<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, 2000
(COMMISSION FILE NUMBER: 0-29148)
GLOBAL TELESYSTEMS (EUROPE) LIMITED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
ENGLAND AND WALES NONE
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
151 SHAFTESBURY AVENUE
LONDON, WC2H 8AL
UNITED KINGDOM
(Address of principal executive office)
+44 207 769 8000
(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, Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements of Global TeleSystems (Europe) Limited
(unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999.................................. 1
Condensed Consolidated Statements of Operations for the
Three and Nine months Ended September 30, 2000 and 1999..... 2
Condensed Consolidated Statements of Cash Flows for the Nine
months Ended September 30, 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................................... 7
Item 3 Quantitative and Qualitative Disclosures About Market
Risk........................................................ 11
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................ 12
Signatures............................................................... 13
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS (EUROPE) LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including restricted cash...... $ 51,832 $ 49,443
Accounts receivable, net.................................. 98,533 116,100
Other assets.............................................. 30,867 22,591
-------- ----------
TOTAL CURRENT ASSETS.............................. 181,232 188,134
Property and equipment, net................................. 250,325 214,089
Goodwill and intangible assets, net......................... 504,193 603,803
Other non-current assets.................................... 16,638 587
-------- ----------
TOTAL ASSETS...................................... $952,388 $1,006,613
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities............ $268,613 $ 250,354
Current portion of debt and capital lease obligations..... 10,250 17,022
-------- ----------
TOTAL CURRENT LIABILITIES......................... 278,863 267,376
Long-term debt and capital lease obligations, less current
portion................................................ 579,274 598,356
Related party long-term debt, less current portion........ 104,191 104,191
Other non-current liabilities............................. 12,753 --
-------- ----------
TOTAL LIABILITIES................................. 975,081 969,923
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................................ 738,031 527,694
Accumulated deficit....................................... (762,699) (492,979)
-------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ (22,693) 36,690
-------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $952,388 $1,006,613
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
GLOBAL TELESYSTEMS (EUROPE) LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues........................................ $ 106,433 $ 94,034 $ 318,356 $ 241,010
Operating expenses:
Access and network services................... 98,968 94,281 294,020 207,880
Selling, general and administrative........... 45,283 42,048 152,445 110,185
Depreciation and amortization................. 21,470 20,125 65,403 49,662
Merger and Restructuring costs................ 8,500 -- 8,500 --
--------- -------- --------- ---------
Total operating expenses.............. 174,221 156,454 520,368 367,727
Loss from operations............................ (67,788) (62,420) (202,012) (126,717)
Other income (expense):
Interest, net................................. (19,183) (17,524) (57,103) (49,952)
Foreign currency (losses)/gains............... (22,709) 13,267 (51,195) 1,847
Other non-operating (expenses)/income......... (3,582) -- 40,590 --
--------- -------- --------- ---------
(45,474) (4,257) (67,708) (48,105)
Net loss.............................. $(113,262) $(66,677) $(269,720) $(174,822)
========= ======== ========= =========
Loss per common share:
Net loss per share.................... $ (0.90) $ (0.53) $ (2.14) $ (1.39)
========= ======== ========= =========
Weighted average common shares
outstanding......................... 126,102 126,102 126,102 126,102
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
GLOBAL TELESYSTEMS (EUROPE) LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES....................... $(195,611) $(132,776)
INVESTING ACTIVITIES
Purchases of property and equipment....................... (108,500) (77,994)
Proceeds from sale of subsidiary.......................... 45,773 --
Restricted cash and other investing activities............ 9,677 42,871
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES............. (53,050) (35,123)
FINANCING ACTIVITIES
Capital contribution from GTS............................. 193,815 41,349
Due from affiliated companies, net........................ 24,729 --
Repayments of capital lease obligations................... (20,201) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 198,343 41,349
Effect of exchange rate changes on cash and cash
equivalents............................................ 67,892 (5,720)
--------- ---------
Net increase (decrease) in cash and cash equivalents...... 17,574 (132,270)
Cash and cash equivalents at beginning of period.......... 16,936 166,107
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 34,510 $ 33,837
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalization of leases.................................. $ 56,023 $ 67,123
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
GLOBAL TELESYSTEMS (EUROPE) LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Global TeleSystems (Europe) Limited ("the Company") is a European
telecommunications company, providing high quality, competitively priced,
international and national long distance telecommunications services.
