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 June 30, 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 JUNE 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................................................19
Signatures .............................................................20
Exhibit Index .............................................................21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 2,996,736 $ 2,213,777
Subscriber receivables, net of allowance
for doubtful accounts of $150,299 and
$116,572, respectively 4,373,849 4,334,563
Systems and equipment, net 99,455,465 104,197,674
Intangible assets, net 37,173,154 38,260,678
Prepaids and other 1,901,117 2,735,940
------------- -------------
Total assets $ 145,900,321 $ 151,742,632
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 15,928,149 $ 14,854,052
Subscriber deposits and deferred revenue 4,017,754 4,078,407
Long-term debt and other obligations 147,394,609 152,445,620
------------- -------------
Total liabilities 167,340,512 171,378,079
------------- -------------
Commitments and contingencies (Note 7)
Partners' deficit:
General partners (21,440,191) (19,635,447)
Limited partners -- --
------------- -------------
Total partners' deficit (21,440,191) (19,635,447)
------------- -------------
Total liabilities and partners' deficit $ 145,900,321 $ 151,742,632
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
-------------------------------- ------------------- ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 14,516,917 $ 17,471,933 $ 29,086,470 $ 34,803,001
------------ ------------ ------------ ------------
Operating expenses:
Systems operations 6,911,118 8,207,353 13,584,884 16,195,030
Selling, general and administrative 1,405,397 1,967,392 2,905,979 4,185,955
Management fee to affiliate 568,400 785,904 1,223,077 1,564,122
Depreciation and amortization 5,088,515 6,145,303 10,312,791 12,347,246
------------ ------------ ------------ ------------
Total operating expenses 13,973,430 17,105,952 28,026,731 34,292,353
------------ ------------ ------------ ------------
Operating income 543,487 365,981 1,059,739 510,648
Interest expense (4,834,458) (5,343,330) (9,601,780) (10,547,793)
Gain (loss) on sale of assets 5,793,187 (1,523,507) 6,702,366 (254,840)
Interest income and other, net 15,938 (69,874) 34,931 (136,674)
------------ ------------ ------------ ------------
Net income (loss) $ 1,518,154 $ (6,570,730) $ (1,804,744) $(10,428,659)
============ ============ ============ ============
</TABLE>
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)
For the six months ended June 30,
---------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $(1,804,744) $(10,428,659)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 8,968,069 10,396,089
Amortization expense 1,344,722 1,951,157
Amortization included in interest expense 660,000 467,388
Provision for doubtful accounts receivable 388,567 631,584
(Gain) loss on sale of assets (6,702,366) 254,787
Changes in assets and liabilities:
Subscriber receivables (427,853) (351,797)
Prepaids and other 834,823 (196,028)
Accounts payable and accrued expenses 1,074,097 (2,433,620)
Subscriber deposits and deferred revenue (60,653) (172,187)
----------- ------------
Net cash provided by operating activities 4,274,662 118,714
----------- ------------
Cash flows from investing activities:
Acquisition of cable systems - net of trades -- (133,633)
Proceeds from sales of cable systems 9,201,558 12,609,509
Acquisition of capital assets (6,898,379) (4,801,432)
Other intangible assets (532,065) (374,172)
----------- ------------
Net cash provided by investing activities 1,771,114 7,300,272
----------- ------------
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) (13,650,000)
Net borrowings (payments) on other debt (616,011) 2,613,987
Payment of debt issue costs (181,806) (183,833)
----------- ------------
Net cash used in financing activities (5,262,817) (6,794,846)
----------- ------------
Net increase in cash and cash equivalents 782,959 624,140
Cash and cash equivalents, beginning of period 2,213,777 2,403,098
----------- ------------
Cash and cash equivalents, end of period $ 2,996,736 $ 3,027,238
=========== ============
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
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 six month periods ended June 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 six months ended June 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 $21.4 million at June 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
six month period ended June 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.
6
<PAGE>
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 six months ended June 30, 1999 and 1998 was
approximately $8.8 million and $10.5 million, respectively.
