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, 1999
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
<PAGE>
GALAXY TELECOM, L.P.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
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.................9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk..........................................15
PART II. Other Information...............................................16
Signatures .............................................................18
Exhibit Index............................................................19
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,107,988 $ 2,213,777
Subscriber receivables, net of allowance for doubtful accounts of
$59,237 and $116,572, respectively 4,368,261 4,334,563
Systems and equipment, net 102,570,480 104,197,674
Intangible assets, net 37,407,965 38,260,678
Prepaids and other 2,123,652 2,735,940
------------- -------------
Total assets $ 151,578,346 $ 151,742,632
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 18,051,769 $ 14,854,052
Subscriber deposits and deferred revenue 4,178,194 4,078,407
Long-term debt and other obligations 152,306,729 152,445,620
------------- -------------
Total liabilities 174,536,692 171,378,079
------------- -------------
Commitments and contingencies (Note 8)
Partners' deficit:
General partners (22,958,346) (19,635,447)
Limited partners -- --
------------- -------------
Total partners' deficit (22,958,346) (19,635,447)
------------- -------------
Total liabilities and partners' deficit $ 151,578,346 $ 151,742,632
============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended March 31,
----------------------------
1999 1998
------------ ------------
Revenues $ 14,569,553 $ 17,331,068
------------ ------------
Operating expenses:
Systems operations 6,673,766 7,987,677
Selling, general and administrative 1,500,582 2,218,563
Management fee to affiliate 654,677 778,218
Depreciation and amortization 5,224,276 6,201,943
------------ ------------
Total operating expenses 14,053,301 17,186,401
------------ ------------
Operating income 516,252 144,667
Interest expense (4,767,322) (5,204,463)
Gain on sale of assets 909,179 1,268,667
Interest income and other, net 18,992 (66,800)
------------ ------------
Net loss $ (3,322,899) $ (3,857,929)
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,322,899) $(3,857,929)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 4,539,932 5,233,285
Amortization expense 684,344 968,658
Amortization included in interest expense 329,999 233,691
Provision for doubtful accounts receivable 106,636 214,635
Gain on sale of assets (909,179) (1,268,667)
Changes in assets and liabilities:
Subscriber receivables (140,334) 460,145
Prepaids and other 612,288 21,334
Accounts payable and accrued expenses 3,197,717 1,078,579
Subscriber deposits and deferred revenue 99,787 5,545
----------- -----------
Net cash provided by operating activities 5,198,291 3,089,276
----------- -----------
Cash flows from investing activities:
Acquisition of cable systems - net of trades -- (133,633)
Proceeds from sales of cable systems 1,102,446 5,848,189
Acquisition of capital assets (3,032,291) (2,918,268)
Other intangible assets (115,376) (231,082)
----------- -----------
Net cash provided by (used in) investing activities (2,045,221) 2,565,206
----------- -----------
Cash flows from financing activities:
Payments under term debt and revolver -- (5,100,000)
Payments under other debt (153,890) (21,610)
Payment of debt issue costs (104,969) (54,667)
----------- -----------
Net cash used in financing activities (258,859) (5,176,277)
----------- -----------
Net increase in cash and cash equivalents 2,894,211 478,205
Cash and cash equivalents, beginning of period 2,213,777 2,403,098
----------- -----------
Cash and cash equivalents, end of period $ 5,107,988 $ 2,881,303
=========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
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 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 months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire 1999 fiscal year. It is suggested that the
accompanying consolidated financial statements 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
ended March 31, 1999 and March 31, 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 $23.0 million at March 31, 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 1998, the Partnership
received net proceeds from sales of its non-core cable television systems of
$38.6 million, which was primarily used to pay down the amounts due under its
revolving line of credit. Management intends to seek new debt and/or equity
financing and reduce its borrowings under its revolving line of credit through
the sales of non-core systems in order for the Partnership to meet its business
plan and sustain operations. However, there is no assurance that the Partnership
will be able to implement its strategy and raise new capital.
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 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.
6
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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. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the three months ended March 31, 1999 and 1998 was
approximately $395,000 and $1.5 million, respectively.
