UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2000
OR
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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 SEPTEMBER 30, 2000
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................10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.............................................18
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)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
ASSETS
<S> <C> <C>
Cash in banks $ 3,239,746 $ 386,485
Subscriber receivables, net of allowance for doubtful accounts
of $103,840 and $87,449, respectively 4,154,947 4,431,946
Systems and equipment, net 87,764,452 94,568,015
Intangible assets, net 31,204,250 34,266,208
Prepaids and other 3,458,621 3,877,975
------------- -------------
Total assets $ 129,822,016 $ 137,530,629
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 21,310,976 $ 17,198,650
Subscriber deposits and deferred revenue 3,740,144 4,026,920
Long-term debt and other obligations 149,898,651 148,176,701
------------- -------------
Total liabilities 174,949,771 169,402,271
Partners' deficit:
General partners (45,127,755) (31,871,642)
Limited partners -- --
------------- -------------
Total partners' deficit (45,127,755) (31,871,642)
------------- -------------
Total liabilities and partners' deficit $ 129,822,016 $ 137,530,629
============= =============
<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)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 13,458,633 $ 14,183,681 $ 41,261,921 $ 43,270,181
------------ ------------ ------------ ------------
Operating expenses:
Systems operations 7,009,465 6,793,725 20,752,173 20,378,609
Selling, general and administrative 1,678,916 1,490,154 4,631,185 4,396,163
Management fee to affiliate 403,210 420,693 1,236,453 1,643,770
Depreciation and amortization 4,712,872 4,772,917 13,850,201 15,085,708
------------ ------------ ------------ ------------
Total operating expenses 13,804,463 13,477,489 40,470,012 41,504,250
------------ ------------ ------------ ------------
Operating income (345,830) 706,192 791,909 1,765,931
Interest expense (5,154,480) (4,603,575) (15,960,953) (14,205,355)
Gain (loss) on sale of assets (28,362) (43,934) 2,002,228 6,658,432
Interest income and other, net (14,201) 40,654 (89,297) 75,585
------------ ------------ ------------ ------------
Net loss $ (5,542,873) $ (3,900,663) $(13,256,113) $ (5,705,407)
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
4
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(13,256,113) $ (5,705,407)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 12,446,986 13,137,080
Amortization expense 1,403,215 1,948,628
Amortization included in interest expense 1,463,208 990,000
Provision for doubtful accounts receivable 1,154,021 713,763
Gain on sale of assets (2,002,228) (6,658,432)
Changes in assets and liabilities:
Subscriber receivables (877,022) (793,819)
Prepaids and other 419,357 1,953,460
Accounts payable and accrued expenses 4,112,326 5,403,780
Subscriber deposits and deferred revenue (286,776) (202,633)
------------ ------------
Net cash provided by operating activities 4,576,974 10,786,420
------------ ------------
Cash flows from investing activities:
Proceeds from sales of cable systems 3,432,250 9,191,149
Purchase of capital assets (6,705,660) (9,579,037)
Other intangible assets (61,837) (544,860)
------------ ------------
Net cash used in investing activities (3,335,247) (932,748)
------------ ------------
Cash flows from financing activities:
Borrowings under term debt and revolver 5,000,000 3,000,000
Payments under term debt and revolver (2,400,000) (7,465,000)
Payments under other debt, net (923,050) (658,801)
Payment of debt issue costs (65,416) (404,869)
------------ ------------
Net cash provided by (used in) financing activities 1,611,534 (5,528,670)
------------ ------------
Net increase in cash and cash equivalents 2,853,261 4,325,002
Cash and cash equivalents, beginning of period 386,485 2,213,777
------------ ------------
Cash and cash equivalents, end of period $ 3,239,746 $ 6,538,779
============ ============
<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 accompanying 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 principals. The
results for the nine months ended September 30, 2000 are not necessarily
indicative of the results to be expected for the entire 2000 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, 1999.
The following notes, insofar as they are applicable to the nine months
ended September 30, 2000 and September 30, 1999, are not audited. In
management's opinion, all adjustments, consisting of only normal recurring
accruals considered necessary for a fair presentation of such consolidated
financial statements, are included.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the three months ended September 30, 2000 and 1999
was approximately $2.6 million and $2.4 million, respectively. Interest paid
during the nine months ended September 30, 2000 and 1999 was approximately $10.2
million and $9.5 million, respectively.
