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 SECURITIES
--------- EXCHANGE ACT OF 1934
For the Quarterly period ended June 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 JUNE 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..........................................17
PART II. Other Information............................................18
Signatures .........................................................19
Exhibit Index .........................................................20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
GALAXY TELECOM, L.P. AND SUDSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash in banks $ 1,811,544 $ 386,485
Subscriber receivables, net of allowance for doubtful accounts
of $122,353 and $87,449, respectively 4,218,382 4,431,946
Systems and equipment, net 89,910,142 94,568,015
Intangible assets, net 31,764,309 34,266,208
Prepaids and other 3,698,869 3,877,975
------------- -------------
Total assets $ 131,403,246 $ 137,530,629
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 17,009,196 $ 17,198,650
Subscriber deposits and deferred revenue 3,789,525 4,026,920
Long-term debt and other obligations 150,189,407 148,176,701
------------- -------------
Total liabilities 170,988,128 169,402,271
Partners' deficit:
General partners (39,584,882) (31,871,642)
Limited partners -- --
------------- -------------
Total partners' deficit (39,584,882) (31,871,642)
------------- -------------
Total liabilities and partners' deficit $ 131,403,246 $ 137,530,629
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<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,
---------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 13,812,885 $ 14,516,917 $ 27,803,288 $ 29,086,470
------------ ------------ ------------ ------------
Operating expenses:
Systems operations 6,920,491 6,911,118 13,742,708 13,584,884
Selling, general and administrative 1,399,451 1,405,397 2,952,269 2,905,979
Management fee to affiliate 413,580 568,400 833,243 1,223,077
Depreciation and amortization 4,364,412 5,088,515 9,137,329 10,312,791
------------ ------------ ------------ ------------
Total operating expenses 13,097,934 13,973,430 26,665,549 28,026,731
------------ ------------ ------------ ------------
Operating income 714,951 543,487 1,137,739 1,059,739
Interest expense (5,383,970) (4,834,458) (10,806,473) (9,601,780)
Gain (loss) on sale of assets (32,817) 6,316,733 2,030,590 7,225,912
Interest income and other, net (87,868) 15,938 (75,096) 34,931
------------ ------------ ------------ ------------
Net loss $ (4,789,704) $ 2,041,700 $ (7,713,240) $ (1,281,198)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,713,240) $ (1,281,198)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 8,338,021 8,968,069
Amortization expense 799,308 1,344,722
Amortization included in interest expense 1,448,208 659,999
Provision for doubtful accounts receivable 489,846 388,567
Gain on sale of assets (2,030,590) (7,225,912)
Changes in assets and liabilities:
Subscriber receivables (276,282) (427,853)
Prepaids and other 179,106 834,823
Accounts payable and accrued expenses (189,454) 1,074,097
Subscriber deposits and deferred revenue (237,395) (60,653)
------------ ------------
Net cash provided by operating activities 807,528 4,274,661
------------ ------------
Cash flows from investing activities:
Acquisition of cable systems - net of trades -- (9,963,947)
Proceeds from sales of cable systems 3,460,611 19,165,505
Purchase of capital assets (4,742,384) (6,898,379)
Other intangible assets (37,929) (532,065)
------------ ------------
Net cash provided by (used in) investing activities (1,319,702) 1,771,114
------------ ------------
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 (617,294) (616,010)
Payment of debt issue costs (45,473) (181,806)
------------ ------------
Net cash provided by (used in) financing activities 1,937,233 (5,262,816)
------------ ------------
Net increase in cash and cash equivalents 1,425,059 782,959
Cash and cash equivalents, beginning of period 386,485 2,213,777
------------ ------------
Cash and cash equivalents, end of period $ 1,811,544 $ 2,996,736
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
GALAXY TELECOM, L.P. AND SUBSIDIARY
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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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 principles. The
results for the six months ended June 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 six months
ended June 30, 2000 and June 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 June 30, 2000 and 1999 was
approximately $7.6 million and $8.4 million, respectively. Interest paid during
the six months ended June 30, 2000 and 1999 was approximately $8.3 million and
$8.8 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 $413,580 for the three months ended June 30, 2000 and $568,400 for the
three months ended June 30, 1999. Management fees totaled $833,243 for the six
months ended June 30, 2000 and $1,223,077 for the six months ended June 30,
1999.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 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 2% (11.25% at June 30, 2000) $ 22,925,000
New term loan with interest payable quarterly, at an
ABR rate of PRIME plus 2% (11.25% at June 30, 2000) 5,000,000
12.375% senior subordinated notes, net of unamortized
discount of $315,000 and $345,000 at June 30, 2000 and
December 31, 1999, respectively, with interest payable
semiannually on April 1 and October 1 119,685,000 119,655,000
Other, including capital leases 2,579,407 3,196,701
------------ ------------
$150,189,407 $148,176,701
============ ============
</TABLE>
Galaxy's September 1995 Amended and Restated Loan Agreement has been
periodically amended and subsequently converted to a Term Loan ("Term Loan").