During the first quarter of 1998, Galaxy traded four systems located in
and around Sheridan County, Nebraska for one system around Boulder, Colorado.
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 are
calculated at 4.5% of gross revenues as defined in the management agreement.
Management fees totaled $654,677 for the three months ended March 31, 1999 and
$778,218 for the three months ended March 31, 1998.
5. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1999 1998
------------- -------------
Revolving Credit Facility $ 30,500,000 $ 30,500,000
Senior Subordinated Notes 120,000,000 120,000,000
Unamortized discount (390,000) (405,000)
Other 2,196,729 2,350,620
------------- -------------
Total $ 152,306,729 $ 152,445,620
============= =============
In March, 1999, 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. The first
principal payment is due on December 31, 1999, in an amount equal to 22% of the
converted balance, and in subsequent quarterly installments escalating annually
from 22 percent to 30 percent of the converted balance through December 2002.
The Revolver will require Galaxy to maintain compliance with certain financial
ratios and other covenants, such as total debt to annualized cash flow, cash
flow to interest expense, capital expense limits and basic subscribers to total
long term debt. The financial covenants in the Revolving Credit Facility may
significantly limit Galaxy's ability to borrow under the Revolver.
7
<PAGE>
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. Galaxy used the proceeds from this sale to pay down principal of the
revolving note.
7. SUBSEQUENT EVENTS
On May 1, 1999, Galaxy traded 18 cable television systems, representing
approximately 7,600 subscribers for 7 cable television systems, representing
approximately 7,200 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.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
Galaxy is subject to various legal and administrative proceedings in the
ordinary course of business. Management believes the outcome of any such
proceedings will not have a material adverse effect on the Partnership's
consolidated financial position, or future results of operations or cash flows.
In addition, 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
affect on the Partnership's consolidated financial position, or future results
of operations or cash flows. Management has not recorded any liability in the
consolidated financial statements that may arise from the adjudication of this
lawsuit.
8
<PAGE>
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. 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 7,600 subscribers for 7 cable television systems, representing
approximately 7,200 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.
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, 1998. Amounts shown are in thousands.
March 31, 1999 March 31, 1998
--------------- ---------------
Amount % Amount %
-------- ----- -------- -----
Revenues $ 14,570 100.0% $ 17,331 100.0%
-------- ----- -------- -----
Operating expenses:
Systems operations 6,674 45.8% 7,988 46.1%
Selling, general and administrative 1,501 10.3% 2,218 12.8%
Management fees to affiliate 655 4.5% 778 4.5%
Depreciation and amortization 5,224 35.9% 6,202 35.8%
Total operating expenses 14,054 96.5% 17,186 99.2%
-------- ----- -------- -----
Operating income 516 3.5% 145 0.8%
Interest expense (4,767) (32.7%) (5,204) (30.0%)
Gain on sale of assets 909 6.2% 1,268 7.3%
Other income (expense), net 19 0.1% (67) (0.4%)
-------- ----- -------- -----
Net loss $ (3,323) (22.9%) $ (3,858) (22.3%)
======== ===== ======== =====
9
<PAGE>
The following table sets forth demographic information as of June 30,
1998, September 30, 1998, December 31, 1998 and March 31, 1999.
June 30, September 30, December 31, March 31,
1998 (1) 1998 1998 1999
----------- ----------- ----------- -----------
Homes Passed 286,196 259,012 228,861 227,620
Basic Subscribers 168,386 152,395 135,991 135,977
Basic Penetration 58.84% 58.84% 59.42% 59.74%
Revenue per Subscriber $ 34.32 $ 35.62 $ 35.62 $ 36.52
Premium Subscribers 80,355 72,185 63,152 61,870
Premium Penetration 47.72% 47.37% 46.44% 45.50%
(1)Includes the demographic information of the Central Georgia systems sold
effective June 30, 1998.
Galaxy generated revenues in the amount of $14,569,553 and $17,331,068 for
the three month periods ended March 31, 1999 and 1998, respectively. This
decrease was a result of the sale of systems during 1998. Galaxy was able to
increase basic rates in some systems and, as a result, average revenue per
subscriber increased from $33.79 at March 31, 1998 to $36.52 at March 31, 1999.