3. 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 $403,210 for the three months ended September 30, 2000 and $420,693 for
the three months ended September 30, 1999. Management fees totaled $1,236,453
for the nine months ended September 30, 2000 and $1,643,770 for the nine months
ended September 30, 1999.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Term loan with interest payable monthly, at an
adjusted LIBOR rate of LIBOR plus 3.25% (9.7% at
December 31, 1999) $ 25,325,000
Amended term loan with interest payable quarterly, at an
ABR rate of PRIME plus 4% (13.5% at September 30, 200$) $ 22,925,000
New term loan with interest payable quarterly, at an
ABR rate of PRIME plus 4% (13.5% at September 30, 2000) 5,000,000
12.375% senior subordinated notes, net of unamortized discount of $300,000 and
$345,000 at June 30, 2000 and December 31, 1999, respectively, with interest
payable
semiannually on April 1 and October 1 119,700,000 119,655,000
Other, including capital leases 2,273,651 3,196,701
------------ ------------
$149,898,651 $148,176,701
============ ============
</TABLE>
Leverage
The Company is highly leveraged. This high leverage and the lack of
unencumbered assets likely will adversely affect the Company's ability to obtain
additional financing in the future for debt service, working capital, capital
expenditures or other purposes. The Company's business strategy is to procure a
sale of all or substantially all of its assets or partnership interests. Even if
the Company is sold, there is no assurance that the proceeds will be sufficient
to repay its existing indebtedness under a senior credit facility provided by a
group of commercial banks ("Senior Credit Facility") and the $120 million
principal amount of the Company's 12 3/8% Senior Subordinated Notes Due 2005
(the "Notes").
The Company is currently in default under its existing Senior Credit
Facility and under the terms of the Notes
The Company's Senior Credit Facility provides that it is an "Event
of Default" if a definitive agreement for the sale of Galaxy and its affiliate
or system asset sales of substantially all the systems owned by Galaxy and its
affiliate has not been executed and delivered by July 31, 2000 with an
unaffiliated third party buyer in a form reasonably satisfactory to the majority
lenders.
Although Galaxy reached tentative agreements with three potential buyers,
the buyers were unable to obtain board approval or financing for the potential
acquisition and each buyer was unable to enter into a definitive sale agreement
with Galaxy by July 31, 2000. As a result, the senior lenders declared a
"non-payment default" under the trust indenture ("Indenture") governing the $120
million principal amount of the Company's 12 3/8% Senior Subordinated Notes Due
2005 (the "Notes"). The senior lenders provided notice to the trustee under the
Indenture that Galaxy would not be permitted to make any payments of principal
or interest on the Notes for up to 179 days after September 27, 2000, the date
of notice.
There is also an event of default outstanding under the Indenture as a
result of the Company's failure to make the interest payment on the Notes due on
October 1, 2000 on or before October 31, 2000. The trustee or holders of the
Notes representing at least 25% of the outstanding principal amount of the Notes
could seek to accelerate the Notes whereupon the principal amount of, and all
accrued and unpaid interest under the Notes would become due and payable. In the
event of any such acceleration, it is likely that the Company would need to seek
protection under the bankruptcy laws and it is uncertain what Holders would
recover as the Senior Credit Facility is senior to the Notes and secured.
Galaxy has engaged Credit Suisse First Boston ("CSFB") to act as its
financial advisor. Under the terms of the engagement, CSFB will, among other
things, assist Galaxy in exploring various strategic alternatives, including
raising additional financing, which may involve refinancing Galaxy's existing
Senior Credit Facility and soliciting consents to amend certain terms of the
Notes to permit such a refinancing. The additional financing may also be used to
meet the Company's interest payment under the Senior Subordinated Notes due
October 1, 2000. The Company, with the assistance of CSFB, continues to evaluate
the sale of assets or the Company as a whole.
Galaxy is negotiating with certain lenders to replace its existing Senior
Credit Facility with a new credit facility ("New Credit Facility"). In order to
refinance its existing debt, the Company must first seek and obtain the approval
of a majority of the Noteholders ("Required Approval"). If the Required Approval
is granted, and if the New Credit Facility is closed, the Company will borrow
funds under the New Credit Facility to refinance the $28.0 million of senior
indebtedness outstanding under the Senior Credit Facility. The New Credit
Facility, if established, would have an initial maximum credit line of at least
$45.0 million. It is expected that the Company will borrow funds under the New
Credit Facility in order to make the interest payment on the Notes that was due
on October 1, 2000, plus interest on the defaulted interest accrued through the
payment date. The implementation of the New Credit Facility would have the
effect of permitting the Company to incur additional indebtedness beyond that
allowed currently under the Indenture governing the Notes. There can be no
assurances that the Required Approval will be granted by the Noteholders or that
the New Credit Facility will be successfully closed.