Net proceeds from any system sale must be used to reduce the outstanding balance
under the Term Loan. The Term Loan also requires Galaxy to maintain compliance
with certain financial ratios and other covenants, such as annualized cash flow
to interest expense, capital expense limits and basic subscribers to total long
term debt. Galaxy is not permitted to borrow additional funds under the Term
Loan without the prior written consent of the lenders. The Term Loan is due the
earlier of December 31, 2000 or upon the occurrence of certain events set forth
in the Loan Agreement.
On March 31, 2000, Galaxy entered into a new $5.0 million Term Loan
Agreement from three of the four lenders under the Term Loan ("New Loan"). The
New Loan also requires Galaxy to maintain compliance with certain financial
ratios and other covenants, such as annualized cash flow to interest expense,
capital expense limits and basic subscribers to total long term debt. The New
Loan bears interest at the same rate as the amended term loan agreement and is
due on December 31, 2000 or upon the occurrence of certain events set forth in
the agreement. The New Loan restricts Galaxy's ability to borrow without the
consent of the lenders.
As a condition to the New Loan, Galaxy will owe an $800,000 fee to the
lenders that will be due and payable upon repayment of the New Loan. The
$800,000 fee shall be reduced to $600,000 if the New Loan is paid in full by
September 15, 2000.
Under the Term Loan and the New Loan, it is an "Event of Default" with
respect to each 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.
Galaxy has entered into separate letters of intent with Cable Direct,
L.L.C. and Pegasus Communications Corporation to sell certain of its smallest
non-core systems. These two separate transactions would affect approximately
25,000 of the Partnership's subscribers at a combined purchase price in excess
of $30,000,000. Galaxy has previously entered into a non-exclusive letter of
intent with Mallard Cablevision, L.L.C. ("Mallard") whereby Galaxy would sell to
Mallard its interests in virtually all its remaining subscribers.
The Partnership has communicated to its lenders the status of each of
the preceding agreements and, even though the July 31, 2000 deadline has
expired, the lenders have taken no action as of this date. The Partnership
continues to diligently pursue definitive agreements with any and all previously
mentioned parties. However, there can be no assurances that any or all of the
agreements can be secured to the satisfaction of the lenders.
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 $3.5
million, or approximately $2,492 per subscriber. During the three months ended
June 30, 2000, Galaxy used a portion of the proceeds from this sale to reduce
principle outstanding on the Term Loan.
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.
<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 $3.5
million, or approximately $2,492 per subscriber. Galaxy will use the proceeds
from this sale to pay the principle of the Term Loan.
On March 31, 2000 Galaxy amended its Term Loan agreement to modify
financial covenants and change the maturity date of all outstanding borrowing
under the Term Loan agreement and entered into a new $5 million New Loan
Agreement from three of the four lenders under the Term Loan agreement. As
discussed in Note 2 to Galaxy's consolidated financial statements for the period
ended December 31, 1999, based on current estimates of operating cash flow,
management does not believe it will have sufficient cash to fund required debt
payments under the Term Loan and the New Loan due on December 31, 2000. It is an
event of default under the Term Loan and New Loan if Galaxy does not have a
definitive agreement to sell its partnership interests or assets by July 31,
2000. Galaxy's partners are negotiating to sell their Galaxy partnership
interests to a third party. However, closing of such transaction is not assured.
Absent the completion of the aforementioned transaction and 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 six
months ended June 30, 2000 and June 30, 1999. Amounts shown are in thousands.