For the three months ended March 31, 1999 and 1998 system operating
expenses consisting of subscriber costs, technician costs and system maintenance
costs were $6,673,766, or 45.8% of revenue, and $7,987,677, or 46.1% of revenue,
respectively. The decrease in these expenses is attributable to the sale of
cable television systems during 1998.
Selling, general and administrative expenses, which includes office rents
and maintenance, marketing costs and corporate expenses, decreased to $1,500,582
from $2,218,563 for the three months ended March 31, 1999 and 1998,
respectively. For the three month period ended March 31, these expenses
decreased as a percentage of revenue from 12.8% in 1998 to 10.3% in 1999. This
decrease is attributable to the sale of cable television systems during 1998.
For the three months ended March 31, 1999 and 1998, depreciation and
amortization expense was $5,224,276, or 35.9% of revenues, and $6,201,943, or
35.8% of revenues, respectively. The decrease in depreciation and amortization
expense is attributable to the sale of cable television systems during 1998.
For the three months ended March 31, 1999 and 1998, interest expense was
$4,767,322 and $5,204,463, 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, net of borrowings. For the three months ended March
31, 1999 and 1998, gain on sale of assets was $909,179 and $1,268,667,
respectively. Other income (expense) went from a net expense of $66,800 for the
three months ended March 31, 1998, to a net income of $18,992 for the three
months ended March 31, 1999. This increase is mainly due to a reduction of other
expenses.
10
<PAGE>
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 $23.0 million at March 31, 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 1998, the Partnership
received net proceeds from sales of its non-core cable television systems of
$38.6 million, which was primarily used to pay down the amounts due under its
revolving line of credit. Management intends to seek new debt and/or equity
financing and reduce its borrowings under its revolving line of credit through
the sales of non-core systems in order for the Partnership to meet its business
plan and sustain operations. However, there is no assurance that the Partnership
will be able to implement its strategy and raise new capital.
As of March 31, 1999, Galaxy had $5,107,988 in cash and cash equivalents.
As of such date, total current liabilities (other than notes payable) exceeded
cash and cash equivalents by $17,121,975. 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, and other extraordinary items, of $5,740,528, or 39.4% of
operating revenues, and $6,346,610, or 36.6% of operating revenues, for the
three months ended March 31, 1999 and 1998, respectively.
Galaxy had aggregate indebtedness of approximately $152.3 million (net of
unamortized discount of $390,000) as of March 31, 1999, representing $120
million of 12.375% Senior Subordinated Notes due in 2005 (the "Notes"), $30.5
million outstanding debt under the Revolver and $2.2 million of other bank debt.
The Revolver, which has been periodically amended, with the latest amendment
occurring in March 1999, allows the Partnership to borrow up to $55.9 million
until June 1999 when the outstanding balance converts to a term loan. The first
principal payment is due on December 31, 1999, in an amount equal to 22% of the
converted balance, and in subsequent quarterly installments escalating annually
from 22 percent to 30 percent of the converted balance through December 2002.
Net proceeds from any system sale will be used to reduce the commitment
available under the Revolver. The Revolver will require Galaxy to maintain
11
<PAGE>
compliance with certain financial ratios and other covenants, such as total debt
to annualized cash flow, cash flow to interest expense, capital expense limits
and basic subscribers to total long term debt. The financial covenants in the
Revolving Credit Facility may significantly limit Galaxy's ability to borrow
under the Revolver.
As of March 31, 1999, Galaxy had $102.6 million in systems and equipment
consisting of $96.9 million of cable television systems and $5.7 million of
vehicles, equipment, buildings and office equipment, all net of accumulated
depreciation. Galaxy had capital expenditures (exclusive of system acquisitions)
of $3.0 million for the three months ended March 31, 1999. For the three months
ended March 31, 1998, Galaxy had capital expenditures (exclusive of system
acquisitions) of $2.9 million. These capital expenditures were financed mainly
through the Revolving Credit Facility and cash flows from operations. During the
first three 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 provided net cash from operating activities of $5,198,291 and
$3,089,276 for the three months ended March 31, 1999 and 1998, respectively, an
increase in net cash provided by operating activities of $2,109,015. This
increase is mainly due to an increase in accounts payable and accrued expenses
during the periods.