5. DISPOSITION OF CABLE SYSTEMS
On March 31, 2000, Galaxy sold one cable television system, located in
Kansas, representing approximately 1,424 subscribers for approximately $3.4
million, or approximately $2,492 per subscriber.
6
<PAGE>
6. 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. Galaxy 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, a few
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 Galaxy could have a material, adverse effect on the
Galaxy'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.
7. 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 Activity." SFAS No. 133 provides
comprehensive and consistent standards for the recognition and measurement
of derivative and hedging activities. It requires that derivatives be
recorded on the balance sheet at fair value and establishes criteria for
hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges of variable cash flows of forecasted transactions, and
hedges of foreign currency exposures of net investments in foreign
operations. Changes in the fair value of derivatives that do not meet the
criteria for hedges are to be recognized in the Statement of Consolidated
Income. During June of 1999, FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement of No. 133," to defer the effective date of SFAS No.
133 by one year. During June of 2000, FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities- an Amendment of FASB Statement No. 133." SFAS No. 138 amends
the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. Galaxy does not
expect the adoption of SFAS No. 133 to have a material effect on its
consolidated financial statements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101)
which provides guidance related to revenue recognition. SAB 101 allows companies
to report any changes in revenue recognition related to adopting its provisions
as an accounting change at the time of implementation in accordance with APB
Opinion No. 20, "Accounting Changes." Galaxy is currently in the process of
assessing whether or not there may be other revenue recognition issues to which
SAB 101 applies. Companies must adopt the new guidance no later than the fourth
quarter of fiscal year 2000. Based on the analysis performed to date, Galaxy
does not expect the adoption of SAB 101 to have a material effect of its
consolidated financial statements.
9
<PAGE>
Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On March 31, 2000, Galaxy sold one cable television system, located in
Kansas, representing approximately 1,424 subscribers for approximately $3.4
million, or approximately $2,492 per subscriber. Galaxy will use the proceeds
from this sale to pay the principal of the Senior Credit Facility.
The Company's financial condition is extremely distressed
The Company has recorded significant net losses in each of the last five
years and at September 30, 2000 had a partner's deficit of $45.2 million. The
auditors' report on the Company's financial statements for the year ended 1999
included "going concern" disclosure. In this report, the auditors stated that
the Company's inability to meet its cash flow needs and to comply with certain
debt covenants raises substantial doubt about its ability to continue as a going
concern.
The Company is currently in default under its existing Senior Credit
Facility and under the terms of the Notes
The Company's existing Senior Credit Facility provides that it is an
"Event of Default" if a definitive agreement for the sale of Galaxy and an
entity affiliated with Galaxy or system asset sales of substantially all the
systems owned by Galaxy and the affiliate has not been executed and delivered by
July 31, 2000 with an unaffiliated third party buyer in a form reasonably
satisfactory to the majority lenders. As a result of Galaxy's inability to
obtain a signed purchase agreement by this date, the senior lenders declared a
"non-payment default" under the Indenture and provided notice to the trustee
under the Indenture that Galaxy would not be permitted to make any payments of
principal or interest on the Notes for up to 179 days after September 27, 2000,
the date of notice.
There is also an event of default outstanding under the Indenture as a
result of the Company's failure to make the interest payment due October 1, 2000
on or before October 31, 2000. The trustee under the Indenture or Noteholders
representing at least 25% of the outstanding principal amount of the Notes could
seek to accelerate the Notes whereupon the principal amount of, and all accrued
and unpaid interest under the Notes would become due and payable. In the event
of any such acceleration, it is likely that the Company would need to seek
protection under the bankruptcy laws.
Recent Actions by Company
As described above, the Company has engaged CSFB to assist Galaxy in
exploring various strategic alternatives, including raising additional
financing, which may involve refinancing Galaxy's existing Senior Credit
Facility and soliciting consents to amend certain terms of the Notes to permit
such a refinancing. The additional financing may also be used to meet the
Company's interest payment under the Notes due October 1, 2000. The Company,
with the assistance of CSFB, continues to evaluate the sale of assets or the
Company as a whole.
