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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
(COMMISSION FILE NUMBER: 0-29148)
GLOBAL TELESYSTEMS (EUROPE) LIMITED
(Exact name of registrant as specified in its charter)
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<S> <C>
ENGLAND AND WALES NONE
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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 [ ]
The registrant is a wholly-owned subsidiary of Global TeleSystems Group,
Inc.
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TABLE OF CONTENTS
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Global TeleSystems (Europe) Limited
(unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999..................................... 1
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999................ 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999................ 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 6
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 9
Signatures............................................................... 10
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PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS (EUROPE) LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 26,029 $ 16,936
Restricted cash........................................... 48,854 32,507
Accounts receivable, net.................................. 142,392 116,100
Prepaid expenses and other current assets................. 14,756 22,591
---------- ----------
TOTAL CURRENT ASSETS.............................. 232,031 188,134
Property and equipment, net................................. 272,455 214,089
Goodwill and intangible assets, net......................... 585,234 603,803
Restricted cash and other non-current assets................ 15,156 587
---------- ----------
TOTAL ASSETS...................................... $1,104,876 $1,006,613
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities............ $ 264,705 $ 250,354
Current portion of debt and capital lease obligations..... 33,239 17,022
---------- ----------
TOTAL CURRENT LIABILITIES......................... 297,944 267,376
Long-term debt and capital lease obligations, less current
portion................................................... 609,218 598,356
Related party long-term debt, less current portion.......... 104,191 104,191
Other non-current liabilities............................... 1,623 --
---------- ----------
TOTAL LIABILITIES................................. 1,012,976 969,923
SHAREHOLDERS' EQUITY
Common stock, L0.01 par value (200,000,000 shares
authorized; 126,101,574 shares issued and
outstanding)........................................... 1,975 1,975
Additional paid-in capital................................ 623,499 527,694
Accumulated deficit....................................... (533,574) (492,979)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 91,900 36,690
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $1,104,876 $1,006,613
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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GLOBAL TELESYSTEMS (EUROPE) LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $116,725 $ 65,914
Operating expenses:
Access and network services............................... 93,282 53,415
Selling, general and administrative....................... 60,003 42,619
Depreciation and amortization............................. 22,753 12,011
-------- --------
Total operating expenses 176,038 108,045
Loss from operations........................................ (59,313) (42,131)
Other income (expense):
Interest, net............................................. (19,053) (14,672)
Foreign currency losses................................... (5,441) (4,220)
Other non-operating income................................ 43,212 --
-------- --------
18,718 (18,892)
-------- --------
Net Loss.................................................... $(40,595) $(61,023)
======== ========
Loss per common share:
Net loss per share.......................................... $ (0.32) $ (0.48)
======== ========
Weighted average common shares outstanding.................. 126,102 125,926
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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GLOBAL TELESYSTEMS (EUROPE) LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES....................... $ (3,586) $(36,077)
INVESTING ACTIVITIES
Purchases of property and equipment....................... (41,875) (22,236)
Restricted cash........................................... (18,720) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (60,595) (22,236)
FINANCING ACTIVITIES
Repayments of debt........................................ (27,752) (611)
Capital contribution from GTS............................. 91,733 --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... 63,981 (611)
Effect of exchange rate changes on cash and cash
equivalents............................................ 9,293 (4,419)
-------- --------
Net increase (decrease) in cash and cash equivalents...... 9,093 (63,343)
Cash and cash equivalents at beginning of period.......... 16,936 166,107
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 26,029 $102,764
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalization of leases.................................. $ 50,310 $ 10,860
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GLOBAL TELESYSTEMS (EUROPE) LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Global TeleSystems (Europe) Limited ("the Company"), formerly Esprit
Telecom Group plc, is a European telecommunications company, providing high
quality, competitively priced, international and national long distance
telecommunications services. Effective January 11, 2000, Esprit Telecom Group
plc re-registered as a private company and changed its name to Global
TeleSystems (Europe) Limited.
The financial statements 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 December
31, 1999 audited consolidated financial statements and the notes related
thereto. The results of operations for the three months ended March 31, 2000 may
not be indicative of the operating results for the full year.
Global TeleSystems Group, Inc. ("GTS") has been realigning its legal
organization structure in order to achieve the most beneficial company-wide tax
and operating structure. Due to this realignment the financial results contained
herein now include subsidiaries that were previously included elsewhere within
the GTS organization structure. GTS has obtained appraisals from an independent
appraisal firm to support the sale of assets, at fair market value, between GTS
affiliates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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.
3. COMPREHENSIVE INCOME (LOSS)
The following table reflects the calculation of comprehensive income (loss)
for the Company for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
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(IN THOUSANDS)
<S> <C> <C>
Net loss.................................................... $(40,595) $(61,023)
Other comprehensive income (loss):
Foreign currency translation adjustments.................. (1,649) (3,674)
-------- --------
Comprehensive loss.......................................... $(42,244) $(64,697)
======== ========
</TABLE>
4
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GLOBAL TELESYSTEMS (EUROPE) LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTION
The Company had receivable and payable balances from affiliates of $36.2
million and $91.7 million, respectively, at March 31, 2000.
The Company derived revenue from affiliates of $19.1 million for the three
months ended March 31, 2000. Costs of revenue from affiliates were $10.0 million
for the three months ended March 31, 2000.