On November 10, 2000, the Board of Directors' of Global TeleSystems, Inc.
("GTS") approved a plan by which GTS will focus on providing broadband services
to traditional carriers, Internet service providers ("ISPs"), application
service providers ("ASPs"), other Web-centric entities and data intensive pan-
European corporations. As part of this plan, GTS intends to sell the portion of
its units focused on serving small-to-medium enterprises ("SME's"), including
the Company and its subsidiaries. In addition, on November 13, 2000 GTS
announced that it is soliciting consents from holders of its 9 7/8% Senior Notes
due 2005 (the "Notes") to amend certain provisions of the indenture governing
the Notes. The purpose of the consent solicitation is to permit GTS to modify
the "Event of Default" provisions of the indenture governing the Notes in order
to provide GTS with greater flexibility to, among other things, restructure the
operations of the Company, and address the indebtedness represented by the
Company's publicly traded debt securities and long-term debt owed to GTS by the
Company. See also Note 6, "Subsequent Events."
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
intercompany 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 and nine months ended September 30, 2000 may
not be indicative of the operating results for the full year.
Throughout 2000, GTS has been realigning its legal organizational structure
in order to achieve the most beneficial company wide tax structure. Due to this
realignment, the fiscal year 2000 financial results contained herein now include
subsidiaries that were previously included elsewhere within the GTS
organizational structure during 1999 and also exclude subsidiaries that were
included within the Company's fiscal year 1999 financial results. GTS has
obtained appraisals from an independent appraisal firm to support the sale and
acquisition of net assets by the Company, at their appraised fair market value,
to and from other GTS affiliates.
Certain reclassifications have been made to the prior 1999 condensed
consolidated financial statements in order to conform to the 2000 presentation.
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.
4
<PAGE> 7
GLOBAL TELESYSTEMS (EUROPE) LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMPREHENSIVE INCOME (LOSS)
The following table reflects the calculation of comprehensive income (loss)
for the Company for the three and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss................................ $(113,262) $(66,677) $(269,720) $(174,822)
Other comprehensive income (loss)
Foreign currency translation
adjustments........................ (32,675) (8,869) 16,522 (11,626)
--------- -------- --------- ---------
Comprehensive loss...................... $(145,937) $(75,546) $(253,198) $(186,448)
========= ======== ========= =========
</TABLE>
4. MERGER AND RESTRUCTURING COSTS
On August 1, 2000, the Board of Directors of GTS approved management's plan
to exit from its residential and pre-paid card businesses, and streamline its
operations by, among other things, consolidating its headquarters functions,
reducing or redeploying headcount, centralizing finance and billing operations
and consolidating sales offices. The Company is a wholly-owned subsidiary of GTS
and as a result of these initiatives, this plan of restructuring will have an
impact on the Company's future financial results. The Company has recorded a
charge of approximately $8.5 million in its third quarter 2000 financial
results. Of the $8.5 million, $4.2 million remains as an accrual at September
30, 2000 for additional cash payments that the Company expects to incur as part
of restructuring plan.
During the fourth quarter of 1999, the Company recorded a $37.3 million
charge to earnings related to the integration and rationalization of its
switched-voice assets that is expected to increase efficiencies in the Company's
network infrastructure. At September 30, 2000 approximately $15.8 million
remains as an accrual for additional cash payments that the Company expect to
incur as part of the restructuring plan.
5. RELATED PARTY TRANSACTION
The Company had receivable and payable balances from affiliates of $38.8
million and $94.3 million, respectively, at September 30, 2000.