During the first six 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 six 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 $568,400 for the three months ended June 30, 1999 and $785,904 for the
three months ended June 30, 1998. Management fees totaled $1,223,077 for the six
months ended June 30, 1999 and $1,564,122 for the six months ended June 30,
1998.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
June 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 (375,000) (405,000)
Other 1,734,609 2,350,620
------------- -------------
Total $ 147,394,609 $ 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 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 Revolver 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, 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.
7. 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.
8
<PAGE>
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
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.
9
<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, 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.
10
<PAGE>
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 six
months ended June 30, 1999 and June 30, 1998. Amounts shown are in thousands.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
--------------------------------------- ---------------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 14,517 100.0% $ 17,472 100.0% $ 29,087 100.0% $ 34,803 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Systems operations 6,911 47.6% 8,207 47.0% 13,585 46.7% 16,195 46.5%
Selling, general and administrative 1,405 9.7% 1,967 11.2% 2,906 10.0% 4,186 12.0%
Management fees to affiliate 568 3.9% 786 4.5% 1,223 4.2% 1,564 4.5%
Depreciation and amortization 5,089 35.1% 6,146 35.2% 10,313 35.5% 12,347 35.5%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 13,973 96.3% 17,106 97.9% 28,027 96.4% 34,292 98.5%
-------- ----- -------- ----- -------- ----- -------- -----
Operating income 544 3.7% 366 2.1% 1,060 3.6% 511 1.5%
Interest expense (4,835) (33.3%) (5,343) (30.6%) (9,602) (33.0%) (10,548) (30.3%)
Gain (loss) on sale of assets 5,793 39.9% (1,523) (8.7%) 6,702 23.0% (255) (0.8%)
Other income (expense), net 16 0.1% (70) (0.4%) 35 0.1% (137) (0.4%)
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss) $ 1,518 10.5% $ (6,570) (37.6%) $ (1,805) (6.2%) $(10,429) (30.0%)
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth demographic information as of September 30,
1998, December 31, 1998, March 31, 1999 and June 30, 1999.
September 30, December 31, March 31, June 30,
1998 1998 1999 1999 (1)
------------- ------------ --------- --------
Homes Passed 259,012 228,861 227,620 225,226
Basic Subscribers 152,395 135,991 135,977 134,233
Basic Penetration 58.84% 59.42% 59.74% 59.60%
Revenue per Subscriber $ 35.62 $ 35.62 $ 36.52 $ 35.94
Premium Subscribers 72,185 63,152 61,870 61,133
Premium Penetration 47.37% 46.44% 45.50% 45.54%
(1) Includes the demographic information of the Alabama systems sold effective
June 25, 1999.
Galaxy generated revenues in the amount of $14,516,917 and $29,086,470 for
the three-month and six-month periods ended June 30, 1999, respectively. For the
three-month and six-month periods ended June 30, 1998, Galaxy generated revenues
in the amount of $17,471,933 and $34,803,001, 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. As a result,
average revenues per subscriber increased from $34.32 for the three months ended
June 30, 1998 to $35.94 for the three months ended June 30, 1999.
11
<PAGE>
For the three months ended June 30, 1999 and 1998, system operating
expenses, consisting of subscriber costs, technician costs and system
maintenance costs, were $6,911,118 and $8,207,353, respectively. As a percentage
of revenues, these expenses increased from 47.0% for the three months ended June
30, 1998 to 47.6% in the comparable period of 1999. For the six months ended
June 30, 1999 and 1998, system operating expenses were $13,584,884 and
$16,195,030, respectively, and, as a percentage of revenues, increased from
46.5% for the six months ended June 30, 1998 to 46.7% 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
$1,967,392 to $1,405,397 for the three months ended June 30, 1999, as compared
to the three months ended June 30, 1998. Selling, general and administrative
expenses decreased from $4,185,955 to $2,905,979 for the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. For the three-month
period ended June 30, these expenses decreased as a percentage of revenue from
11.2% in 1998 to 9.7% in 1999. For the six-month period ended June 30, these
expenses decreased from 12.0% in 1998 to 10.0% 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 June 30, 1999 and 1998, depreciation and
amortization expense was $5,088,515, or 35.1% of revenues, and $6,145,303, or
35.2% of revenues, respectively. For the six months ended June 30, 1999 and
1998, depreciation and amortization expense was $10,312,791, or 35.5% of
revenues, and $12,347,246, 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 June 30, 1999 and 1998, interest expense was
$4,834,458 and $5,343,330, respectively. For the six months ended June 30, 1999
and 1998, interest expense was $9,601,780 and $10,547,793, 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 six
months of 1999, Galaxy paid $13.7 million towards the principal of the Revolving
Credit Facility.
