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, 1999
OROR
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 SEPTEMBER 30, 1999
INDEX
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Galaxy Telecom, L.P. and Subsidiary ...........................3
Notes to Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................10
Item 3. Quantitative and qualitative disclosures
about market risk............................................17
PART II. Other Information................................................18
Signatures .............................................................19
Exhibit Index .............................................................20
2
PART I. FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 6,538,779 $ 2,213,777
Subscriber receivables, net of allowance for doubtful accounts of
$108,277 and $116,572, respectively 4,414,619 4,334,563
Systems and equipment, net 97,695,491 104,197,674
Intangible assets, net 36,728,202 38,260,678
Prepaids and other 782,480 2,735,940
------------- -------------
Total assets $ 146,159,571 $ 151,742,632
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 20,257,832 $ 14,854,052
Subscriber deposits and deferred revenue 3,875,774 4,078,407
Long-term debt and other obligations 147,366,819 152,445,620
------------- -------------
Total liabilities 171,500,425 171,378,079
Commitments and contingencies (Note 7)
Partners' deficit:
General partners (25,340,854) (19,635,447)
Limited partners -- --
Total partners' deficit (25,340,854) (19,635,447)
------------- -------------
Total liabilities and partners' deficit $ 146,159,571 $ 151,742,632
============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
3
GALAXY TELECOM, L.P. AND SUDSIDIARY 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,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues $ 14,183,681 $ 16,852,423 $ 43,270,181 $ 51,655,423
------------ ------------ ------------ ------------
Operating expenses:
Systems operations 6,793,725 7,925,228 20,378,609 24,120,258
Selling, general and administrative 1,490,154 2,069,006 4,396,163 6,254,961
Management fee to affiliate 420,693 761,759 1,643,770 2,325,880
Depreciation and amortization 4,772,917 6,010,057 15,085,708 18,357,303
------------ ------------ ------------ ------------
Total operating expenses 13,477,489 16,766,050 41,504,250 51,058,402
------------ ------------ ------------ ------------
Operating income 706,192 86,373 1,765,931 597,021
Interest expense (4,603,575) (5,115,239) (14,205,355) (15,663,033)
Gain (loss) on sale of assets (43,934) (3,262,273) 6,658,432 (3,517,111)
Interest income and other, net 40,654 (56,973) 75,585 (193,649)
------------ ------------ ------------ ------------
Net loss $ (3,900,663) $ (8,348,112) $ (5,705,407) $(18,776,772)
============ ============ ============ ============
<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,
---------------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $ (5,705,407) $(18,776,772)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 13,137,080 15,501,517
Amortization expense 1,948,628 2,855,786
Amortization included in interest expense 990,000 701,082
Provision for doubtful accounts receivable 713,763 928,393
(Gain) loss on sale of assets (6,658,432) 3,517,111
Changes in assets and liabilities:
Subscriber receivables (793,819) (436,121)
Prepaids and other 1,953,460 1,098,435
Accounts payable and accrued expenses 5,403,780 (1,366,397)
Subscriber deposits and deferred revenue (202,633) (792,985)
------------ ------------
Net cash provided by operating activities 10,786,420 3,230,049
------------ ------------
Cash flows from investing activities:
Acquisition of cable systems - net of trades -- (133,633)
Proceeds from sales of cable systems 9,191,149 21,530,553
Acquisition of capital assets (9,579,037) (7,813,668)
Other intangible assets (544,860) (1,160,453)
------------ ------------
Net cash provided by (used in) investing activities (932,748) 12,422,799
------------ ------------
Cash flows from financing activities:
Borrowings under term debt and revolver 3,000,000 4,425,000
Payments under term debt and revolver (7,465,000) (22,550,000)
Borrowings on other debt 77,430 3,853,500
Payments on other debt (736,231) (1,479,339)
Payment of debt issue costs (404,869) (676,531)
------------ ------------
Net cash used in financing activities (5,528,670) (16,427,370)
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,325,002 (774,522)
Cash and cash equivalents, beginning of period 2,213,777 2,403,098
------------ ------------
Cash and cash equivalents, end of period $ 6,538,779 $ 1,628,576
============ ============
<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, 1999 are not
necessarily indicative of the results to be expected for the entire 1999 fiscal
year. The accompanying interim consolidated financial statements should be read
in conjunction with Galaxy's Annual Report on Form 10-K for the year ended
December 31, 1998.