The Company derived revenue from affiliates of $19.5 million for the nine
months ended September 30, 2000. Costs of revenue from affiliates were $40.3
million for the nine months ended September 30, 2000.
6. SUBSEQUENT EVENTS
Organizational Structure Change
On November 10, 2000, the Board of Directors' of GTS approved a plan by
which GTS will focus on providing broadband services to traditional carriers,
ISPs, ASPs, other Web-centric entities and data intensive pan-European
corporations. The objective of the restructuring is to position the GTS as a
data services-only provider that will generate positive earnings before
interest, taxes, depreciation and amortization ("EBITDA").
As part of this plan, GTS will immediately restructure into four "stand
alone" business units -- GTS Broadband Services; GTS Business Services; GTS
Central Europe; and Golden Telecom, Inc. GTS intends to sell the portion of its
Business Services and Central Europe units focused on serving
small-to-medium-sized enterprises ("SMEs"), including the Company and its
subsidiaries, and has retained an investment banker to assist in the sale of
these assets.
5
<PAGE> 8
GLOBAL TELESYSTEMS (EUROPE) LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These actions are intended to simplify the organization and operations of
GTS. The Company is a wholly-owned subsidiary of GTS and as a result of these
initiatives, the Company expects that it will incur a charge for severance,
shut-down activities, legal and professional fees as well as the write-off of
certain intangible assets, including goodwill related to the Business Services
businesses. This charge is expected to be in the range of $600 million to $650
million, of which $550 million to $600 million is anticipated to be non-cash,
prior to any proceeds that may result from the intended sales transactions.
Consent Solicitation
On November 13, 2000, GTS commenced soliciting consents from holders of its
9 7/8% Senior Notes due 2005 (the "Notes") to amend certain provisions of the
indenture governing the Notes. The purpose of the consent solicitation is to
permit GTS to modify the "Event of Default" provisions of the indenture
governing the Notes in order to provide GTS with greater flexibility to, among
other things, restructure the operations of the Company, and address the
indebtedness represented by the Company's publicly traded debt securities and
long-term debt owed to GTS by the Company. Such additional flexibility is sought
to reduce the possibility that actions taken to restructure such operations or
address such indebtedness may negatively impact the creditworthiness of GTS,
other than the Company and its subsidiaries. The amendments sought in the
consent solicitation would remove as events of default under the indenture
defaults under any indebtedness of, judgments against, and bankruptcy,
insolvency and related filings and other events of, the Company or any of its
direct or indirect subsidiaries. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
6
<PAGE> 9
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, 2000 and 1999, and certain factors that management believes are
likely to affect the Company's 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 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
On November 10, 2000, the Board of Directors' of GTS approved a plan by
which GTS will focus on providing broadband services to traditional carriers,
ISPs, ASPs, other Web-centric entities and data intensive pan-European
corporations. The objective of the restructuring is to position GTS as a data
services-only provider that will generate positive EBITDA.
As part of this plan, GTS will immediately restructure into four "stand
alone" business units -- GTS Broadband Services; GTS Business Services; GTS
Central Europe; and Golden Telecom, Inc. GTS intends to sell the portion of its
Business Services and Central Europe units focused on serving
small-to-medium-sized enterprises ("SMEs"), and has retained an investment bank
to assist in the sale of these assets.
7
<PAGE> 10
RESULTS OF OPERATIONS
Organizational Structure Change
The financial results for the three and nine month period that is reflected
below is not indicative of the financial results of the Company upon the sale by
GTS of its interest in its SME-focused Business Services units. In addition, as
a result of these initiatives, the Company expects that it will incur a charge
for severance, shut-down activities, legal and professional fees as well as the
write-off of certain intangible assets, including goodwill related to the
Business Services businesses. This charge is expected to be in the range of $600
million to $650 million, of which $550 million to $600 million is anticipated to
be non-cash, prior to any proceeds that may result from the intended sales
transactions.
