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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(COMMISSION FILE NUMBER: 0-29148)
ESPRIT TELECOM GROUP PLC
(Exact name of registrant as specified in its charter)
ENGLAND AND WALES NONE
(State of incorporation) (I.R.S. Employer Identification No.)
MINERVA HOUSE
VALPY STREET, READING RG1 1AR UNITED KINGDOM
(Address of principal executive office)
+44 118 951 4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At October 22, 1999, there were 126,101,574 outstanding shares of
common stock of the registrant.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements of Esprit Telecom Group plc (unaudited)....... 3
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 ............................................ 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and September 30, 1998,
respectively ................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and September 30, 1998,
respectively ................................................. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk......... 13
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K .................................. 15
Signatures ...................................................................... 16
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ESPRIT TELECOM GROUP PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
(in thousands, except share data)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................................... $ 33,837 $ 166,107
Restricted cash .................................................... 34,276 35,079
Accounts receivable, net ........................................... 158,441 70,503
Prepaid expenses and other assets .................................. 9,507 4,356
------------ ------------
TOTAL CURRENT ASSETS ....................................... 236,061 276,045
Property and equipment, net ......................................... 243,086 114,949
Goodwill and intangible assets, net ................................. 614,503 210,566
Restricted cash and other non-current assets ........................ 14,443 31,391
------------ ------------
TOTAL ASSETS ............................................... $ 1,108,093 $ 632,951
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities ...................... $ 228,252 $ 108,776
------------ ------------
TOTAL CURRENT LIABILITIES .................................. 228,252 108,776
Long-term debt, capital leases and other non-current liabilities .... 645,284 575,996
Note payable to shareholder ......................................... 104,168 --
------------ ------------
TOTAL LIABILITIES .......................................... 977,704 684,772
SHAREHOLDERS' EQUITY
Common stock, (pound)0.01 par value (200,000,000 shares
authorized; 126,101,574, and 125,799,771 shares issued and
outstanding at
September 30, 1999 and December 31, 1998, respectively) ........... 2,074 2,088
Additional paid-in capital .......................................... 456,578 91,217
Cumulative translation adjustment ................................... (5,170) 6,456
Accumulated deficit ................................................. (323,093) (151,582)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ................................. 130,389 (51,821)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 1,108,093 $ 632,951
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ESPRIT TELECOM GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues ...................................... $ 94,034 $ 54,501 $ 241,010 $ 113,248
Operating expenses:
Access and network services ................. 94,281 41,883 207,880 88,893
Selling, general and administrative ......... 42,048 23,002 110,185 46,239
Depreciation and amortization ............... 20,125 8,659 49,662 17,072
------------ ------------ ------------ ------------
Total operating expenses ...................... 156,454 73,544 367,727 152,204
Loss from operations .......................... (62,420) (19,043) (126,717) (38,956)
Other income (expense):
Interest, net ............................... (17,524) (6,048) (49,952) (18,640)
Foreign currency gains (losses) ............. 13,267 (1,127) 1,847 (3,047)
------------ ------------ ------------ ------------
(4,257) (7,175) (48,105) (21,687)
------------ ------------ ------------ ------------
Net Loss ...................................... $ (66,677) $ (26,218) $ (174,822) $ (60,643)
============ ============ ============ ============
Loss per common share:
Net loss per share ............................ $ (0.53) $ (0.21) $ (1.39) $ (0.49)
============ ============ ============ ============
Weighted average common shares outstanding .... 126,102 125,266 126,102 124,717
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ESPRIT TELECOM GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES .................. $ (132,776) $ (13,593)
------------ ------------
INVESTING ACTIVITIES
Acquisitions, net of cash ............................. -- (159,525)
Other investing activities ............................ (35,123) (53,985)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ........ (35,123) (213,510)
------------ ------------
FINANCING ACTIVITIES
Proceeds from debt, net of debt issue costs ........... -- 237,426
Other financing activities ............................ 41,349 2
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES ................................. 41,349 237,428
------------ ------------
Effect of exchange rate changes on cash and cash
equivalents .......................................... (5,720) 593
------------ ------------
Net (decrease) increase in cash and cash equivalents .. (132,270) 10,918
Cash and cash equivalents at beginning of period ...... 166,107 219,827
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 33,837 $ 230,745
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ESPRIT TELECOM GROUP PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS DESCRIPTION
Esprit Telecom Group plc ("Esprit" or "the Company"), is a European
telecommunications company, providing high quality, competitively priced,
international and national long distance telecommunications services. The
Company commenced operations in June 1992 with the objective of competing in the
liberalizing European telecommunications market and established an early
presence in several key European markets. Today, the Company provides
telecommunications services in the United Kingdom, Germany, The Netherlands,
Spain, France, Belgium, Italy and Ireland and has commenced construction of a
broadband Synchronous Digital Hierarchy ("SDH") fiber optic network linking the
key cities in which it operates. Esprit intends to continue focus on providing
telecommunications services both within and across national borders to a
pan-European market.