The following notes, insofar as they are applicable to the three months
and nine months ended September 30, 1999 and 1998, 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.
The Partnership has incurred losses each year since its inception and has
a Partnership deficit of $25.3 million at September 30, 1999. During 1998, the
Partnership began implementation of a strategy whereby it would sell its cable
television systems in its non-core regions and focus on improving and acquiring
cable television systems in its core regions, which are primarily located in
Illinois, Kansas, Kentucky, Mississippi and Nebraska. In fiscal 1998 and for the
nine month period ended September 30, 1999, the Partnership received net
proceeds from sales of its non-core cable television systems of $38.6 million
and $9.2 million, respectively. These proceeds were primarily used to pay down
the amounts due under its revolving line of credit. Management intends to seek
new debt and/or equity financing and reduce its borrowings under its revolving
line of credit through the sales of non-core systems in order for the
Partnership to meet its business plan and sustain operations. However, there is
no assurance that the Partnership will be able to implement its strategy and
raise new capital.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (January 1, 2001, 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.
6
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the nine months ended September 30, 1999 and 1998 was
approximately $9.5 million and $11.2 million, respectively.
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.
During the first nine months of 1999, Galaxy traded 18 cable television
systems located primarily in Colorado, Iowa and South Dakota, representing
approximately 7,500 subscribers for seven cable television systems located
primarily in Mississippi, representing approximately 7,100 subscribers .
4. 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
totaled $420,692 for the three months ended September 30, 1999 and $761,759 for
the three months ended September 30, 1998. Management fees totaled $2,325,880
for the nine months ended September 30, 1999 and $1,643,770 for the nine months
ended September 30, 1998.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, December 31,
1999 1998
------------- -------------
Revolving Credit Facility $ 26,035,000 $ 30,500,000
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (360,000) (405,000)
Other 1,691,819 2,350,620
------------- -------------
Total $ 147,366,819 $ 152,445,620
============= =============
In March 1999, Galaxy amended the Revolving Credit Facility ("the
Revolver"). The amendment allowed the Partnership to borrow up to $55.9 million
until June 1999 when the outstanding balance converted to a term loan. The first
principal payment is due on March 31, 2000, in an amount equal to 5.5% of the
converted balance, and in subsequent quarterly installments escalating annually
from 22 percent to 30 percent of the converted balance through December 2002.
The Revolver will require Galaxy to maintain compliance with certain financial
ratios and other covenants, such as total debt to annualized cash flow, cash
flow to interest expense, capital expense limits and basic subscribers to total
long term debt. The financial covenants in the Revolver may significantly limit
Galaxy's ability to borrow under the Revolver.
7
The required principal payments on Galaxy's long-term debt and other
obligations at September 30, 1999, assuming no additional borrowings, are as
follows:
Remaining principal payments due in 1999 $ 113,451
Remaining principal payments due in 2000 8,124,131
Remaining principal payments due in 2001 9,534,237
Remaining principal payments due in 2002 9,955,000
Remaining principal payments due in 2003 -
Remaining principal payments due thereafter 120,000,000
-----------
$ 147,726,819
===========
6. SALES, ACQUISITIONS 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 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 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
$5.8 million, resulting in Galaxy recording a gain on sale of approximately $3.5
million, net of expenses.
On June 23, 1999, Galaxy sold 24 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 $2.2 million. Galaxy used a majority of the proceeds from this
sale to pay down principal of the revolving note.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 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 the Partnership could have a material, adverse effect
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.
8
Galaxy is also 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.
8. SUBSEQUENT EVENT
On October 1, 1999, Galaxy sold 10 cable television systems, located
primarily in Missouri, representing approximately 1,165 subscribers for
approximately $1.36 million, or approximately $1,161 per subscriber. Galaxy used
a majority of the proceeds from this sale to pay down principal of the revolving
note.
9
Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
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 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 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
$5.8 million, resulting in Galaxy recording a gain on sale of approximately $3.5
million, net of expenses.