The following table sets forth the Company's statement of operations as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2000 1999 2000 1999
------ ----- ----- -----
<S> <C> <C> <C> <C>
Revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Access and network services......................... 93.0 100.3 92.4 86.3
Selling, general and administrative................. 42.6 44.7 47.9 45.7
Depreciation and amortization....................... 20.2 21.4 20.5 20.6
Merger and restructuring costs...................... 8.0 -- 2.6 --
------ ----- ----- -----
Loss from operations........................ (63.8) (66.4) (63.4) (52.6)
Interest, net......................................... (18.0) (18.6) (18.0) (20.7)
Foreign currency losses............................... (21.3) 14.1 (16.0) 0.8
Other non-operating income............................ (3.4) -- 12.7 --
------ ----- ----- -----
Net loss.................................... (106.5)% (70.9)% (84.7)% (72.5)%
====== ===== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared To The Three Months Ended
September 30, 1999
Revenue. Consolidated revenue increased to $106.4 million for the three
months ended September 30, 2000 as compared to $94.0 million for the three
months ended September 30, 1999. The increase in revenue was due to the increase
in customer traffic, which resulted from the Company's increased customer base
and the acquisitions that were completed in 1999. Further, the increase in
traffic was partially offset by a decline in prices for the Company's products
and services.
Access and Network Services. Access and network services costs for the
three months ended September 30, 2000 increased to $99.0 million or 93.0% of
revenues as compared to $94.3 million or 100.3% of revenues for the three months
ended September 30, 1999. The increase was due to increased settlement and
interconnect costs.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended September 30, 2000 increased to $45.3
million or 42.6% of revenues as compared to $42.0 million or 44.7% of revenues
for the three months ended September 30, 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 the increased customer base.
Depreciation and Amortization. Depreciation and amortization for the three
months ended September 30, 2000 increased to $21.5 million or 20.2% of revenues
as compared to $20.1 million or 21.4% of revenues for the three months ended
September 30, 1999. The increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of the network
infrastructure. Additionally, the Company has experienced an increase in
amortization expense associated with goodwill and intangibles that have arisen
from the 1999 acquisition activities.
Merger and August 2000 Restructuring Charge. In August 2000, the Board of
Directors of GTS approved management's plan to exit from its residential and
pre-paid card businesses, and streamline its
8
<PAGE> 11
operations by, among other things, consolidating its headquarters functions,
reducing or redeploying headcount, centralizing finance and billing operations
and consolidating sales offices. The Company is a wholly subsidiary of GTS and
as a result of these initiatives this plan of restructuring will have an impact
on the Company's future financial results. The Company has recorded a charge of
approximately $8.5 million in its third quarter 2000 financial results. The
components of the charge include approximately $7.0 million for severance costs
associated with the termination of personnel and approximately $1.4 million for
costs associated with the cancellation of facility leases and anticipated office
closures.
Interest, net. Interest for the three months ended September 30, 2000 was
($19.2) million as compared to ($17.5) million for the comparable period in
1999. The increase in net interest expense is attributable to the increase in
the Company's outstanding capital lease obligations since the third quarter of
1999, offset by the interest income earned from short-term investments of the
proceeds received from financing activities.
Foreign Currency Loss. The Company recognized foreign currency losses of
$22.7 million in the three months ended September 30, 2000 as compared to gains
of $13.3 million in the three months ended September 30, 1999. The foreign
currency losses are primarily attributable to the effect of currency movements
on the Company's outstanding debt obligations.
Nine Months Ended September 30, 2000 Compared To The Nine Months Ended
September 30, 1999
Revenue. Consolidated revenue increased to $318.4 million for the nine
months ended September 30, 2000 as compared to $241.0 million for the nine
months ended September 30, 1999. The growth in revenue was due to the increase
in customer traffic, which resulted from the Company's increased customer base
and the acquisitions that were completed in 1999. Further, the increase in
traffic was partially offset by a decline in prices for the Company's products
and services.
Access and Network Services. Access and network services costs for the
nine months ended September 30, 2000 increased to $294.0 million or 92.4% of
revenues as compared to $207.9 million or 86.3% of revenues for the nine months
ended September 30, 1999. The increase was due to increased settlement and
interconnect costs.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended September 30, 2000 increased to $152.5
million or 47.9% of revenues as compared to $110.2 million or 45.7% of revenues
for the nine months ended September 30, 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 the increased customer base.
Depreciation and Amortization. Depreciation and amortization for the nine
months ended September 30, 2000 increased to $65.4 million or 20.5% of revenues
as compared to $49.7 million or 20.6% of revenues for the nine months ended
September 30, 1999. The substantial increase in depreciation and amortization
costs is attributable to the depreciation related to the expansion of the
network infrastructure. Additionally, the Company experienced an increase in
amortization expense associated with goodwill and intangibles that have arisen
from the 1999 acquisition activities.
Merger and August 2000 Restructuring Charge. In August 2000, the Board of
Directors of GTS approved management's plan to exit from its residential and
pre-paid card businesses, and streamline its operations by, among other things,
consolidating its headquarters functions, reducing or redeploying headcount,
centralizing finance and billing operations and consolidating sales offices. The
Company is a wholly subsidiary of GTS and as a result of these initiatives this
plan of restructuring will have an impact on the Company's future financial
results. The Company has recorded a charge of approximately $8.5 million in its
third quarter 2000 financial results. The components of the charge include
approximately $7.0 million for severance costs associated with the termination
of personnel and approximately $1.4 million for costs associated with the
cancellation of facility leases and anticipated office closures.
Interest, net. Interest for the nine months ended September 30, 2000 was
($57.1) million as compared to ($50.0) million for the comparable period in
1999. The increase in net interest expense is attributable to the substantial
increase in the Company's outstanding capital lease obligations since the third
quarter of 1999,
9
<PAGE> 12
offset by the interest income earned from short-term investments of the proceeds
received from the Company's financing activities.
Foreign Currency Loss. The Company recognized foreign currency losses of
$51.2 million in the nine months ended September 30, 2000 as compared to gains
of $1.8 million in the nine months ended September 30, 1999. The foreign
currency losses are primarily attributable to the effect of currency movements
on outstanding debt obligations.
LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
The Company is a wholly-owned subsidiary of GTS and during 1999 and the
first nine months of 2000, GTS contributed $87.5 million and $193.8 million,
respectively, in the form of equity contributions. There can be no assurances,
however, that GTS will fund additional amounts required by the Company during
the remainder of 2000 or in 2001. On November 10, 2000, the Board of Directors'
of GTS approved a plan by which GTS will focus on providing broadband services
to traditional carriers, ISPs, ASPs, other Web-centric entities and data
intensive pan-European corporations. As part of this plan, GTS intends to sell
the portion of its units focused on serving small-to-medium enterprises
("SMEs"), including the Company and its subsidiaries. In addition, on November
13, 2000, GTS commenced soliciting consents from holders of its 9 7/8% Senior
Notes due 2005 (the "Notes") to amend certain provisions of the indenture
governing the Notes. The purpose of the consent solicitation is to permit GTS to
modify the "Event of Default" provisions of the indenture governing the Notes in
order to provide GTS with greater flexibility to, among other things,
restructure the operations of the Company, and address the indebtedness
represented by the Company's publicly traded debt securities and long-term debt
owed to GTS by the Company. Such additional flexibility is sought to reduce the
possibility that actions taken to restructure such operations or address such
indebtedness may negatively impact the creditworthiness of GTS, other than the
Company and its subsidiaries. The amendments sought in the consent solicitation
would remove as events of default under the indenture defaults under any
indebtedness of, judgments against, and bankruptcy, insolvency and related
filings and other events of, the Company or any of its direct or indirect
subsidiaries.
The Company has incurred substantial debt to finance its business. As of
September 30, 2000, the amount of such indebtedness represented by the Company's
publicly traded debt securities consisted of $230 million principal amount of
its 11 1/2% Senior Notes due 2007, DM 125 million principal amount of its
11 1/2% Senior Notes due 2007, $150 million principal amount of its 10 7/8%
Senior Notes due 2008 and DM 150 million principal amount of its 11% Senior
Notes due 2008 and the amount of such indebtedness represented by long-term debt
owed to GTS was $104.2 million.
Management expects that the Company's existing operations will continue to
generate negative cash flows and net losses for at least the next 12 months. If
the Company's available sources of funds are insufficient to make principal and
interest payments on the Company's debt, it may need to renegotiate the terms
of, or refinance, such debt. If the Company fails to make the required payments
or to comply with the covenants under such debt, the Company will default on
those debt obligations. An event of default would permit holders of the
Company's debt to accelerate the maturity of that debt, which in turn could,
absent GTS's receipt of the consents being solicited in the consent solicitation
to the proposed amendments to the indenture governing the Notes and execution of
a supplemental indenture effecting the proposed amendments described above,
cause a potential cross-acceleration under such indenture.
GTS believes that the proposed amendments to the indenture governing the
Notes will provide it with the flexibility necessary to, among other things,
effectively restructure the Company's operations and address the indebtedness
represented by the Company's publicly traded debt securities and long-term debt
owed to GTS by the Company. GTS is in the process of evaluating the range of
alternatives that will be afforded by such flexibility. The range of
alternatives may include (a) the disposition (via sale, merger, etc.) of the
Company and/or the remaining portion of GTS's Business Services operations; (b)
a rationalization/restructuring of the Company and the remaining portion of
GTS's Business Services operations; (c) the negotiation of
10
<PAGE> 13
modifications to, or restructuring of, the indebtedness represented by the
Company's publicly traded debt securities and long-term debt owed to GTS by the
Company and/or (d) seeking protection for the Company under the insolvency laws
of the United Kingdom, the United States or any other applicable jurisdiction.
There can be no assurance that any such sale, rationalization, restructuring or
other efforts will be successful or that the Company will be able to continue to
fund losses resulting from its operations or service the indebtedness
represented by its publicly traded debt securities and long-term debt owed to
GTS by the Company. GTS currently intends that the Company will continue to meet
its trade obligations consistent with past practices while GTS addresses its
options with regard to the Company.
As described above, failure to generate sufficient funds in the future, may
require the Company to restructure, re-align or reduce its operations,
restructure its debt obligations, delay or abandon some or all of its
anticipated expenditures, to sell assets, or both, all of which could have a
material adverse effect on the Company's operations.
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of $34.5 million and $16.9
million as of September 30, 2000 and December 31, 1999, respectively. The
Company had restricted cash of $17.3 million and $32.5 million as of September
30, 2000 and December 31, 1999, respectively, that primarily represent amounts
held in escrow for debt interest payments.
In the nine months ended September 30, 2000 the Company used cash of $195.6
million for its operating activities compared to $132.8 million used in the nine
months ended September 30, 1999. The Company also used cash of $53.1 million and
used cash of $35.1 million for its investing activities in the nine months ended
September 30, 2000 and 1999, respectively. In the nine months ended September
30, 2000, the Company's financing activities generated $198.3 million of cash.
The Company cannot assure you that its operations will achieve or sustain
profitability or positive cash flow in the future. If the Company cannot achieve
and sustain operating profitability or positive cash flow from operations, it
may not be able to meet its 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 the Company has 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.
The Company has significant operations within the European Union including
many of the countries that have adopted the Euro. The Company continues to
evaluate the impact the Euro will have on its continuing business operations and
no assurances can be given that the Euro will not have material adverse affect
on business, financial condition and results of operations. However, the Company
does not expect the Euro to have a material effect on its competitive position
as a result of price transparency within the European Union as the Company has
always operated as a pan-European business with transparent pricing in ECU for
the majority of the Company's customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes since December 31, 1999.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF
REPORT SUBJECT OF REPORT
------- -----------------
<C> <S>
None
</TABLE>
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities 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
------------------------------------
Name: Jeffrey H. Von Deylen
Title: Senior Vice President,
Finance
(Principal Accounting Officer)
Date: November 14, 2000
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