2. BASIS OF PRESENTATION
The financial statements of Esprit included herein are unaudited and
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and in accordance with Securities and Exchange
Commission regulations which differs in certain significant respects from the
accounting principles generally accepted in the United Kingdom. The financial
results set forth above represent the Company's financial results under US GAAP.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. Material
inter-company affiliate account transactions have been eliminated. In the
opinion of management, the financial statements reflect all adjustments of a
normal and recurring nature necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the Company's September
30, 1998 audited consolidated financial statements and the notes related
thereto. The results of operations for the three and nine months ended September
30, 1999 may not be indicative of the operating results for the full year.
On March 4, 1999, Global TeleSystems Group, Inc. ("GTS") acquired
substantially all of the outstanding ordinary shares and American Depositary
Shares of Esprit. The combination was accounted for as a pooling of interests.
Accordingly, the transaction resulted in Esprit becoming a subsidiary of GTS.
3. POLICIES AND PROCEDURES
The Company's net loss per share calculation (basic and diluted) is
based upon the weighted average common shares outstanding. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee stock options have been excluded from the net loss
per share calculation because their effects would be anti-dilutive.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended in June 1999. The Company
expects to adopt the new statement effective January 1, 2001. The statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the statement will
have a significant effect on its results of operations or financial position.
4. BUSINESS COMBINATIONS
On April 26, 1999, GTS acquired a majority stake in Omnicom, a French
company, and assumed operational control. Effective on that date, GTS
transferred its ownership interest in Omnicom to the Company. Total
consideration for the Omnicom shares consisted of approximately $320 million in
cash and 3,700,994 shares of GTS's common stock. The excess of the purchase
price over the fair value of assets acquired has been preliminarily calculated
at approximately $440.2 million and has been allocated to goodwill.
In May 1998, Esprit acquired all of the outstanding common stock of
Thyssen Festnetz Management GmbH and the whole limited partnership interest in
Thyssen Festnetz GmbH & Co. KG (collectively, the "Plusnet business") for cash
consideration of
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approximately $151.0 million before expenses. This has been accounted for as an
acquisition under the purchase method of accounting. The excess of the purchase
price over the fair value of assets acquired has been preliminarily calculated
at $160.5 million and has been allocated to goodwill. This has subsequently been
adjusted downward by approximately $8.4 million in 1999 based upon items as
prescribed in the agreed contractual terms of the acquisition.
5. COMPREHENSIVE INCOME (LOSS)
The following table reflects the calculation of comprehensive income
(loss) for Esprit for the three and nine months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss .................................... $ (66,677) $ (26,218) $ (174,822) $ (60,643)
Other comprehensive income (loss)
Foreign currency translation adjustments .. (8,869) 6,513 (11,626) 1,609
------------ ------------ ------------ ------------
Comprehensive loss .......................... $ (75,546) $ (19,705) $ (186,448 $ (59,034)
============ ============ ============ ============
</TABLE>
6. RELATED PARTY TRANSACTION
On April 14, 1999 the Company issued a subordinated promissory note to
its parent company, GTS for GBP 61,804,697 ($100 million). Interest on the note
will accrue at 9% per annum until maturity, which is June 16, 2008.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis relates to the financial
condition and results of operations of the Company for the three and nine months
ended September 30, 1999 and 1998. This information should be read in
conjunction with the Company's Condensed, Consolidated Financial Statements and
the notes related thereto appearing elsewhere in the document.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" including, without limitation,
those concerning (i) projected traffic volume, (ii) future revenues and costs
and (iii) changes in the Company's competitive environment, contain
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Report.