On June 23, 1999, Galaxy sold 24 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 $2.2 million. Galaxy used the proceeds from this sale to pay down
principal of the revolving note.
On October 1, 1999, Galaxy sold 10 cable television systems, located
primarily in Missouri, representing approximately 1,165 subscribers for
approximately $1.36 million, or approximately $1,161 per subscriber. Galaxy used
a majority of the proceeds from this sale to pay down principal of the revolving
note.
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, 1999 and September 30, 1998. Amounts shown are in
thousands.
10
For the three months ended For the nine months ended
-------------------------------------- --------------------------------------
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
----------------- ------------------ ----------------- -----------------
Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- -----
Revenues $ 14,184 100.0% $ 16,852 100.0% $ 43,271 100.0% $ 51,655 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Systems operations 6,794 47.9% 7,925 47.0% 20,379 47.1% 24,120 46.7%
Selling, general and administrative 1,490 10.5% 2,069 12.3% 4,396 10.2% 6,255 12.1%
Management fees to affiliate 421 3.0% 762 4.5% 1,644 3.8% 2,326 4.5%
Depreciation and amortization 4,773 33.7% 6,011 35.7% 15,086 34.9% 18,358 35.5%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 13,478 95.0% 16,767 99.5% 41,505 96.0% 51,059 98.8%
-------- ----- -------- ----- -------- ----- -------- -----
Operating income 706 5.0% 85 0.5% 1,766 4.1% 596 1.2%
Interest expense (4,604) (32.5%) (5,115) (30.4%) (14,205) (32.8%) (15,663) (30.3%)
Gain (loss) on sale of assets (44) (0.3%) (3,261) (19.4%) 6,658 15.4% (3,516) (6.8%)
Other income (expense), net 41 0.3% (57) (0.3%) 76 0.2% (194) (0.4%)
-------- ----- -------- ----- -------- ----- -------- -----
Net loss $ (3,901) (27.5%) $ (8,348) (49.5%) $ (5,705) (13.2%) $(18,777) (36.4%)
======== ===== ======== ===== ======== ===== ======== =====
The following table sets forth demographic information as of December 31,
1998, March 31, 1999, June 30, 1999 and September 30, 1999.
December 31, March 31, June 30, September 30,
1998 1999 1999 (1) 1999
---- ---- -------- ----
Homes Passed 228,861 227,620 225,226 214,341
Basic Subscribers 135,991 135,977 134,233 126,861
Basic Penetration 59.42% 59.74% 59.60% 59.19%
Revenue per Subscriber $35.62 $36.52 $35.94 $36.93
Premium Subscribers 63,152 61,870 61,133 57,013
Premium Penetration 46.44% 45.50% 45.54% 44.94%
(1) Includes the demographic information of the Alabama systems sold effective
June 25, 1999.
11
Galaxy generated revenues in the amount of $14,183,681 and $43,270,181 for
the three-month and nine-month periods ended September 30, 1999, respectively.
For the three-month and nine-month periods ended September 30, 1998, Galaxy
generated revenues in the amount of $16,852,423 and $51,655,423, respectively.
The decrease in revenue from 1998 to 1999 was a result of a reduction in
subscribers due to the sale of non-core cable systems. Galaxy was able to
realize additional revenue per subscriber by increasing basic rates in certain
systems and from increasing data service revenue from its fiber optic network.
As a result, average revenues per subscriber increased from $35.62 for the three
months ended September 30, 1998 to $36.93 for the three months ended September
30, 1999.
For the three months ended September 30, 1999 and 1998, system operating
expenses, consisting of subscriber costs, technician costs and system
maintenance costs, were $6,793,725 and $7,925,228, respectively. As a percentage
of revenues, these expenses increased from 47.0% for the three months ended
September 30, 1998 to 47.9% in the comparable period of 1999. For the nine
months ended September 30, 1999 and 1998, system operating expenses were
$20,378,609 and $24,120,258, respectively, and, as a percentage of revenues,
increased from 46.7% for the nine months ended September 30, 1998 to 47.1% in
the comparable period of 1999. These expenses increased as a percentage of
revenue primarily due to increased programming costs to Galaxy.