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
--------------------------------------- ---------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 13,813 100.0% $ 14,517 100.0% $ 27,803 100.0% $ 29,086 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Systems operations 6,920 50.1% 6,911 47.6% 13,743 49.4% 13,585 46.7%
Selling, general and administrative 1,399 10.1% 1,405 9.7% 2,952 10.6% 2,906 10.0%
Management fee to affiliate 414 3.0% 568 3.9% 833 3.0% 1,223 4.2%
Depreciation and amortization 4,364 31.6% 5,089 35.1% 9,137 32.9% 10,313 35.5%
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 13,097 94.8% 13,973 96.3% 26,665 95.9% 28,027 96.4%
-------- ----- -------- ----- -------- ----- -------- -----
Operating income 716 5.2% 544 3.7% 1,138 4.1% 1,059 3.6%
Interest expense (5,384) (39.0%) (4,834) (33.3%) (10,806) (38.9%) (9,602) (33.0%)
Gain (loss) on sale of assets (34) (0.2%) 5,793 39.9% 2,030 7.3% 6,702 23.0%
Interest income and other, net (88) (0.6%) 16 0.1% (75) (0.3%) 35 0.1%
-------- ----- -------- ----- -------- ----- -------- -----
Net loss $ (4,790) (34.7%) $ 1,519 10.5% $ (7,713) (27.7%) $ (1,806) (6.2%)
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth demographic information as of, September
30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000.
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Homes Passed 214,341 210,816 205,539 205,539
Basic Subscribers 126,861 126,357 123,941 120,954
Basic Penetration 59.19% 59.94% 60.30% 58.85%
Monthly Revenue per Subscriber $ 36.93 $ 36.11 $ 37.15 $ 37.24
Premium Subscribers 57,013 56,231 53,684 49,350
Premium Penetration 44.94% 44.50% 43.31% 40.80%
</TABLE>
Galaxy generated revenues in the amount of $13,812,885 and $27,803,288
for the three-month and six-month periods ended June 30, 2000, respectively. For
the three-month and six-month periods ended June 30, 1999, Galaxy generated
revenues in the amount of $14,516,917 and $29,086,470, 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 $35.94 for the three months ended June 30, 1999 to
$37.24 for the three months ended June 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 June 30, 2000 and 1999, system operating
expenses, consisting of subscriber costs, technician costs and system
maintenance costs, were $6,920,491 and $6,911,118, respectively. As a percentage
of revenues, these expenses increased from 47.6% for the three months ended June
30, 1999 to 50.1% in the comparable period of 2000. For the six months ended
June 30, 2000 and 1999, system operating expenses were $13,742,708 and
$13,584,884, respectively, and, as a percentage of revenues, increased from
46.7% for the six months ended June 30, 1999 to 49.4% 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, decreased from
$1,405,397 to $1,399,451 for the three months ended June 30, 2000, as compared
to the three months ended June 30, 1999. Selling, general and administrative
expenses increased from $2,905,979 to $2,952,269 for the six months ended June
30, 2000 as compared to the six months ended June 30, 1999. For the three-month
period ended June 30, these expenses increased as a percentage of revenue from
9.7% in 1999 to 10.1% in 2000. For the six-month period ended June 30, these
expenses increased from 10.0% in 1999 to 10.6% in 2000. The increase for the
three and six month periods is primarily due to a decrease in co-op marketing
reimbursements during the first quarter of 2000.
For the three months ended June 30, 2000 and 1999, depreciation and
amortization expense was $4,364,412, or 31.6% of revenues, and $5,088,515, or
35.1% of revenues, respectively. For the six months ended June 30, 2000 and
1999, depreciation and amortization expense was $9,137,329, or 32.9% of
revenues, and $10,312,791, 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, 2000 and 1999, interest expense was
$5,383,969 and $4,834,458, respectively. For the six months ended June 30, 2000
and 1999, interest expense was $10,806,472 and $9,601,780, respectively. These
increase were due to an increase in interest rates charged to Galaxy during
those periods.
Gain (loss) on sale of assets went from a net gain on sale of assets of
$6,316,733 for the three months ended June 30, 1999, to a net loss on sale of
assets of $32,817 for the three months ended June 30, 2000. Gain (loss) on sale
of assets went from a net gain on sale of assets of $7,225,912 for the six
months ended June 30, 1999, to a net gain on sale of assets of $2,030,589 for
the six months ended June 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 $87,869 for the three months ended
June 30, 2000 and a net income of $15,938 for the three months ended June 30,
1999. For the six months ended June 30, 2000 interest income and other, net,
reflected a net expense of $75,097, compared to a net income of $34,930 for the
six months ended June 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 $39.6 million at June 30, 2000. During 2000, the
Partnership received net proceeds from sales of cable television systems of
approximately $3.5 million, which was primarily used to pay down principle of
the Term Loan.
On March 31, 2000 the Partnership amended its Term Loan agreement to
modify financial covenants and change the maturity date of all outstanding
borrowings under the term loan agreement.
Additionally, as part of this amended Term Loan and New Loan
agreements, the Partnership must have a definitive sale agreement in force by
July 31, 2000 to sell substantially all the interests or assets of the
Partnership sufficient for the repayment of all Partnership loans. Absence of a
definitive agreement to sell substantially all the assets of the Company
triggers an event of default under the terms of the amended Term Loan and New
Loan agreements.