Galaxy used net cash in investing activities of $2,045,221 for the three
months ended March 31, 1999, and provided net cash by investing activities of
$2,565,206 for the three months ended March 31, 1998, a decrease in net cash
provided by investing activities of $4,610,427. This decrease is mainly due to a
decrease in proceeds from sale of assets during the first three months of 1999.
Galaxy used net cash in financing activities of $258,859 and $5,176,277
for the three months ended March 31, 1999 and 1998, respectively, a decrease in
net cash used in investing activities of $4,917,418. This decrease was mainly
due to the significant payments made under the Revolver during the first three
months of 1998.
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, proceeds from sales of non-core assets and its access to additional
capital in the public and private debt markets.
12
<PAGE>
YEAR 2000
The year 2000 ("Y2K") issue concerns the inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000. This section is a Year 2000 Readiness Disclosure.
Galaxy has put a program in place designed to bring information systems
and software into Y2K compliance in time to minimize any significant detrimental
effects on operations. The program covers information systems infrastructure,
financial and administrative systems, process control and cable television
systems. Galaxy's program recognizes that date sensitive systems may fail at
different points in time depending on their function. Galaxy is utilizing
internal personnel, contract programmers and vendors to identify Y2K issues,
modify code and test the modifications. In most cases, these third party
programmers and vendors have verified their Y2K compliance with Galaxy. In some
cases, non-compliant software and hardware will be replaced. The steps Galaxy
has taken in this program include (1) planning and awareness, (2) identification
of where failures may occur, (3) resolution including repair, upgrade, etc. and
(4) deployment of compliant systems. The first two steps, planning and awareness
and identification are largely completed.
The following table illustrates Galaxy's present status of completion of
each step of its Y2K program.
Percentage Expected
completed Completion
Phase within each step Date
Planning and awareness 100% --
Identification 95% September 1999
Resolution 85% September 1999
Deployment 70% September 1999
The completion dates set forth above are based on Galaxy's current
expectations. However, due to the uncertainties inherent in the Y2K issue, no
assurances can be given as to whether such projects will be completed on such
dates. Galaxy expects the total incremental cost of the Y2K issue to be
approximately $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 $2,200 in its Y2K
effort during the first quarter of 1999. The occurrence of the remainder of
these costs is expected during 1999, and the 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.
13
<PAGE>
The failure to correct a material Y2K problem could result in an
interruption or failure of certain important business operations. Management
believes that its Y2K program will significantly reduce Galaxy's risks
associated with the changeover to the Y2K and has implemented certain
contingency plans to minimize the effect of any potential Y2K related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that
Galaxy has deemed critical in regard to customer service, business operations,
financial impact or safety.
Customer service networks and/or automated voice response systems failure
could prevent access to customer account information, hamper installation
scheduling and disable the processing of pay-per-view requests. Galaxy plans to
have its customer service representatives answer telephone calls from customers
in the event of outages and expects to retrieve needed customer information
manually from the billing service provider.
Galaxy is dependent on third-party vendors. For example, if a cable
programmer encounters Y2K problems that impede its ability to deliver its
programming, Galaxy will be unable to provide that programming to its cable
customers. Galaxy has attempted to ascertain their state of Y2K readiness
through questionnaires, interviews, industry group participation and other
available means. Galaxy has not received any response from third-party vendors
that indicate a problem with the Y2K issue. There can be no assurance, however,
that such a problem will not occur.
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 Y2K
to allow for data recovery. In addition, Galaxy continues to monitor the Y2K
readiness of Convergys.
Advertising revenue could be adversely affected by the failure of certain
equipment which could impede or prevent the insertion of advertising spots in
Galaxy's programming. Galaxy anticipates that it can minimize such effect by
manually resetting the dates each day until the equipment is repaired.