Selling, general and administrative expenses, which include office rents
and maintenance, marketing costs and corporate expenses, decreased from
$2,069,006 to $1,490,154 for the three months ended September 30, 1999, as
compared to the three months ended September 30, 1998. Selling, general and
administrative expenses decreased from $6,254,961 to $4,396,163 for the nine
months ended September 30, 1999 as compared to the nine months ended September
30, 1998. For the three-month period ended September 30, these expenses
decreased as a percentage of revenue from 12.3% in 1998 to 10.5% in 1999. For
the nine-month period ended September 30, these expenses decreased from 12.1% in
1998 to 10.2% in 1999. The decrease in these expenses is attributable to a
decrease in marketing costs and a decrease in call center and other
administrative costs due to the sale of non-core cable systems.
For the three months ended September 30, 1999 and 1998, depreciation and
amortization expense was $4,772,917, or 33.7% of revenues, and $6,010,057, or
35.7% of revenues, respectively. For the nine months ended September 30, 1999
and 1998, depreciation and amortization expense was $15,085,708, or 34.9% of
revenues, and $18,357,303 or 35.5% of revenues, respectively. The decrease in
these expenses is attributable to the sale of cable television systems in the
Partnership's non-core areas.
For the three months ended September 30, 1999 and 1998, interest expense
was $4,603,575 and $5,115,239, respectively. For the nine months ended September
30, 1999 and 1998, interest expense was $14,205,355 and $15,663,033,
respectively. The decrease in interest expense is primarily due to a reduction
in the outstanding balance of the Revolving Credit Facility. During 1998, Galaxy
paid $28.7 million towards the principal of the Revolving Credit Facility.
During the first nine months of 1999, Galaxy paid $7.5 million towards the
principal of the Revolving Credit Facility.
Gain (loss) on sale of assets went from a net loss on sale of $3,262,273
for the three months ended September 30, 1998, to a net loss on sale of $43,934
for the three months ended September 30, 1999. Gain (loss) on sale of assets
went from a net loss on sale of $3,517,111 for the nine months ended September
30, 1998, to a net gain on sale of $6,658,432 for the nine months ended
September 30, 1999.
12
Interest income and other, net, which includes interest income and other
expenses, reflected a net income of $40,655 for the three months ended September
30, 1999 and a net expense of $56,973 for the three months ended September 30,
1998. For the nine months ended September 30, 1999 interest income and other,
net, reflected a net income of $75,586, compared to a net expense of $193,647
for the nine months ended September 30, 1998. This was mainly due to an increase
in interest income, offset by a decrease in other expenses.
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 the
Partnership agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership has incurred losses each year since its inception and has
a Partnership deficit of $25.3 million at September 30, 1999. During 1998, the
Partnership began implementation of a strategy whereby it would sell its cable
television systems in its non-core regions and focus on improving and acquiring
cable television systems in its core regions, which are primarily located in
Illinois, Kansas, Kentucky, Mississippi and Nebraska. . In fiscal 1998 and for
the nine month period ended September 30, 1999, the Partnership received net
proceeds from sales of its non-core cable television systems of $38.6 million
and $9.2 million, respectively. These proceeds were primarily used to pay down
the amounts due under its revolving line of credit. Management intends to seek
new debt and/or equity financing and reduce its borrowings under its revolving
line of credit through the sales of non-core systems in order for the
Partnership to meet its business plan and sustain operations. However, there is
no assurance that the Partnership will be able to implement its strategy and
raise new capital.
As of September 30, 1999, Galaxy had $6,538,779 in cash and cash
equivalents. As of such date, total liabilities less long-term debt exceeded
cash and cash equivalents by $17,594,827. Galaxy expects to fund this deficiency
through its operating cash flows, the Revolving Credit Facility and new equity
or debt financing.
Operating cash flows is defined as earnings before interest, depreciation
and amortization expense, and other extraordinary items. Due to the results of
operations discussed above, Galaxy generated operating cash flows of $5,479,109,
or 38.6% of operating revenues, and $6,096,430, or 36.0% of operating revenues,
for the three months ended September 30, 1999 and 1998, respectively. Galaxy
generated operating cash flows of $16,851,639, or 38.9% of operating revenues,
and $18,954,324, or 36.7% of operating revenues, for the nine months ended
September 30, 1999 and 1998, respectively.
