease in depreciation and amortization expense for the nine months ended
September 30, 1998, was attributable to the sale of cable television systems,
offset by an increase in fixed assets from purchases.
15
For the three months ended September 30, 1998 and 1997, interest expense
was $5,115,239 and $5,285,888, respectively. For the nine months ended September
30, 1998 and 1997, interest expense was $15,663,033 and $15,635,671,
respectively. During the first nine months of 1998, Galaxy paid $22.6 million
towards the principal of the Revolving Credit Facility, of which $14.8 million
was paid on or after June 30, 1998. For the three months ended September 30,
1998 and 1997, gain (loss) on sale of assets was a net loss of $3,262,273 and a
net gain of $48,489, respectively. For the nine months ended September 30, 1998
and 1997, gain (loss) on sale of assets was a net loss of $3,674,393 and a net
loss of $93,955, respectively. This increase in net loss on sale of assets is
due to the losses incurred on the sale of systems discussed above. For the three
months ended September 30, 1998 and 1997, other income (expense), which includes
interest income and other expenses, was a net expense of $56,973 and $177,714,
respectively. For the nine months ended September 30, 1998 and 1997, other
income (expense) was a net expense of $193,649 and $197,809, respectively. These
decreases in net expenses were mainly due to an increase in interest income.
The Partnership 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 the Partnership as specified in the
Partnership's limited partnership agreement.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, Galaxy had $1,628,576 in cash and cash
equivalents. As of such date, total liabilities less long-term debt exceeded
cash and cash equivalents and subscriber receivable, net of allowance for
doubtful accounts, by $13,866,437. Galaxy expects to fund this deficiency
through its operating cash flows, proceeds from system sales and the Revolver.
Galaxy generated earnings before interest expense, depreciation and
amortization expense and other extraordinary items of $6,096,430, or 36.2% of
operating revenues, and $6,322,169, or 36.4% of operating revenues, for the
three months ended September 30, 1998 and 1997, respectively, and $18,954,324,
or 36.7% of operating revenues, and $19,622,668, or 38.2% of operating revenues,
for the nine months ended September 30, 1998 and 1997, respectively.
Galaxy had aggregate long-term indebtedness of approximately $163.5
million (net of unamortized discount of $420,000) as of September 30, 1998,
representing $120 million of 12.375% Senior Subordinated Notes due in 2005 (the
"Notes"), $41.1 million of the Revolver and $2.8 million of other bank debt. The
Revolver, which has been periodically amended, with the latest amendment
occurring in August, 1998, allows the Partnership to borrow up to $55.9 million
until June 1999 when the outstanding balance converts to a term loan. Principal
payments are due in installments of 18 percent of the converted balance on
September 30, 1999, 4 percent of the converted balance on December 31, 1999 and
16
in subsequent quarterly installments escalating annually from 16 percent to 30
percent of the converted balance through December 2002. Net proceeds from any
system sale will be used to reduce the commitment available under the Revolver.
The Revolver requires Galaxy to maintain compliance with certain financial
ratios and other covenants. The financial covenants in the Revolver could limit
Galaxy's ability to borrow under the Revolver. Galaxy presently intends to
utilize the Revolver to fund capital expenditures, working capital and make
small acquisitions of additional cable systems.
As of September 30, 1998, Galaxy had $114.8 million in systems and
equipment consisting of $104.4 million of cable television systems and $10.4
million of vehicles, equipment, buildings and office equipment, all net of
accumulated depreciation. Galaxy had capital expenditures of $7.8 million for
the nine months ended September 30, 1998. For the nine months ended September
30, 1997, Galaxy had capital expenditures of $13.6 million. These capital
expenditures were financed mainly through the Revolver and cash flows from
operations. During 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 provided net cash by operating activities of $3,230,049 and
$8,894,237 for the nine months ended September 30, 1998 and 1997, respectively,
a decrease in net cash provided by operating activities of $5,664,188. This
reduction is mainly due to the sale of cable systems during 1998.
Galaxy provided net cash by investing activities of $12,422,799 for the
nine months ended September 30, 1998, and used net cash by investing activities
of $13,042,395 for the nine months ended September 30, 1997, an increase in net
cash provided by investing activities of $25,465,194. This increase is mainly
due to an increase in proceeds from sale of assets and a reduction in capital
expenditures.
Galaxy used net cash by financing activities of $16,427,370 for the nine
months ended September 30, 1998, and provided net cash by financing activities
of $7,320,005 for the nine months ended September 30, 1997, a decrease in net
cash provided by investing activities of $23,747,375. This decrease was mainly
due to the payment of principal.
Historically, 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, borrowings under the
Revolver, proceeds from sales of non-core assets and its access to additional
capital in the public and private debt markets.
17
For information on the impact of recent accounting pronouncements see Note
2 to the consolidated financial statements appearing elsewhere herein.
YEAR 2000
The year 2000 ("Y2K") issue concerns the inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000.
Many of Galaxy's systems are Y2K compliant. During 1998, Galaxy has put a
program in place designed to bring information systems and software into Y2K
compliance in time to minimize any significant detrimental effects on
operations. The program covers information systems infrastructure, financial and
administrative systems, process control and cable television systems. Our
program recognizes that date sensitive systems may fail at different points in
time depending on their function. Galaxy is utilizing internal personnel,
contract programmers and vendors to identify Y2K issues, modify code and test
the modifications. In some cases, non-compliant software and hardware will be
replaced. The steps Galaxy has taken in this program include (1) planning and
awareness, (2) identification of where failures may occur, (3) resolution
including repair, upgrade, etc. and (4) deployment of compliant systems. The
first two steps, planning and awareness and identification are largely
completed.
Galaxy classifies as critical those suppliers of products or services
consumed on an ongoing basis that, if interrupted, would materially disrupt
Galaxy's ability to conduct operations. Those suppliers include programming
suppliers and utility companies. Galaxy is conducting on site reviews of these
suppliers for purposes of assessing their Y2K plans and their progress toward
implementation.
Galaxy expects the total incremental cost of the Y2K issue to be
approximately $100,000. This estimated cost does not include any normal ongoing
costs for computer hardware or software that would be replaced even without the
presence of the Y2K issue. The majority of these costs are expected to be
incurred during 1999.
Galaxy will begin preparing contingency plans relating specifically to
identified Y2K risks, and cost estimates of these plans during the first half of
1999. Once developed, Y2K contingency plans and related cost estimates will be
continually refined as additional information becomes available.
18
Despite Galaxy's efforts in solving the Y2K issue, there can be no
assurance that partial or total systems interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon
Galaxy's business, financial condition, results of operations and business
prospects.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this 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 within existing systems
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
could result in significant volatility in the market value of the Senior
Subordinated Notes.
19
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.
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
20
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.
10. Amendment No. 5 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 Ban
27. Financial Data Schedule
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the
quarter ended September 30, 1998.
21
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: November 16, 1998 /s/ J. Keith Davidson
----------------------------------
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
22
EXHIBIT INDEX
Exhibit Number Description
- - -------------- ----------------------------------
10 Amendment No. 5 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.
27 Financial Data Schedule
23