In the event that the local public utility cannot supply power, Galaxy
will not be able to supply power to most of its cable headends and office sites.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by Galaxy due to the numerous uncertainties and
variables associated with such scenarios.
Despite Galaxy's efforts in solving the Y2K issue, there can be no
assurance that partial or total systems interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon
Galaxy's business, financial condition, and results of operations and business
prospects.
14
<PAGE>
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. These factors include the receipt of regulatory approvals, the success
of Galaxy's implementation of digital technology, subscriber equipment
availability, tower space availability, 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, (vii) numerous
competitive factors, including alternative methods of distributing and receiving
video transmissions and (viii) the ability of Galaxy to successfully implement
its strategy of focusing on core service areas.
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.
15
<PAGE>
Item 3. -- QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
Galaxy is not directly exposed to any foreign exchange rates or commodity
price fluctuations.
Galaxy is exposed to changes in interest rates due to its variable rate of
interest (LIBOR plus 3.25%) on its revolving line of credit.
Based on Galaxy's variable debt at March 31, 1999, a 1% increase in market
interest rates would increase yearly interest expense and decrease income by
approximately $328,000. This amount was calculated using the variable interest
rate in effect at March 31, 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.
16
<PAGE>
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. 6 to the Revolving Credit Facility Agreement among
Galaxy, Fleet Bank, as agent, and certain other lenders, dated
March 31, 1999.
27. Financial Data Schedule
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the quarter
ended March 31, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GALAXY TELECOM, L.P.
BY: Galaxy Telecom, Inc.
as General Partner
Date: May 11, 1999 /s/ J. Keith Davidson
-------------------------------------
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- ----------------------------------
10 Amendment No. 6 to the Amended and Restated Loan Agreement
dated March 31, 1999 by and among Galaxy, Galaxy Telecom
Capital Corp., Fleet National Bank, State Street Bank and
Trust Company, The First National Bank of Chicago and Union
Bank.
27 Financial Data Schedule
19
AMENDMENT NO. 6
This Amendment No. 6 entered into as of March 31, 1999 (this "Amendment")
by and among GALAXY TELECOM, L.P., ("GTLP"), GALAXY TELECOM CAPITAL CORP.
("Capital Corp."; and together with GTLP, the "Borrower"), the financial
institutions party to the Amended and Restated Loan Agreement referred to below
(the "Lenders"), and FLEET NATIONAL BANK ("Fleet"), a national banking
association organized under the laws of the United States of America, as agent
for itself and the other Lenders (the "Agent"). Capitalized terms used but not
otherwise expressly defined herein shall have the meanings assigned thereto in
the Loan Agreement (as such term is defined below).
PRELIMINARY STATEMENTS:
WHEREAS, the Borrower, the Lenders, and the Agent have entered into an
Amended and Restated Loan Agreement dated as of September 28, 1995, as
amended by Amendment No. 1 dated as of October 21,1996, Amendment No. 2 dated
as of March 28, 1997, Amendment No. 3 dated as of November 14, 1997,
Amendment No. 4 dated as of March 27, 1998 and Amendment No. 5 dated as of
August 31, 1998 (as amended, the "Loan Agreement"). Capitalized terms used
herein and not otherwise defined shall have the meanings specified in the
Loan Agreement;
WHEREAS, the Borrower has requested that the Lenders amend certain
provisions of the Loan Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendment. The parties hereto agree that the Loan Agreement is
hereby amended as follows:
(a) Total Indebtedness and Senior Indebtedness Coverage. Effective
as of the date hereof, Section 5.1.10 of the Loan Agreement is
hereby amended by replacing the required ratio for the period
from April 1, 1999 through June 30, 1999 and the period from
July 1, 1999 through December 31, 1999 with the period and
ratios set forth below opposite such period:
Total Senior
Indebtedness
Indebtedness
Ratio Ratio
April 1, 1999 through 6.75:1.00
2.00:1.00
December 31, 1999
(b) Total Indebtedness per Subscriber. Effective as of the date
hereof, clause (B) of Section 5.1.11 of the Loan Agreement is
hereby amended to read as follows:
"(B) $1,100:1.00 for the period from September 30, 1998
through December 31, 1998 and $1,175 for the period from January 1,
1999 through December 31, 1999,"
(c) Interest Coverage. Effective as of the date hereof, Section
5.1.12 of the Loan Agreement is hereby amended by deleting the
period "July 1, 1999 through December 31, 1999" and the ratio
for such period and by substituting the following in place
thereof:
July 1, 1999 through 1.25:1.00
December 31, 1999
2. Minimum Ratio of Operating Cash Flow to Total Debt Service. Effective
as of the date hereof, it is agreed that, to the extent that the Borrower makes
principal payments on the Loans in accordance with Sections 2.1.2(b) or
2.1.7.2(b) of the Loan Agreement during 1999, such principal payments shall not
be included in calculating Total Debt Service for 1999.
