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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998
(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 December 31, 1998
and September 30, 1998............................................ 3
Condensed Consolidated Statements of Operations for the Three Months
Ended December 31, 1998 and December 31, 1997, respectively....... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1998 and December 31, 1997, 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............. 12
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds ............................. 14
Item 4 Submission of Matters to a Vote of Security Holders ................... 14
Item 5 Other Information ..................................................... 14
Item 6 Exhibits and Reports on Form 8-K ...................................... 14
Signatures........................................................................... 15
</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>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1998
------------ -------------
(in thousands, except share data)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ....................................... $ 166,107 $ 230,745
Restricted cash ................................................. 35,079 35,047
Accounts receivable, net ........................................ 70,503 50,037
Prepaid expenses and other assets ............................... 4,356 19,842
---------- ----------
TOTAL CURRENT ASSETS .................................... 276,045 335,671
Property and equipment, net ....................................... 114,949 93,588
Goodwill and intangible assets, net ............................... 210,566 193,047
Restricted cash and other non-current assets ...................... 31,391 48,317
---------- ----------
TOTAL ASSETS ............................................ $ 632,951 $ 670,477
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities .................. $ 108,776 $ 129,424
---------- ----------
TOTAL CURRENT LIABILITIES ............................... 108,776 129,424
Long-term debt, capital leases and other non-current liabilities .. 575,996 553,287
---------- ----------
TOTAL LIABILITIES ....................................... 684,772 682,711
SHAREHOLDERS' EQUITY
Common stock, (pound)0.01 par value (200,000,000 shares authorized;
125,799,771 and 125,528,528 shares issued and outstanding at
December 31, 1998 and September 30, 1998, respectively), ........ 2,088 1,649
Additional paid-in capital ........................................ 91,217 91,217
Cumulative translation adjustment ................................. 6,456 6,338
Accumulated deficit ............................................... (151,582) (111,438)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY .............................. (51,821) (12,234)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 632,951 $ 670,477
========== ==========
</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
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
(in thousands, except share data)
<S> <C> <C>
Revenues ..................................... $ 61,661 $ 21,797
Operating expenses:
Access and network services ................ 47,345 18,153
Selling, general and administrative ........ 28,520 8,789
Depreciation and amortization .............. 9,486 1,998
---------- ----------
Total operating expenses ..................... 85,351 28,940
Loss from operations ......................... (23,690) (7,143)
Other income (expense):
Interest, net .............................. (17,736) (399)
Foreign currency losses .................... (1,125) --
---------- ----------
(18,861) (399)
---------- ----------
Net Loss ..................................... $ (42,551) $ (7,542)
========== ==========
Loss per common share:
Net loss per share ......................... $ (0.34) $ (0.06)
========== ==========
Weighted average common shares outstanding.. 125,676 122,240
========== ==========
</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>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
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(in thousands)
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.... $ (27,559) $ 3,599
---------- ----------
INVESTING ACTIVITIES
Acquisitions, goodwill and intangibles .............. (46,097) (13,525)
Purchases of property and equipment ................. (27,026) (7,521)
Other investing activities .......................... 16,748 (106,690)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ....... (56,375) (127,736)
---------- ----------
FINANCING ACTIVITIES
Net proceeds from issuance of equity securities ..... 12,840 3,611
Proceeds from debt, net of debt issue costs ......... -- 303,493
Other financing activities .......................... -- (1,783)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 12,840 305,321
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents ......................................... 6,456 (975)
---------- ----------
Net (decrease) increase in cash and cash equivalents... (64,638) 180,209
Cash and cash equivalents at beginning of period ...... 230,745 39,618
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 166,107 $ 219,827
========== ==========
</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 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 months ended December 31, 1998 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.
Further, on September 24, 1999 and effective October 1, 1998, the Company
changed its fiscal year end from September 30 to December 31. The three month
transition period ended December 31, 1998 bridges the gap between the Company's
old and new fiscal year ends.
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.
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4. BUSINESS COMBINATIONS
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 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 months ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss .................................... $ (42,551) $ (7,542)
Other comprehensive income (loss)............
Foreign currency translation adjustments... 118 (853)
---------- ----------
Comprehensive loss .......................... $ (42,433) $ (8,395)
========== ==========
</TABLE>
6. SUBSEQUENT EVENTS
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.