Galaxy had aggregate indebtedness of approximately $147.4 million (net of
unamortized discount of $360,000) as of September 30, 1999, representing $120.0
million of 12.375% Senior Subordinated Notes due in 2005 (the "Notes"), $26.0
million outstanding debt under its Revolving Credit Facility and $1.7 million of
other bank debt. The Revolving Credit Facility, which has been periodically
amended, with the latest amendment occurring in March, 1999, allowed the
Partnership to borrow up to $55.9 million until June 1999 when the outstanding
balance converted to a term loan. The first principal payment is due on March
31, 2000, in an amount equal to 5.5% of the converted balance, and in subsequent
quarterly installments escalating annually from 22 percent to 30 percent of the
converted balance through December 2002. Net proceeds from any system sale will
be used to reduce the outstanding balance under the Revolving Credit Facility.
The Revolving Credit Facility will require Galaxy to maintain compliance with
certain financial ratios and other covenants, such as total debt to annualized
cash flow, cash flow to interest expense, capital expense limits and basic
subscribers to total long-term debt. The financial covenants in the Revolving
Credit Facility may significantly limit Galaxy's ability to borrow under it.
13
As of September 30, 1999, Galaxy had $97.7 million in systems and
equipment consisting of $92.1 million of cable television systems and $5.6
million of vehicles, equipment, buildings and office equipment, all net of
accumulated depreciation. Galaxy had capital expenditures (exclusive of system
acquisitions) of $9.6 million for the nine months ended September 30, 1999. For
the nine months ended September 30, 1998, Galaxy had capital expenditures
(exclusive of system acquisitions) of $7.8 million. These capital expenditures
were financed mainly through the Revolving Credit Facility and cash flows from
operations. During the first nine months of 1999, 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 net cash provided from operating activities was $10,786,420 and
$3,230,049 for the nine months ended September 30, 1999 and 1998, respectively,
an increase in net cash provided by operating activities of $7,556,371. This
increase is due to an increase in accounts payable and accrued expenses and a
decrease in prepaids and other during the periods.
Galaxy used net cash in investing activities of $932,748 for the nine
months ended September 30, 1999, and had net cash provided by investing
activities of $12,422,799 for the nine months ended September 30, 1998, a
decrease in net cash provided by investing activities of $13,355,547. This
decrease is primarily due to a decrease in cash provided by proceeds from sales
of cable systems during the first nine months of 1999 as compared to 1998.
Galaxy used net cash in financing activities of $5,528,670 and $16,427,370
for the nine months ended September 30, 1999 and 1998, respectively, a decrease
in net cash used in investing activities of $10,898,700. This decrease was
mainly due to less payments made under the Revolver during the first nine months
of 1999.
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, proceeds from sales of non-core assets and its
access to additional capital in the public and private debt markets.
YEAR 2000
The year 2000 ("Y2K") issue concerns the inability of information systems
to properly recognize and process date-sensitive information beginning January
1, 2000. This section is a Year 2000 Readiness Disclosure.
Galaxy has put a program in place designed to bring information systems
and software into Y2K compliance in time to minimize any significant detrimental
effects on operations. The program covers information systems infrastructure,
financial and administrative systems, process control and cable television
systems. Galaxy's program recognizes that date sensitive systems may fail at
different points in time depending on their function. Galaxy is utilizing
internal personnel, contract programmers and vendors to identify Y2K issues,
modify code and test the modifications. In most cases, these third party
programmers and vendors have verified their Y2K compliance with Galaxy. In some
cases, non-compliant software and hardware will be replaced. The steps Galaxy
has taken in this program include (1) planning and awareness, (2) identification
of where failures may occur, (3) resolution including repair and upgrade, and
(4) deployment of compliant systems. The first two steps, planning and awareness
and identification are largely completed.
14
The following table illustrates Galaxy's present status of completion of
each step of its Y2K program.