3. Principal Amortization. Notwithstanding anything to the contrary set
forth in the Loan Agreement, (i) the net cash proceeds (after reasonable
expenses) of all System Asset Sales occurring from the date hereof until the
close of business on December 31, 1999, and (ii) the net cash proceeds (after
reasonable expenses) received by the Borrower, GTI and/or LLC from any equity
investment in, or Indebtedness for Borrowed Money incurred by, any of the
Borrower, GTI and/or LLC, shall be applied in the following manner: (A) with
respect to any such System Asset Sale, equity investment or Indebtedness
incurrence occurring prior to the Conversion Date, such net cash proceeds shall
be paid to the Agent and held by the Agent in escrow until July 1, 1999 and then
applied on July 1, 1999 to prepay the principal amortization of the Loans due on
September 30, 1999 and December 31, 1999, (B) with respect to any such System
Asset Sale, equity investment or Indebtedness incurrence occurring on or after
July 1, 1999, such net cash proceeds shall be immediately paid to the Agent and
immediately applied to prepay the principal amortization of the Loans due on
September 30, 1999 and December 31, 1999 and (C) with respect to any such System
Asset Sale, equity investment or Indebtedness incurrence the net cash proceeds
of which are in excess of the amounts to be applied as provided in (A) and (B)
above, such excess net cash proceeds shall be applied to prepay the Loans in the
inverse order of maturity and with respect to any such prepayment of the Loans
occurring prior to the Conversion Date, the Commitment shall be permanently
reduced by a like amount. Any amendment to or waiver of the terms of the
foregoing sentence shall be deemed to require the consent of all of the Lenders
as provided for under Section 9.5(vii) of the Loan Agreement. In addition to the
foregoing, in the event that the Loans have not been repaid in full and the
Commitment terminated on or before June 30, 1999, it shall constitute an Event
of Default under the Loan Agreement if the amount of Management Fees actually
paid by the Borrower to the Manager during any fiscal quarter, commencing with
the fiscal quarter commencing on July 1, 1999, shall exceed an amount equal 3%
of the Gross Revenues of the Borrower (other than from the sale or other
disposition of a capital asset) during such fiscal quarter.
4. Amendment Fee. The Borrower agrees to pay an amendment fee for the Pro
Rata account of each Lender in an aggregate amount equal to $139,750. The Pro
Rata portion of such fee due to State Street Bank and Trust Company shall be
paid directly to State Street Bank and Trust Company on the date hereof. The
remaining portion of such fee shall be paid to the Agent for the Pro Rata
accounts of the other Lenders on June 1, 1999, provided that if the Loans are
refinanced and the Commitment is terminated on or before June 1, 1999, the
payment of such remaining portion shall be deemed to be waived.
5. Conditions. This Amendment is subject to the provisions of Section 9.5
of the Loan Agreement, and shall become effective, as of the date first above
written, upon the satisfaction of the following conditions precedent:
(a)receipt by the Agent of counterparts of this Amendment
executed by the Borrowers and the Lenders, and counterparts
of the Consent appended hereto executed by the Guarantors;
(b)such other items or documents as may be requested by the
Agent or the Lenders.