Gain (loss) on sale of assets went from a net loss on sale of $1,523,507
for the three months ended June 30, 1998, to a net gain on sale of $5,793,187
for the three months ended June 30, 1999. Gain (loss) on sale of assets went
from a net loss on sale of $254,840 for the six months ended June 30, 1998, to a
net gain on sale of $6,702,366 for the six months ended June 30, 1999.
Interest income and other, net, which includes interest income and other
expenses, reflected a net income of $15,938 for the three months ended June 30,
1999 and a net expense of $69,874 for the three months ended June 30, 1998. For
the six months ended June 30, 1999 interest income and other, net, reflected a
net income of $34,931, compared to a net expense of $136,674 for the six months
ended June 30, 1998. This was mainly due to a decrease of other expenses.
12
<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 $21.4 million at June 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 six month period ended June 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 June 30, 1999, Galaxy had $2,996,736 in cash and cash equivalents.
As of such date, total liabilities less long-term debt exceeded cash and cash
equivalents by $16,949,167. 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 $5,632,002,
or 38.8% of operating revenues, and $6,511,284, or 37.3% of operating revenues,
for the three months ended June 30, 1999 and 1998, respectively. Galaxy
generated operating cash flows of $11,372,530, or 39.1% of operating revenues,
and $12,857,894, or 37.0% of operating revenues, for the six months ended June
30, 1999 and 1998, respectively.
Galaxy had aggregate indebtedness of approximately $147.4 million (net of
unamortized discount of $375,000) as of June 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 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 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
<PAGE>
As of June 30, 1999, Galaxy had $99.5 million in systems and equipment
consisting of $93.7 million of cable television systems and $5.8 million of
vehicles, equipment, buildings and office equipment, all net of accumulated
depreciation. Galaxy had capital expenditures (exclusive of system acquisitions)
of $6.9 million for the six months ended June 30, 1999. For the six months ended
June 30, 1998, Galaxy had capital expenditures (exclusive of system
acquisitions) of $4.8 million. These capital expenditures were financed mainly
through the Revolving Credit Facility and cash flows from operations. During the
first six 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 $4,274,661 and
$118,714 for the six months ended June 30, 1999 and 1998, respectively, an
increase in net cash provided by operating activities of $4,155,947. This
increase is due to an increase in accounts payable and accrued expenses and a
decrease in prepaids and other during the periods.
Galaxy provided net cash in investing activities of $1,771,114 for the six
months ended June 30, 1999, and provided net cash by investing activities of
$7,300,272 for the six months ended June 30, 1998, a decrease in net cash
provided by investing activities of $5,529,158. This decrease is primarily due
to the purchase of the MCI cable television systems in 1999, offset by an
increase in cash provided by proceeds from sale of assets during the first six
months of 1999.
Galaxy used net cash in financing activities of $5,262,816 and $6,794,846
for the six months ended June 30, 1999 and 1998, respectively, a decrease in net
cash used in investing activities of $1,532,030. This decrease was mainly due to
less payments made under the Revolver during the first six 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.
14
<PAGE>
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.
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 90% September 1999
Deployment 80% 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 $2,200 in its Y2K
effort during the first six 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.
15
<PAGE>
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.
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.
16
<PAGE>
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.
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.
17
<PAGE>
Based on Galaxy's variable debt at June 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 June 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.
18
<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.
27. Financial Data Schedule
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
19
<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: August 12, 1999 /s/ J. Keith Davidson
--------------------------------------------
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- ----------------------------------
27 Financial Data Schedule
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<COMMON> 0
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