Galaxy is negotiating with certain lenders to replace its existing Senior
Credit Facility with a new credit facility ("New Credit Facility"). In order to
refinance its existing debt, the Company must first seek and obtain the approval
of a majority of the Noteholders ("Required Approval"). If the Required Approval
is granted, and if the New Credit Facility is closed, the Company will borrow
funds under the New Credit Facility to refinance the $28.0 million of senior
indebtedness outstanding under the Senior Credit Facility. The New Credit
Facility, if established, would have an initial maximum credit line of at least
$45.0 million. It is expected that the Company will borrow funds under the New
Credit Facility in order to make the interest payment on the Notes that was due
on October 1, 2000, plus interest on the defaulted interest accrued through the
payment date. The implementation of the New Credit Facility would have the
effect of permitting the Company to incur additional indebtedness beyond that
allowed currently under the Indenture governing the Notes. There can be no
assurances that the Required Approval will be granted by the Noteholders or that
the New Credit Facility will be successfully closed.
Galaxy has entered into a Letter of Intent with CableDirect, L.L.C.
("CableDirect"), dated September 2, 2000, pursuant to which Galaxy will sell
approximately 26,429 small, rural subscribers in several states to CableDirect
in exchange for approximately $26,429,000 in cash and $6,607,250 in equity
interests of CableDirect. Galaxy also has entered into a Letter of Intent with
Pegasus Communications Corporation ("Pegasus"), dated July 6, 2000, pursuant to
which Galaxy will sell to Pegasus lists of approximately 6,300 subscribers in
remote or rural areas. These subscribers are located in areas in which Pegasus
and its affiliates have the right to distribute DIRECTV(R) services. Pegasus
will engage Galaxy to convert these subscribers to DIRECTV and to market and
sell the DIRECTV service to other homes in these areas. The purchase price will
be largely dependent on the actual number of Galaxy's subscribers and new homes
that convert to Pegasus' DIRECTV services. No assurances can be given that these
transactions will be completed.
Failure to Obtain Required Approval
In the event the Required Approval is not obtained, the Company will not
be able to enter into the New Credit Facility to refinance its existing senior
indebtedness and it will not be able to borrow additional funds under the New
Credit Facility to make the October 1, 2000 interest payment on the Notes. Under
the Company's existing Senior Credit Facility, approximately $28.5 million is
due and payable as of December 31, 2000. However, this amount could be declared
immediately due and payable by the Company's current senior lenders due to an
event of default that occurred on July 31, 2000, when Galaxy failed to have a
signed purchase agreement for its assets or partnership interests.
In addition, the trustee and Noteholders representing 25% of the
outstanding principal amount of the Notes are entitled to accelerate the Notes
due to an event of default that occurred on October 31, 2000 when Galaxy failed
to make an interest payment. Galaxy would be responsible for the costs and
expenses of collection. If Galaxy fails to pay these amounts on demand, the
Trustee may institute a court proceeding to obtain a judgment against Galaxy.
Holders of a majority in principal amount of the Notes may elect to rescind such
acceleration declaration at any time prior to judgment if Galaxy pays all
Trustee costs and expenses and all overdue amounts under the Notes, and all
other events of default are cured or waived.
If the current senior lenders declare the Company's debt immediately
due and payable after that date, the Company could be forced to make a "quick
sale" of its assets or partnership interests, or the Company could be forced
into bankruptcy. Even if the Company is able to sell its assets or partnership
interests to a third party, there can be no assurances that the proceeds would
be sufficient to repay its indebtedness under the existing Senior Credit
Facility and the Notes.
Absent the closing of the New Credit Facility, the partnership's inability
to meet its cash flow needs raises substantial doubt about its ability to meet
its liquidity and capital resource needs.
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 and nine
months ended September 30, 2000 and September 30, 1999. Amounts shown are in
thousands.
<TABLE>
<CAPTION>
For the three months ended September 30, For the nine months ended September 30,
--------------------------------------- ---------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 13,459 100.0% $ 14,184 100.0% $ 41,262 100.0% $ 43,270 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Systems operations 7,010 52.1% 6,794 47.9% 20,752 50.3% 20,379 47.1%
Selling, general and administrative 1,679 12.5% 1,490 10.5% 4,631 11.2% 4,396 10.2%
Management fee to affiliate 403 3.0% 421 3.0% 1,236 3.0% 1,644 3.8%
Depreciation and amortization 4,713 35.0% 4,773 33.7% 13,850 33.6% 15,086 34.9%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 13,805 102.6% 13,477 95.0% 40,469 98.1% 41,504 95.9%
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (346) (2.6%) 706 5.0% 793 1.9% 1,766 4.1%
Interest expense (5,155) (38.3%) (4,604) (32.5%) (15,962) (38.7%) (14,205) (32.8%)
Gain (loss) on sale of assets (28) (0.2%) (44) (0.3%) 2,002 4.9% 6,658 15.4%
Interest income and other, net (14) (0.1%) 41 0.3% (89) (0.2%) 76 0.2%
-------- ----- -------- ----- -------- ----- -------- -----
Net loss ($ 5,543) (41.2%) ($ 3,901) (27.5%) ($13,256) (32.1%) ($ 5,705) (13.2%)
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth demographic information as of December 31,
1999, March 31, 2000, June 30, 2000 and September 30, 2000.