Percentage Expected
completed Completion
Phase within each step Date
- -------------------------- ------------------ --------------
Planning and awareness 100% --
Identification 100% --
Resolution 95% November 1999
Deployment 95% December 1999
The completion dates set forth above are based on Galaxy's current
expectations. However, due to the uncertainties inherent in the Y2K issue, no
assurances can be given as to whether such projects will be completed on such
dates. Galaxy expects the total incremental cost of the Y2K issue to be
approximately $75,000. 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. Galaxy has spent approximately $15,000 in its Y2K
effort during the first nine months of 1999. The occurrence of the remainder of
these costs is expected during 1999, and the payment of a majority of these
costs has been and will be provided from operations.
Galaxy has been focusing its efforts on identification, resolution and
deployment of its Y2K exposures and has not yet developed significant
contingency plans in the event it encounters unknown events. Galaxy intends to
examine its status periodically to determine whether such plans are necessary.
The failure to correct a material Y2K problem could result in an
interruption or failure of certain important business operations. Management
believes that its Y2K program will significantly reduce Galaxy's risks
associated with the changeover to the Y2K and is implementing certain
contingency plans to minimize the effect of any potential Y2K related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that
Galaxy has deemed critical in regard to customer service, business operations,
financial impact or safety.
Customer service networks and/or automated voice response systems failure
could prevent access to customer account information, hamper installation
scheduling and disable the processing of pay-per-view requests. Galaxy plans to
have its customer service representatives answer telephone calls from customers
in the event of outages and expects to retrieve needed customer information
manually from the billing service provider.
Galaxy is dependent on third-party vendors. For example, if a cable
programmer encounters Y2K problems that impede its ability to deliver its
programming, Galaxy will be unable to provide that programming to its cable
customers. Galaxy has attempted to ascertain its vendors' state of Y2K readiness
through questionnaires, interviews, industry group participation and other
available means. Galaxy has not received any response from third-party vendors
that indicate a problem with the Y2K issue. There can be no assurance, however,
that such a problem will not occur.
15
A failure of the services provided by Convergys, Galaxy's billing service
provider, could result in a loss of customer records which could disrupt the
ability to bill customers for a protracted period. Galaxy plans to prepare
electronic backup records of its customer billing information prior to the year
2000 to allow for data recovery. In addition, Galaxy continues to monitor the
Y2K readiness of Convergys.
Advertising revenue could be adversely affected by the failure of certain
equipment which could impede or prevent the insertion of advertising spots in
Galaxy's programming. Galaxy anticipates that it can minimize such effect by
manually resetting the dates each day until the equipment is repaired.
In the event that the local public utility cannot supply power, Galaxy
will not be able to supply power to most of its cable headends and office sites.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by Galaxy due to the numerous uncertainties and
variables associated with such scenarios.
Despite Galaxy's efforts in addressing the Y2K issue, there can be no
assurance that partial or total systems interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon
Galaxy's business, financial condition, and results of operations and business
prospects.
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 other 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 1999; however, the rate of increase cannot be estimated with
precision or certainty. Galaxy believes that general and administrative expenses
and depreciation and amortization expense will continue to increase to support
overall growth.
Because of the foregoing uncertainties affecting Galaxy's future operating
results, past performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical results or trends as
determinative of Galaxy's future performance. In addition, Galaxy's
participation in a developing industry employing rapidly changing technology
could result in significant volatility in the market value of the Senior
Subordinated Notes.
16
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.
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Galaxy is not directly exposed to any foreign exchange rates or commodity
price fluctuations.
Galaxy is exposed to changes in interest rates due to its variable rate of
interest (LIBOR plus 3.25%) on its revolving line of credit.
Based on Galaxy's variable debt at September 30, 1999, a 1% increase in
market interest rates would increase yearly interest expense and decrease income
by approximately $147,300. This amount was calculated using the variable
interest rate in effect at September 30, 1999, assuming a constant level of
variable-rate debt. This amount does not include the effects of other events
that could affect interest rates, such as a downturn in overall economic
activity, or actions management could take to lessen risk. This also does not
take into account any changes in Galaxy's financial structure that may result
from higher interest rates.
17
PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 6. Exhibits and Reports on Form 8-K
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 September 30, 1999.
18
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 12, 1999 /s/ J. Keith Davidson
-------------------------------------
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
19
EXHIBIT INDEX
Exhibit Number Description
- -------------- ----------------------------------
27 Financial Data Schedule