The factors described in this report could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company, and investors,
therefore, should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
OVERVIEW
The Company offers a range of telecommunications services and products
to three targeted customer segments: ( i ) retail long distance voice and fax
services for corporate customers to all global destinations either directly, via
dedicated leased lines linked to its network, or indirectly, on a switched basis
using the public telephone operator ("PTO") network by means of an access code
("Retail" or "Retail Services"); (ii) wholesale long distance traffic
termination services for other telecommunications carriers, including PTOs,
major telecommunications alliances and regional telephone companies ("Wholesale"
or "Wholesale Services"); and (iii) network management, access and termination
services to telecommunications service providers, such as calling card companies
("Service Providers"), and to resellers ("Resellers") (as a segment Service
Provider/Reseller Services). The Company has recently introduced two new
categories of service to complement its established long distance
telecommunications services and products: ( i ) bandwidth services, consisting
of providing telecommunications transmission capacity to its customers from May
1998, as well as other telecommunications companies ("Bandwidth Services") and
(ii) enhanced services, such as toll free services, calling cards and switched
data services ("Enhanced Services").
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RESULTS OF OPERATIONS
The following table sets forth our statement of operations as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0% 100.0%
Access and network services ................. 100.3 76.8 86.3 78.5
Selling, general and administrative ......... 44.7 42.2 45.7 40.8
Depreciation and amortization ............... 21.4 15.9 20.6 15.1
---------- ---------- ---------- ----------
Loss from operations ........................ (66.4) (34.9) (52.6) (34.4)
Interest, net ............................... (18.6) (11.1) (20.7) (16.5)
Foreign currency gains (losses) ............. 14.1 (2.1) 0.8 (2.6)
---------- ---------- ---------- ----------
(4.5) (13.2) (19.9) (19.1)
Net loss .................................... (70.9)% (48.1)% (72.5)% (53.5)%
========== ========== ========== ==========
Net loss applicable to common shareholders .. (70.9)% (48.1)% (72.5)% (53.5)%
========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenue. Our consolidated revenue increased to $94.0 million for the
three months ended September 30, 1999 as compared to $54.5 million for the three
months ended September 30, 1998. The growth in revenue was primarily
attributable to the increase in our customer base and resulting traffic in all
of our operations, partially offset by a decline in prices for the Company's
products and services. The largest increases occurred in France with the
acquisition of Omnicom on April 26, 1999.
Access and Network Services. Our access and network services costs for
the three months ended September 30, 1999 increased to $94.3 million or 100.3%
of revenues as compared to $41.9 million or 76.8% of revenues for the three
months ended September 30, 1998. The increase was primarily due to the increase
in Esprit's traffic volume.
Selling, General and Administrative. Selling, general and
administrative expenses for the three months ended September 30, 1999 increased
to $42.0 million or 44.7% of revenues as compared to $23.0 million or 42.2% of
revenues for the three months ended September 30, 1998. The increase in selling,
general and administrative expenses in 1999 is attributable to increases in the
number of staff associated with business growth, as well as administrative and
marketing costs required for our increased customer base.
Depreciation and Amortization. Depreciation and amortization increased
to $20.1 million for the three months ended September 30, 1999 as compared to
$8.7 million for the three months ended September 30, 1998. The substantial
increase in depreciation and amortization costs is attributable to the
depreciation related to the expansion of our network infrastructure.
Additionally, we have experienced an increase in amortization expense associated
with goodwill and intangibles that have arisen from our acquisition activities.
Interest, net. Interest increased to approximately ($17.5) million for
the three months ended September 30, 1999 from ($6.0) million in the three
months ended September 30, 1998. This significant increase in interest is
attributable to the substantial increase in our outstanding debt obligations
since the third quarter of 1998 offset by an increase in interest earned on the
short term investments of equity and debt proceeds.
Foreign Currency Gain (Loss). We recognized foreign currency gains of
$13.3 million in the three months ended September 30, 1999 as compared to losses
of ($1.1) million in the three months ended September 30, 1998. Our foreign
currency gains are primarily attributable to the effect of currency movements on
our outstanding debt obligations.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenue. Our consolidated revenue increased to $241.0 million for the
nine months ended September 30, 1999 as compared to $113.2 million for the nine
months ended September 30, 1998. The growth in revenue was primarily
attributable to the increase in our customer base and resulting traffic in all
of our operations, partially offset by a decline in prices for the Company's
products and services. The largest increases occurred in France with the
acquisition of Omnicom on April 26, 1999. Additionally, there were increases in
the United Kingdom, the Netherlands, and Germany, where the comparatives reflect
the acquisition of PLUSNET Gesellschaft fur Netwerk Services GmbH ("PLUSNET") in
May 1998, compared to nine months of revenue in the period ended September 30,
1999.