5
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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 March 31,
2000 and 1999 and of certain factors that management believes are likely to
affect our prospective financial condition. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
the notes related thereto appearing elsewhere in this 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).
6
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RESULTS OF OPERATIONS
The following table sets forth our statement of operations as a percentage
of revenues:
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THREE MONTHS
ENDED MARCH 31,
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2000 1999
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Revenues.................................................... 100.0% 100.0%
Access and network services................................. 79.9 81.0
Selling, general and administrative......................... 51.4 64.7
Depreciation and amortization............................... 19.5 18.2
----- -----
Loss from operations........................................ (50.8) (63.9)
Interest, net............................................... (16.3) (22.3)
Foreign currency losses..................................... (4.7) (6.4)
Other non-operating income.................................. 37.0 --
----- -----
16.0 (28.7)
Net loss.................................................... (34.8)% (92.6)%
===== =====
Net loss applicable to common shareholders.................. (34.8)% (92.6)%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
Revenue. Our consolidated revenue increased to $116.7 million for the three
months ended March 31, 2000 as compared to $65.9 million for the three months
ended March 31, 1999. The growth in revenue was primarily attributable to the
increase in our customer base and resulting traffic in our operations as a
result of the acquisition of Omnicom SA ("Omnicom") in France in April 1999.
However, the increase in revenue is partially offset by a decline in prices for
the Company's products and services.
Access and Network Services. Our access and network services costs for the
three months ended March 31, 2000 increased to $93.3 million or 79.9% of
revenues as compared to $53.4 million or 81.0% of revenues for the three months
ended March 31, 1999. The increase was primarily due to the increase in the
Company's traffic volume as a result of the acquisition of Omnicom in France in
April 1999.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 2000 increased to $60.0 million or
51.4% of revenues as compared to $42.6 million or 64.7% of revenues for the
three months ended March 31, 1999. The increase in selling, general and
administrative expenses in 2000 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
$22.8 million for the three months ended March 31, 2000 as compared to $12.0
million for the three months ended March 31, 1999. 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. Interest expense for the three months ended March 31, 2000 was
$25.9 million as compared to $16.6 million for the comparable period in 1999.
The increase in interest expense is primarily attributable to the substantial
increase in our outstanding debt obligations since the first quarter of 1999.
Interest income for the three months ended March 31, 2000 was $6.8 million
as compared to $1.9 million in the comparable period in 1999. The increase is
due to the interest earned through our short-term investments of the proceeds
received from our financing activities.
Foreign Currency Loss. We recognized foreign currency losses of $5.4
million in the three months ended March 31, 2000 as compared to losses of $4.2
million in the three months ended March 31, 1999. Our foreign currency losses
are primarily attributable to the effect of currency movements on our
outstanding debt obligations.
Other Non-Operating Income. As a result of GTS's efforts associated with
realigning its legal entity organizational structure, the Company realized a
gain of $42.3 million in the first quarter 2000 associated with the sale of
certain business assets to an affiliated GTS subsidiary.
7
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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. The Company is a wholly-owned subsidiary
of Global TeleSystems Group, Inc. and during 1999 and the first quarter 2000,
GTS contributed $87.5 million and $91.7 million, respectively, in the form of
equity contributions. There can be no assurances, however, that GTS will fund
additional amounts in the future.
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 $26.0 million and $16.9 million as of
March 31, 2000 and December 31, 1999, respectively. We had restricted cash of
$48.9 million and $32.5 million as of March 31, 2000 and December 31, 1999,
respectively, that primarily represent amounts held in escrow for debt interest
payments.
In the three months ended March 31, 2000, our operating activities used
cash of $3.6 million compared to $36.1 million used in the three months ended
March 31, 1999. We also used cash of $60.6 million and $22.2 million for our
investing activities in the three months ended March 31, 2000 and 1999,
respectively. In the three months ended March 31, 2000 and 1999, our financing
activities provided cash of $64.0 million and used cash of $0.6 million,
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.
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, where we have operations, 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 continue to evaluate 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.
8
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes since December 31, 1999.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
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DESIGNATION DESCRIPTION
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27 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
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DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
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None
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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.
GLOBAL TELESYSTEMS (EUROPE) LIMITED
(Registrant)
By: /s/ JEFFREY H. VON DEYLEN
------------------------------------
Jeffrey H. Von Deylen
Senior Vice President, Finance
(Principal Accounting Officer)
Dated: May 15, 2000
10
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INDEX TO EXHIBITS
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<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
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27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
03/31/2000 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 26,029
<SECURITIES> 0
<RECEIVABLES> 166,760
<ALLOWANCES> (24,368)
<INVENTORY> 0
<CURRENT-ASSETS> 232,031
<PP&E> 355,051
<DEPRECIATION> (82,596)
<TOTAL-ASSETS> 1,104,876
<CURRENT-LIABILITIES> 382,815
<BONDS> 746,648
0
0
<COMMON> 1,975
<OTHER-SE> 89,925
<TOTAL-LIABILITY-AND-EQUITY> 1,104,876
<SALES> 0
<TOTAL-REVENUES> 116,725
<CGS> 0
<TOTAL-COSTS> 93,282
<OTHER-EXPENSES> 82,756
<LOSS-PROVISION> 1,334
<INTEREST-EXPENSE> 25,877
<INCOME-PRETAX> (40,595)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,595)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