<TABLE>
<CAPTION>
June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- -
<S> <C> <C> <C> <C> <C>
Homes Passed 225,226 214,341 210,816 205,539 205,539
Basic Subscribers 134,233 126,861 126,357 123,941 120,954
Basic Penetration 59.60% 59.19% 59.94% 60.30% 58.85%
Monthly Revenue per Subscriber $ 35.94 $ 36.93 $ 36.11 $ 37.15 $ 37.24
Premium Subscribers 61,133 57,013 56,231 53,684 49,350
Premium Penetration 45.54% 44.94% 44.50% 43.31% 40.80%
</TABLE>
Galaxy generated revenues in the amount of $13,458,633 and $41,261,921 for
the three-month and nine-month periods ended September 30, 2000, respectively.
For the three-month and nine-month periods ended September 30, 1999, Galaxy
generated revenues in the amount of $14,183,681 and $43,270,181, respectively.
The decrease in revenue from 1999 to 2000 was a result of a reduction in
subscribers due to the sale of non-core cable systems. Average monthly revenues
per subscriber increased from $36.93 for the three months ended September 30,
1999 to $37.35 for the three months ended September 30, 2000. Galaxy was able to
realize additional revenue per subscriber by increasing basic rates in certain
systems and adding revenues from advanced services such as digital, internet
access, and distance learning.
For the three months ended September 30, 2000 and 1999, system operating
expenses, consisting of subscriber costs, technician costs and system
maintenance costs, were $7,009,465 and $6,793,725, respectively. As a percentage
of revenues, these expenses increased from 47.9% for the three months ended
September 30, 1999 to 52.1% in the comparable period of 2000. For the nine
months ended September 30, 2000 and 1999, system operating expenses were
$20,752,173 and $20,378,609, respectively, and, as a percentage of revenues,
increased from 47.1% for the nine months ended September 30, 1999 to 50.3% in
the comparable period of 2000. 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, increased from
$1,490,154 to $1,678,916 for the three months ended September 30, 2000, as
compared to the three months ended September 30, 1999. Selling, general and
administrative expenses increased from $4,396,163 to $4,631,185 for the nine
months ended September 30, 2000 as compared to the nine months ended September
30, 1999. For the three-month period ended September 30, these expenses
increased as a percentage of revenue from 10.5% in 1999 to 12.5% in 2000. For
the nine month period ended September 30, these expenses increased from 10.2% in
1999 to 11.2% in 2000. The increase for the three and nine month periods is
primarily due to a decrease in co-op marketing reimbursements during the first
quarter of 2000.
For the three months ended September 30, 2000 and 1999, depreciation and
amortization expense was $4,712,872, or 35.0% of revenues, and $4,772,917, or
33.7% of revenues, respectively. For the nine months ended September 30, 2000
and 1999, depreciation and amortization expense was $13,850,201, or 33.6% of
revenues, and $15,085,708, or 34.9% 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, 2000 and 1999, interest expense
was $5,154,480 and $4,603,575, respectively. For the nine months ended September
30, 2000 and 1999, interest expense was $15,960,953 and $14,205,355,
respectively. These increases were due to an increase in interest rates charged
to Galaxy during those periods.
Gain (loss) on sale of assets went from a net loss on sale of assets of
$43,934 for the three months ended September 30, 1999, to a net loss on sale of
assets of $28,362 for the three months ended September 30, 2000. Gain (loss) on
sale of assets went from a net gain on sale of assets of $6,658,432 for the nine
months ended September 30, 1999, to a net gain on sale of assets of $2,002,228
for the nine months ended September 30, 2000. More gain on sale of assets was
realized in 1999 as a result of the sale of non-core assets during that period.
Interest income and other, net, which includes interest income and other
expenses, reflected a net expense of $14,201 for the three months ended
September 30, 2000 and a net income of $40,654 for the three months ended
September 30, 1999. For the nine months ended September 30, 2000 interest income
and other, net, reflected a net expense of $89,297, compared to a net income of
$75,585 for the nine months ended September 30, 1999.