Access and Network Services. Our access and network services costs in
1999 increased to $207.9 million or 86.3% of revenues for the nine months ended
September 30, 1999, as compared to $88.9 million or 78.5% of revenues for the
nine months ended September 30, 1998. The increase was primarily due to the
increase in Esprit's traffic volume.
Selling, General and Administrative. Selling, general and
administrative expenses for the nine months ended September 30, 1999 increased
to $110.2 million or 45.7% of revenues as compared to $46.2 million or 40.8% of
revenues for the nine months ended September 30, 1998. The increase in selling,
general and administrative expenses in 1999 is attributable to increases in the
number of staff associated with business growth, as well as administrative and
marketing costs required for our increased customer base.
Depreciation and Amortization. Depreciation and amortization increased
to $49.7 million for the nine months ended September 30, 1999 as compared to
$17.1 million for the nine months ended September 30, 1998. The substantial
increase in depreciation and amortization costs is attributable to the
depreciation related to the expansion of our network infrastructure.
Additionally, we have experienced an increase in amortization expense associated
with goodwill and intangibles that have arisen from our acquisition activities.
Interest, net. Interest increased to approximately ($50.0) million in
the nine months ended September 30, 1999 from ($18.6) million in the nine months
ended September 30, 1998. This significant increase in interest is attributable
to the substantial increase in our outstanding debt obligations since the third
quarter of 1998 offset by an increase in interest earned on the short term
investments of equity and debt proceeds.
Foreign Currency Gain (Loss). We recognized foreign currency gains of
$1.8 million in the nine months ended September 30, 1999 as compared to losses
of ($3.0) million in the nine months ended September 30, 1998. Our foreign
currency gains are primarily attributable to the effect of currency movements on
our outstanding debt obligations.
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LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
Our revenues and costs are dependent upon factors that are not within
our control such as political, economic and regulatory changes, changes in
technology, increased competition and various factors such as strikes, weather,
and performance by third parties in connection with our operations. Due to the
uncertainty of these factors, actual revenues and costs may vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
our future capital requirements. In addition, if we expand our operations at an
accelerated rate or consummate acquisitions, our funding needs will increase,
possibly to a significant degree, and we will expend our capital resources
sooner than currently expected. As a result of the foregoing, or if our capital
resources otherwise prove to be insufficient, we might need to raise additional
capital to execute our current business plan and to fund expected operating
losses, as well as to consummate future acquisitions and exploit opportunities
to expand and develop our businesses.
We cannot assure you that we will be able to consummate additional
capital financing on favorable terms. As a result, we may be subject to
additional or more restrictive financial covenants and our interest obligations
may increase significantly. Failure to generate sufficient funds in the future,
may require us to delay or abandon some or all of our anticipated expenditures,
to sell assets, or both, either of which could have a material adverse effect on
our operations.
LIQUIDITY ANALYSIS
We had cash and cash equivalents of $33.8 million and $166.1 million as
of September 30, 1999 and December 31, 1998, respectively. We had restricted
cash of $48.7 million and $66.5 million as of September 30, 1999 and December
31, 1998, respectively, that primarily represent amounts held in escrow for debt
interest payments.
In the nine months ended September 30, 1999 we used cash of $132.8
million for our operating activities compared to $13.6 million used in the nine
months ended September 30, 1998. The significant increase in cash spending for
our operations in the nine months ended September 30, 1999 as compared to 1998
is attributable to the growth of our business operations which has resulted in
higher operating cash costs and accounts receivable carrying balances. We also
used cash of $35.1 million and $213.5 million for our investing activities in
the nine months ended September 30, 1999 and 1998, respectively. In the nine
months ended September 30, 1999 and 1998, our financing activities generated
$41.3 million and $237.4 million of cash, respectively. We cannot assure you
that our operations will achieve or sustain profitability or positive cash flow
in the future. If we cannot achieve and sustain operating profitability or
positive cash flow from operations, we may not be able to meet our debt service
obligations or working capital requirements.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs using two
digits rather than four to define the applicable year. Because of this
programming convention, software, hardware or firmware may recognize a date
using "00" as the year 1900 rather than the year 2000. Use of non-Year 2000
compliant programs could result in system failures, miscalculations or errors
causing disruptions of operations or other business problems, including, among
others, a temporary inability to process transactions and invoices or engage in
similar normal business activities.