6. Miscellaneous. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts. All parts of the
Loan Agreement not affected by this Amendment are hereby ratified and affirmed
in all respects, provided that if any provision of the Loan Agreement shall
conflict or be inconsistent with this Amendment, the terms of this Amendment
shall supersede and prevail. Upon and after the date of this Amendment all
references to the Loan Agreement in that document, or in any Financing Document,
shall mean the Loan Agreement as amended by this Amendment. Except as expressly
provided in this Amendment, the execution and delivery of this Amendment does
not and will not amend, modify or supplement any provision of, or constitute a
consent to or a waiver of any noncompliance with the provisions of the Loan
Agreement, and, except as specifically provided in this Amendment, the Loan
Agreement shall remain in full force and effect.
7. Representations and Warranties. The Borrower hereby represents and
warrants to the Lenders and the Agent that the representations and warranties
set forth in Section 4 of the Loan Agreement are true and correct in all
material respects as of the date hereof. The Borrower hereby agrees to indemnify
and hold the Lenders and the Agent harmless from and against any claim, cost,
damage (including without limitation consequential damages), expense (including
without limitation reasonable attorneys' fees and expenses), loss, liability, or
judgment now or hereafter arising as a result of any claim against the Borrower,
the Lenders and/or the Agent arising out of the transactions contemplated by
this Amendment. The provisions of this Section shall continue in effect and
shall survive (among other events) any termination of this Agreement,
foreclosure, a deed in lieu transaction, payment and satisfaction of the Note
and other obligations of the Borrower hereunder, and release of any collateral
for the Loans.
8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written, under seal.
BORROWERS:
GALAXY TELECOM, L.P.
By: Galaxy Telecom, Inc., its
general partner
By:____________________________
Name:
Title:
GALAXY TELECOM CAPITAL CORP.
By:_______________________
Name:
Title:
<PAGE>
LENDERS:
FLEET NATIONAL BANK, as Agent and
as a Lender
By:____________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
By:____________________________
Name:
Title:
UNION BANK
By:____________________________
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:____________________________
Name:
Title:
<PAGE>
CONSENT
Dated as of March 31, 1999
Each of GALAXY TELECOM , INC., as Guarantor under an Unlimited Guaranty
dated as of December 23, 1994 (as amended, the "General Partner Guaranty"), as
Grantor under a Security Agreement dated as of December 23, 1994, and as
Assignor under a Collateral Assignment of Contracts, Leases, Licenses,
Easements, Permits and Franchises, a Collateral Assignment of Easements, and a
Collateral Assignment and Pledge of Partnership Interest, each dated as of
December 23, 1994 (as amended, collectively, the "General Partner Security
Documents") , and GALAXY TELECOM INVESTMENTS, L.L.C., as Guarantor under an
Unlimited Guaranty dated as of December 23, 1994 (as amended, the "Investments
Guaranty"), as Grantor under a Security Agreement dated as of December 23, 1994,
and as Assignor under a Collateral Assignment and Pledge of Partnership Interest
dated as of December 23, 1994 (as amended, collectively, the "Investments
Security Documents"), hereby consents to the foregoing Amendment No. 6 to the
Loan Agreement, and hereby confirms and agrees that (i) the General Partner
Guaranty and the Investments Guaranty, and each of the General Partner Security
Documents and the Investments Security Documents is, and shall continue to be,
in full force and effect and is hereby ratified and confirmed in all respects
except that, upon the effectiveness of and on and after the date of Amendment
No. 6, each reference in such Guaranty to the Loan Agreement shall mean and be a
reference to the Loan Agreement as amended by Amendment No. 6, and (ii) each of
the General Partner Security Documents and the Investments Security Documents
and all of the collateral described therein do, and shall continue to, secure
the payment of all of the Obligations (as defined therein). LLC agrees to be
bound by and comply with the provisions of Section 3 of Amendment No. 6, to the
extent the same applies to LLC.
GALAXY TELECOM, INC.
By:_______________________________________
Name:
Title:
GALAXY TELECOM INVESTMENTS, L.L.C.
By:_______________________________________
Name:
Title:
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