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 $45.2 million at September 30, 2000. During 2000, the
Partnership received net proceeds from sales of cable television systems of
approximately $3.4 million, which was primarily used to pay down principal of
the Company's Senior Credit Facility.
The Company believes that cash generated from operations alone will not be
sufficient to pay the Senior Credit Facility due on December 31, 2000 without
proceeds from the sale of assets, refinancing of the Senior Credit Facility, or
the sale of the Partnership's interest in Galaxy. Unless the Company is able to
obtain the Required Approval to amend the Indenture, and unless the New Credit
Facility is closed, the partnership's inability to meet its cash flow needs
raises substantial doubt about its ability to continue as a going concern.
As of September 30, 2000, Galaxy had $3,239,746 in cash and cash
equivalents. As of such date, total liabilities (other than notes payable)
exceeded cash and cash equivalents by $21,811,374. Galaxy expects to fund this
deficiency through its operating cash flows, the sale of assets and new debt
financing.
Galaxy had earnings before interest, depreciation and amortization
expense, and gain on sale of cable systems ("EBITDA") of $4,367,042, or 32.4% of
operating revenues, and $5,479,109, or 38.6% of operating revenues, for the
three months ended September 30, 2000 and 1999, respectively. Galaxy had EBITDA
of $14,642,110, or 35.5% of operating revenues, and $16,851,639, or 38.9% of
operating revenues, for the nine months ended September 30, 2000 and 1999,
respectively.
Galaxy had an aggregate of $149.9 million of indebtedness as of September
30, 2000, representing $119.7 million of senior subordinated notes (net of
unamortized discount of $0.3 million), $27.9 million outstanding debt under its
Senior Credit Facility and $2.3 million in various other obligations.
As of September 30, 2000, Galaxy had $87.7 million in systems and
equipment consisting of $83.1 million of cable television systems and $4.6
million of vehicles, equipment, buildings and office equipment, all net of
accumulated depreciation. Galaxy had capital expenditures (exclusive of system
acquisitions) of $6.7 million for the nine months ended September 30, 2000. For
the nine months ended September 30, 1999, Galaxy had capital expenditures
(exclusive of system acquisitions) of $9.6 million. These capital expenditures
were financed mainly through the sale of non-core assets and cash flows from
operations. During the first nine months of 2000, 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 $4,576,974 and
$10,786,420 for the nine months ended September 30, 2000 and 1999, respectively,
a decrease in net cash provided by operating activities of $6,209,446. This
decrease is mainly due to a decrease in EBITDA, along with a decrease in cash
used to pay prepaids and other, accounts payable and accrued expenses during the
periods.
Galaxy used net cash from investing activities of $3,335,247 for the nine
months ended September 30, 2000, and $932,748 for the nine months ended
September 30, 1999, an increase in net cash used in investing activities of
$2,402,499. This decrease is due to a decrease in proceeds from the sale of
cable systems, offset by a decrease in the purchase of capital assets during
2000.
Galaxy provided net cash in financing activities of $1,611,534 for the
nine months ended September 30, 2000, and used net cash from financing
activities of $5,528,670 for the nine months ended September 30, 1999,
respectively, a change in cash flows from financing activities of $7,140,204.
This was mainly due to a decrease in cash used to pay down principle of the term
debt, net of borrowings.
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 Galaxy's ability to refinance its Senior Credit
Facility and to pay interest on the Notes, 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) rising interest rates, and fuel and programming costs, along with
Galaxy's customers' possible unwillingness to pay increased charges to cover
such increased expenses, (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 while operating under a limited capital expenditures budget.
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.
17
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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 (ABR plus 2%) on its Senior Credit Facility. Based on Galaxy's variable
debt at September 30, 2000, a 1% increase in market interest rates would
increase yearly interest expense and decrease income by approximately $302,000.
This amount was calculated using the variable interest rate in effect at
September 30, 2000, 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
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PART II. OTHER INFORMATION
Items 1 through 5.
None.
Item 3. Default on Senior Securities
The amount of default on the Notes is $7.4 million due October 1, 2000
plus interest on the defaulted interest.
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. On January 20, 2000 Galaxy filed a report on Form 8-K
release announcing that it had engaged the service of Credit Suisse First
Boston (formerly known as Donaldson, Lufkin & Jenrette Securities
Corporation) to act as its financial advisor.
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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 14, 2000
---------------------------------------
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
20
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EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule
