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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
(COMMISSION FILE NUMBER: 333-37719 )
GLOBAL TELESYSTEMS EUROPE B.V.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NETHERLANDS NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
TERHULPSESTEENWEG 6A
1560 HOEILAART
BELGIUM
(Address of principal executive office)
(322) 658-5200
(Registrant's telephone number)
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] [ ]
As of September 30, 2000 there were 200,634 outstanding common shares of
the registrant of which 200,316 were held by Global TeleSystems, Inc.
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GLOBAL TELESYSTEMS EUROPE B.V.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements of Global TeleSystems Europe B.V.
(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 2 Changes in Securities and Use of Proceeds...................
Item 4 Submission of Matters to a Vote of Security Holders.........
Item 6 Exhibits and Reports on Form 8-K............................ 12
Signatures.................................................. 13
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS EUROPE B.V.
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...... $ 392,750 $ 583,787
Accounts receivable, net.................................. 109,127 83,267
Other current assets...................................... 152,652 74,423
---------- ----------
Total current assets.............................. 654,529 741,477
Property and equipment, net................................. 1,021,498 756,452
Goodwill and intangible assets, net......................... 344,086 268,577
Other non-current assets.................................... 60,101 17,441
---------- ----------
TOTAL ASSETS...................................... $2,080,214 $1,783,947
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 224,849 $ 100,301
Deferred revenue.......................................... 45,627 66,170
Current portion of capital lease obligations.............. 30,067 11,120
---------- ----------
Total current liabilities......................... 300,543 177,591
Long-term debt............................................ 1,155,645 1,057,975
Long term portion of capital lease obligations............ 219,616 171,861
Deferred revenue and other non-current liabilities........ 153,238 118,132
---------- ----------
TOTAL LIABILITIES................................. 1,829,042 1,525,559
SHAREHOLDERS' EQUITY
Common stock, 1000 guilders par value (297,000 shares
authorized; 200,634 and 200,316 shares issued and
outstanding at September 30, 2000 and December 31,
1999, respectively..................................... 101,644 101,518
Additional paid-in capital................................ 261,097 232,062
Accumulated deficit....................................... (111,569) (75,192)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 251,172 258,388
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $2,080,214 $1,783,947
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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GLOBAL TELESYSTEMS EUROPE B.V.
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........................................... $119,966 $ 90,143 $352,615 $213,012
Operating expenses:
Access and network services...................... 56,803 26,149 151,072 64,913
Selling, general and administrative.............. 30,787 14,536 87,142 35,940
Depreciation and amortization.................... 29,572 18,781 84,993 45,152
Merger and restructuring costs................... 3,400 -- 3,400 --
-------- -------- -------- --------
Total operating expenses................. 120,562 59,466 326,607 146,005
(Loss) Income from operations...................... (596) 30,677 26,008 67,007
Other income (expenses):
Interest, net.................................... (19,314) (12,659) (54,580) (38,645)
Foreign currency losses.......................... (4,167) (653) (4,709) (1,651)
-------- -------- -------- --------
(23,481) (13,312) (59,289) (40,296)
-------- -------- -------- --------
Net (loss) income before income taxes.... (24,077) 17,365 (33,281) 26,711
Income taxes....................................... 1,383 979 3,096 4,649
-------- -------- -------- --------
Net (loss) income........................ $(25,460) $ 16,386 $(36,377) $ 22,062
======== ======== ======== ========
Net (loss) income per share:
Basic............................................ $(127.04) $ 82.06 $(181.57) $ 111.47
======== ======== ======== ========
Diluted.......................................... $(127.04) $ 81.75 $(181.57) $ 110.12
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
GLOBAL TELESYSTEMS EUROPE B.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 104,054 $ 19,227
INVESTING ACTIVITIES
Purchases of property and equipment....................... (329,601) (111,443)
Acquisitions, net of cash acquired........................ (78,212) (15,667)
Other investing activities................................ (5,366) 30,305
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES............. (413,179) (96,805)
FINANCING ACTIVITIES
Due to affiliated companies, net.......................... (57,272) (21,576)
Repayments of debt........................................ (15,192) (26,106)
Proceeds from debt........................................ 179,056 302,450
Payment of debt issue costs............................... (7,070) (10,164)
Net proceeds from issuance of common stock................ 948 1,249
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 100,470 245,853
Effect of exchange rate changes on cash and cash
equivalents............................................ 14,039 11,234
--------- ---------
Net (decrease) increase in cash and cash equivalents...... (194,616) 179,509
Cash and cash equivalents at beginning of period.......... 565,402 130,081
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 370,786 $ 309,590
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalization of leases.................................. $ 114,563 $ 51,123
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Global TeleSystems Europe B.V. (the "Company"), formerly Hermes Europe
Railtel B.V., is one of the leading European providers of managed bandwidth
services and related telecommunications services to telecommunications carriers,
Internet service providers and other bandwidth-intensive customers. The Company
operates a centrally managed fiber optic network (the "Network") in Europe
connecting various cities with service to the United States provided through
capacity leased on transatlantic cables. In addition, the Company operates
Ebone, a Tier 1 Internet backbone network that connects European service
providers to the Internet.