Issues Posed by the Year 2000 Issue. We are exposed to the Year 2000
issue in a number of ways. Among other things, the Year 2000 issue might affect
our: (1) computer hardware and software; (2) telecommunications equipment and
other systems with embedded logic (among other things, this includes our fire
detection, access control systems, heating, ventilation and air conditioning,
and uninterruptible power supply); (3) operating partners and organizations upon
which we are dependent; (4) local access connections, upon which we are
dependent; and (5) supply chain.
Our Year 2000 Compliance Program. We have initiated a Year 2000
compliance program to address the aforementioned risks which the Year 2000 issue
poses and to avoid any material loss or impact to us or our customers due to
these risks. The object of this Year 2000 compliance program is to ensure that
neither the performance nor functionality of our operations are affected by
dates, prior to, during and after 2000. The scope of the Year 2000 compliance
program includes all of the business functions, locations and resources which
are essential to us. The resources which are within the scope of the Year 2000
compliance program are, among other things, our computer systems, software,
vendor supplied software, telecommunications equipment, third party
telecommunications
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partners and other network service suppliers, environmental and building control
systems, internal communication systems and other interfaces with third party
services. As explained below, our efforts to assess our systems as well as
non-system areas related to Year 2000 compliance involve (1) a wide-ranging
assessment of the Year 2000 problems that may affect us, (2) the development of
remedies to address the problems discovered in the assessment phase and (3)
testing of the remedies.
Assessment Phase. The assessment phase includes internal and third
party review of potential risks associated with the availability, integrity and
reliability of operational systems necessary to conduct business. During the
assessment phase we have identified substantially all of our major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 compliance program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
which might be materially impacted by Year 2000 issues. Our observations from
the assessment phase during the third and fourth quarters of 1998 is that most
of our telecommunications equipment and software has been purchased within the
past three years and the majority is already compliant or can be made compliant
with minor upgrades. We completed the assessment phase of our Year 2000
readiness in the fourth quarter of 1998.
Assessment of Third Party Compliance. As noted above, we have also undertaken
our Year 2000 compliance program to assess and monitor the progress of third
party vendors in resolving Year 2000 issues. We have obtained confirmations,
wherever possible, from our primary telecommunication vendors, business partners
and hardware and software vendors as to what plans, if any, are being developed
or are already in place to address their ability to process transactions related
to the Year 2000 transition. The British Standards Institute (BSI) defines these
transition dates. We have received statements of intended compliance as of
mid-1999 from the majority of vendors contacted.
Remediation, Prevention and Testing Phases. Based on those resources identified
in the assessment phase, we developed a detailed plan in the third and fourth
quarter of 1998, which directed the remediation and testing phases. All critical
components were in testing by December 31, 1998. All critical components were
Y2K compliant by October 15, 1999.
Business Continuity, Contingency Planning. We believe that we have identified
and remediated the high risk and high impact items in support of business
continuity. We believe that we are prepared through our contingency plans to
respond to Y2K transition problems for our subsidiaries, whether external or
internal. We intend to have key members of the Year 2000 Readiness committee on
duty at our Crisis Command Center during the critical changeover period, to
ensure that any unforeseen disruptions are dealt with to reach a timely resolve.
Our Worst Case Scenario. Our worst case scenario would be the failure
of our telecommunications equipment, power providers and/or interfaces with
other telecommunication vendors and either or both of the following:
o a loss of interconnect capacity from one or more major
suppliers of transmission capacity; and
o our inability to record, track or invoice billable minutes
which could ultimately cause us to temporarily stop carrying
traffic.
These cases would create business interruption at some of our
operations and would adversely affect our revenues. However, we have operations
that are geographically diversified; therefore, it is not anticipated that the
worst case scenario would affect all operations at the same time. Additionally,
if power failures occur, we currently have diesel generators at certain of our
major sites. Based on our assessment during the third and fourth quarters of
1998, we do not foresee a material loss due to these conditions. However, we
cannot assure you that Year 2000 non-compliance by our systems or the systems of
vendors, customers, partners or others will not result in a material adverse
effect.
Contingency Plans. We have developed a contingency plan to address our
worst case scenario; however, certain of the initiatives are subject to
execution risk. This risk would include the ability to have access to diesel
fuel or large generators should power failures occur, the ability to quickly
replace telecommunications equipment and the ability to contract with
alternative telecommunication and maintenance providers at reasonable terms.
Moreover, we maybe further limited in resources in certain geographical regions
due to the market volatility and weak economies in which we have business
operations.
Costs Related to the Year 2000 Issue. We expect that we will incur
approximately $1.5 million in expenses to complete the assessment, detailed
planning, remediation, prevention and testing phases, exclusive of replacement
costs for telecommunications equipment and software, of which approximately $0.2
million had been incurred during 1998. It is estimated that between $0.2 million
12
<PAGE> 13
to $0.4 million of the total expenditure will be required to complete the
remediation and testing phase, excluding the replacement of telecommunications
equipment and software. We have currently identified that certain
telecommunications equipment and software will need to be replaced and we
anticipate that we will incur approximately $0.2 million to replace the
identified telecommunications equipment and software. Further, we are currently
unable to quantify the total costs that we may incur for the replacement of all
telecommunications equipment and software due to the stage of our Year 2000
readiness review. These costs will be funded from operating cash flows and
expensed as incurred. In addition, the preceding cost estimate does not include
amounts associated with the accelerated acquisition of replacement systems, as
none are included in the initial assessment during the third and fourth quarters
of 1998. We do not expect that the costs of addressing our Year 2000 readiness
will have a material effect on our financial condition or results of operations.
However, we cannot assure you that Year 2000 non-compliance by our systems or
the systems of vendors, customers, partners or others will not result in a
material adverse effect for us.
Risks Related to the Year 2000 Issue. Although our efforts to be Year
2000 compliant are intended to minimize the adverse effects of the Year 2000
issue on our business and operations, the actual effects of the issue will not
be known until 2000. Difficulties in implementing the remediation or prevention
phases or failure by us to fully implement the planning or remediation phases or
the failure of our major vendors, third party network service providers, and
other material service providers and customers to adequately address their
respective Year 2000 issues in a timely manner would have a material adverse
effect on our business, results of operations, and financial condition.
IMPACT OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the
European Union, including Belgium, The Netherlands, Ireland, France, Germany,
Italy and Spain established fixed conversion rate between their existing
sovereign currencies and a new currency called the "Euro." These countries
adopted the Euro as their common legal currency on that date. The Euro trades on
currency exchanges and is available for non-cash transactions. Hereafter and
until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries.
We have significant operations within the European Union including many
of the countries that have adopted the Euro. We are currently evaluating the
impact the Euro will have on our continuing business operations and no
assurances can be given that the Euro will not have material adverse affect on
our business, financial condition and results of operations. However, we do not
expect the Euro to have a material effect on our competitive position as a
result of price transparency within the European Union as we have always
operated as a pan-European business with transparent pricing in ECU for the
majority of our customers. Moreover, we are evaluating our ability to update our
information systems to accommodate the adoption of the Euro but we do not expect
to incur material costs in either the evaluating or the updating of such
systems. In addition, we cannot accurately predict the impact the Euro will have
on currency exchange rates or on our currency exchange risk.
Although we do have subsidiaries that have adopted the Euro as their
legal currency, the functional currency for the Company remains pounds sterling.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Some of our operations are outside the United Kingdom and therefore our
consolidated financial results are subject to fluctuations in currency exchange
rates. Our operations transact their business in the following significant
currencies: Deutschmark, French Franc, British Pound Sterling, Belgian Franc,
Dutch Guilder, and, effective January 1, 1999, the Euro. For those operating
companies that transact their business in currencies that are not readily
convertible, we attempt to minimize our exposure by indexing our invoices and
collections to the applicable dollar/foreign currency exchange rate to the
extent our costs (including interest expense, capital expenditures and equity)
are incurred in GBP. Although we are attempting to match revenues, costs,
borrowing and repayments in terms of their respective currencies, we have
experienced, and may continue to experience, losses and a resulting negative
impact on earnings with respect to holdings solely as a result of foreign
currency exchange rate fluctuations, which include foreign currency devaluations
against the GBP. Furthermore, certain of our operations have notes payable and
notes receivable which are denominated in a currency other than their own
functional currency or loans linked to the Deutsche mark and US Dollar. We may
also experience economic loss and a negative impact on earnings related to these
monetary assets and liabilities.
13
<PAGE> 14
We have developed risk management policies that establish guidelines
for managing foreign exchange risk. We are currently evaluating the materiality
of foreign exchange exposures in different countries and the financial
instruments available to mitigate this exposure. Our ability to hedge our
exposure is limited since certain of our operations are located in countries
whose currencies are not easily convertible. Financial hedge instruments for
these countries are nonexistent or limited and also pricing of these instruments
is often volatile and not always efficient. We designed and implemented
reporting processes to monitor the potential exposure on an ongoing basis
beginning in 1998. We will use the output of this process to execute financial
hedges to cover foreign exchange exposure when practical and economically
justified.
Esprit's treasury function manages its funding, liquidity and exposure
to interest rate and foreign exchange rate risks. The Company's treasury
operations are conducted within a framework of policies and guidelines
authorized by the Company's Board of Directors. In accordance with the Company's
policy statement, Esprit does not enter into any transactions of a speculative
nature. Although the Company is exposed to fluctuations in exchange rates, it
does not use any derivatives to mitigate that risk.
The principal and material areas of exposure arise out of the Company's
U.S. Dollar-denominated Notes and DM-denominated Notes which bear a fixed rate
of funding but are exposed to fluctuation in exchange rate movements. Although
the Company does not actively hedge these open positions, it does attempt to
mitigate them by maintaining assets in the exposed currencies whenever possible.
Foreign exchange exposures are monitored by tracking actual and projected
commitments every quarter.
INTEREST RATES
Esprit has fixed rate debt, as the interest rates on the Notes are
fixed until maturity. The following is a breakdown of the Company's principal
and material debt as of September 30, 1999:
<TABLE>
<CAPTION>
NOTES INTEREST RATE MATURITY
- ----- ------------- --------
<S> <C> <C>
U.S.$ 230,000,000................................. 11.500% 2007
DM 125,000,000.................................. 11.500% 2007
U.S.$ 150,000,000................................. 10.875% 2008
DM 150,000,000................................. 11.000% 2008
</TABLE>
EXCHANGE RATES
As noted above, the Company's principal and material areas of exposure
arise out of its foreign currency denominated Notes. The fact that the Company
has certain principal and material amounts of assets in those currencies
mitigates this exposure. The Company had the following mitigating foreign
currency assets as of September 30, 1999:
Deposits
U.S.$ 14,957,000
EUR 6,171,000
Restricted Securities
U.S.$ 38,401,000
DM 20,402,000
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
DESIGNATION DESCRIPTION
----------- -----------
27 Financial Data Schedule
B. Reports on Form 8-K
DATE OF REPORT SUBJECT OF REPORT
------------------ -----------------
September 30, 1999 On September 24, 1999, the Board
of Directors determined that it
would adopt a new fiscal year
ending December 31 in order to
conform to its parent company,
GTS.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrants have duly caused this report to be signed on their behalf
by the undersigned thereunto duly authorized.
ESPRIT TELECOM GROUP PLC
(Registrant)
By: /s/ GRIER C. RACLIN
------------------------------
Name: Grier C. Raclin
Title: Officer
Date: November 10, 1999
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,837
<SECURITIES> 0
<RECEIVABLES> 166,545
<ALLOWANCES> (8,104)
<INVENTORY> 0
<CURRENT-ASSETS> 236,061
<PP&E> 306,867
<DEPRECIATION> (63,781)
<TOTAL-ASSETS> 1,108,093
<CURRENT-LIABILITIES> 228,252
<BONDS> 760,201
0
0
<COMMON> 2,074
<OTHER-SE> 128,315
<TOTAL-LIABILITY-AND-EQUITY> 1,108,093
<SALES> 0
<TOTAL-REVENUES> 241,010
<CGS> 0
<TOTAL-COSTS> 207,880
<OTHER-EXPENSES> 159,847
<LOSS-PROVISION> 5,850
<INTEREST-EXPENSE> 50,544
<INCOME-PRETAX> (174,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (174,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (174,822)
<EPS-BASIC> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