Galaxy has entered into separate letters of intent with Cable Direct,
L.L.C. and Pegasus Communications Corporation to sell certain of its smallest
non-core systems. These two separate transactions would affect approximately
25,000 of the Partnership's subscribers at a combined purchase price in excess
of $30,000,000. Galaxy has previously entered into a non-exclusive letter of
intent with Mallard Cablevision, L.L.C. ("Mallard") whereby Galaxy would sell to
Mallard its interests in virtually all its remaining subscribers.
The Partnership has communicated to its lenders the status of each of
the preceding agreements and, even though the July 31, 2000 deadline has
expired, the lenders have taken no action as of this date. The Partnership
continues to diligently pursue definitive agreements with any and all previously
mentioned parties. However, there can be no assurances that any or all of the
agreements can be secured to the satisfaction of the lenders.
The Partnership believes that cash generated from operations alone will
not be sufficient to pay the Term Loan and the New Loan on December 31, 2000
without proceeds from the sale of assets, refinancing of the Term Loans, or the
sale of the Partnership's interest in Galaxy. Absent the completion of the
aforementioned transaction and the partnership's inability to meet its cash flow
needs raises substantial doubt about its ability to meet its liquidity and
capital resource needs.
As of June 30, 2000, Galaxy had $1,811,544 in cash and cash
equivalents. As of such date, total liabilities (other than notes payable)
exceeded cash and cash equivalents by $18,987,177. Galaxy expects to fund this
deficiency through its operating cash flows, the sale of assets and new equity
or debt financing.
Galaxy had earnings before interest, depreciation and amortization
expense, and gain on sale of cable systems ("EBITDA") of $5,079,363, or 36.8% of
operating revenues, and $5,632,002, or 38.8% of operating revenues, for the
three months ended June 30, 2000 and 1999, respectively. Galaxy had EBITDA of
$10,275,068, or 37.0% of operating revenues, and $11,372,530, or 39.1% of
operating revenues, for the six months ended June 30, 2000 and 1999,
respectively.
Galaxy had an aggregate of $150.2 million of indebtedness as of June
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
term loan and $2.6 million in various other obligations.
On March 31, 2000, Galaxy entered into a new $5.0 million Term Loan
Agreement from three of the four lenders under the Term Loan ("New Loan"). The
New Loan also requires Galaxy to maintain compliance with certain financial
ratios and other covenants, such as annualized cash flow to interest expense,
capital expense limits and basic subscribers to total long term debt. The New
Loan bears interest at the same rate as the amended term loan agreement and is
due on December 31, 2000 or upon the occurrence of certain events set forth in
the agreement. The New Loan restricts Galaxy's ability to borrow without the
consent of the lenders.
As of June 30, 2000, Galaxy had $89.9 million in systems and equipment
consisting of $85.0 million of cable television systems and $4.9 million of
vehicles, equipment, buildings and office equipment, all net of accumulated
depreciation. Galaxy had capital expenditures (exclusive of system acquisitions)
of $4.7 million for the six months ended June 30, 2000. For the six months ended
June 30, 1999, Galaxy had capital expenditures (exclusive of system
acquisitions) of $6.9 million. These capital expenditures were financed mainly
through the sale of non-core assets and cash flows from operations. During the
first six 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 $807,530 and
$4,274,661 for the six months ended June 30, 2000 and 1999, respectively, a
decrease in net cash provided by operating activities of $3,467,131. This
decrease is mainly due to a decrease in accounts payable and accrued expenses
during the periods.
Galaxy used net cash from investing activities of $1,319,703 for the
six months ended June 30, 2000, and provided net cash from investing activities
of $1,771,114 for the six months ended June 30, 1999, a decrease in net cash
provided in investing activities of $3,090,817. This decrease is mainly due to a
decrease in proceeds from the sale of cable systems during 2000.
Galaxy provided net cash in financing activities of $1,937,233 for the
six months ended June 30, 2000, and used net cash from financing activities of
$5,262,816 for the six months ended June 30, 1999, respectively, a change in
cash flows from investing activities of $7,200,049. 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 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.
<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 (ABR plus 2%) on its Term Loan. Based on Galaxy's variable debt at
June 30, 2000, a 1% increase in market interest rates would increase yearly
interest expense and decrease income by approximately $305,000. This amount was
calculated using the variable interest rate in effect at June 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.
<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.
None.
<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 11, 2000 /s/ J. Keith Davidson
BY: J. Keith Davidson
Vice President-Finance
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule