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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 months ended December 31,
1998 and 1997. 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 and 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
DECEMBER 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues .................................... 100.0% 100.0%
Access and network .......................... 76.8 83.3
Selling, general and administrative ......... 46.3 40.3
Depreciation and amortization ............... 15.3 9.2
-------- --------
Loss from operations ........................ (38.4) (32.8)
Interest, net ............................... (28.8) (1.8)
Foreign currency losses ..................... (1.8) --
-------- --------
(30.6) (1.8)
Net loss .................................... (69.0) (34.6)%
======== ========
Net loss applicable to common shareholders... (69.0) (34.6)%
======== ========
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1997
Revenue. Our consolidated revenue increased to $61.7 million for the three
months ended December 31, 1998 as compared to $21.8 million for the three months
ended December 31, 1997. 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.
Additionally, the acquisition of PLUSNET Gesellschaft fur Netzwerk Services GmbH
("PLUSNET") in May 1998 contributed to the increase in revenue for the three
months ended December 31, 1998, whereas there was no comparative revenue for the
three months ended December 31, 1997.
Access and Network Services. Our access and network services costs for the
three months ended December 31, 1998 increased to $47.3 million or 76.8% of
revenues as compared to $18.2 million or 83.3% of revenues for the three months
ended December 31, 1997. The increase in access and network services costs is
primarily due to the increase in the Company's traffic volume. The decrease in
access and network services costs as a percentage of revenues in the fourth
quarter of 1998 is attributable to increases in the efficiency of the Esprit
Network and the impact of increased usage of the interconnect arrangements
combined with lower interconnect prices.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended December 31, 1998 increased to $28.5 million
or 46.3% of revenues as compared to $8.8 million or 40.3% of revenues for the
three months ended December 31, 1997. The increase in selling, general and
administrative expenses in 1998 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
$9.5 million for the three months ended December 31, 1998 as compared to $2.0
million for the three months ended December 31, 1997. 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 ($17.7) million for the
three months ended December 31, 1998 from ($0.4) million in the three months
ended December 31, 1997. This significant increase in interest is attributable
to the substantial increase in our outstanding debt obligations since 1997
offset by an increase in interest earned on the short term investments of equity
and debt proceeds.
Foreign Currency Loss. We recognized foreign currency losses of $1.1 million
in the three months ended December 31, 1998. Our foreign currency losses 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 $166.1 million and $230.7 million as of
December 31, 1998 and September 30, 1998, respectively. We had restricted cash
of $66.5 million and $83.2 million as of December 31, 1998 and September 30,
1998, respectively, that primarily represent amounts held in escrow for debt
interest payments.
In the three months ended December 31, 1998 we used $27.6 million of cash
for our operating activities. The significant increase in cash spending for our
operations in the quarter ended December 31, 1998 as compared to 1997 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 $56.4 million for our investing activities in the fourth quarter of
1998 respectively. In the three months ended December 31, 1998 we received cash
of $12.8 million from our financing activities. 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 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
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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
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
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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.
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
12
<PAGE> 13
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 December 31, 1998:
<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 December 31, 1998:
Deposits
U.S.$ 106,851,000
DM 81,896,000
Restricted Securities
U.S.$ 50,124,000
DM 27,155,000
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
See Note 6 to the Company's unaudited Condensed Consolidated Financial
Statements included in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
DESIGNATION DESCRIPTION
----------- -----------
27 Financial Data Schedule
14
<PAGE> 15
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 8, 1999
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) 12/31/98
UNAUDITED CONSOLIDATED FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 166,107
<SECURITIES> 0
<RECEIVABLES> 74,496
<ALLOWANCES> (3,993)
<INVENTORY> 0
<CURRENT-ASSETS> 276,045
<PP&E> 153,688
<DEPRECIATION> (38,739)
<TOTAL-ASSETS> 632,951
<CURRENT-LIABILITIES> 108,776
<BONDS> 577,513
0
0
<COMMON> 2,088
<OTHER-SE> (53,909)
<TOTAL-LIABILITY-AND-EQUITY> 632,951
<SALES> 0
<TOTAL-REVENUES> 61,661
<CGS> 0
<TOTAL-COSTS> 47,345
<OTHER-EXPENSES> 38,006
<LOSS-PROVISION> 1,898
<INTEREST-EXPENSE> 17,736
<INCOME-PRETAX> (42,551)
<INCOME-TAX> 0
<INCOME-CONTINUING> (42,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,551)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