The Company was formed on July 6, 1993 and is 99.8% owned by GTS Carrier
Services, Inc., a wholly owned subsidiary of Global TeleSystems, Inc. ("GTS"), a
leading independent provider of telecommunications services to businesses, other
high usage customers and telecommunications carriers in Europe, Russia and the
Commonwealth of Independent States.
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. 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 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 FY2000 financial results contained herein now include
subsidiaries that were previously included elsewhere within the GTS
organizational structure during 1999. As required under the Company's bond
covenants, GTS has obtained appraisals from an independent appraisal firm to
support the acquisition of net assets by the Company, at their appraised fair
market value, from other GTS affiliates.
Certain reclassifications have been made to the prior period consolidated
financial statements presented in order to conform to the September 30, 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 and June
2000. 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. EARNINGS PER SHARE
The Company's net income (loss) per share calculation (basic and diluted)
is based upon the weighted average common shares issued. There are no
reconciling items in the numerator of the Company's net income
4
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GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(loss) per share calculation. The following is a reconciliation of the
denominator of the Company's net income (loss) per share calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding............ 200,409 199,683 200,347 197,911
Common Stock Equivalents....................... -- 747 -- 2,436
------- ------- ------- -------
Diluted Shares Outstanding..................... 200,409 200,430 200,347 200,347
======= ======= ======= =======
</TABLE>
4. 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) income $(25,460) $16,386 $(36,377) $22,062
Other comprehensive loss
Foreign currency translation adjustments (6,585) 189 (8,903) (2,259)
-------- ------- -------- -------
Comprehensive (loss) income $(32,045) $16,575 $(45,280) $19,803
======== ======= ======== =======
</TABLE>
5. DEBT FINANCING TRANSACTION
On July 14, 2000, a subsidiary of the Company executed an eight year, $550
million, multi-currency bank facility ("the Bank Facility"). The Bank Facility
will be applied to the purchase of additional network assets; to construct the
Company's proposed hosting centers and city enterprise networks; to pursue
business development opportunities in the telecommunications field; and for
general corporate purposes in the telecommunications business. Of the $550
million committed under the Bank Facility, $275 million is currently available,
of which, as of September 30, 2000, the subsidiary has borrowed E.200 million,
or $175.9 million. The remaining $275 million of commitment will be available
when certain licenses and rights of way relating to the Company's network have
been transferred to the subsidiary (collectively, the "Conditions Subsequent").
The Company currently expects that the Conditions Subsequent will be completed
during the time period required by the lenders under the Bank Facility (nine
months from entry into the Bank Facility in the case of licenses and rights of
way in France and the United Kingdom and six months from entry into the Bank
Facility in the case of licenses and rights of way in other countries), but
borrowed funds will have to be repaid and any outstanding bank guarantees
discharged, and commitments to lend under the Bank Facility will be reduced to
zero, upon the expiration of a 90-day period following each of the above-
described six-and nine-month periods (as applicable) if the Conditions
Subsequent are not satisfied.
6. EQUITY TRANSACTIONS
On July 26, 2000, GTS exchanged 3,166,528 of its common shares for 3,283 of
the Company's common shares pursuant to an exchange agreement which GTS had
entered into on October 15, 1999, with the minority interest holders of the
Company, who were grantees of the Company's stock options. The July 26, 2000
exchange of GTS common shares was based on the fair market value of the Company
as of the date of the exchange, and the transaction resulted in excess purchase
price over the fair value of assets acquired of approximately $37.2 million,
which was recorded in July 2000.
5
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GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 2000, the remaining 318 options of the Company were exercised.
As a result of this transaction, as of September 2000, 99.8% of the outstanding
common shares of the Company are owned by GTS. GTS is obligated to exchange its
common stock for the remaining 318 shares of the Company's stock during 2001.
7. MERGER AND AUGUST 2000 RESTRUCTURING COSTS
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. As a result of these initiatives, the Company
has recorded a charge of approximately $3.4 million in its third quarter 2000
financial results, since this plan of restructuring will have an impact on the
Company's current business operations. The components of the charge include
approximately $1.3 million for severance costs associated with the termination
of personnel and approximately $2.1 million for costs associated with
cancellation of facility leases and anticipated office closure costs.
Of the $3.4 million, $3.1 million remains as an accrual at September 30,
2000 for additional cash payments that the Company expects to incur as a part of
its plan for restructuring.
8. RELATED PARTY TRANSACTIONS
The Company had receivable and payable balances from affiliates of GTS of
$133.5 million and $54.6 million, respectively, at September 30, 2000.
The Company derived revenue from affiliates of $47.6 million for the nine
months ended September 30, 2000. Costs of revenue from affiliates were $17.6
million for the nine months ended September 30, 2000.
9. 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,
Internet service providers ("ISPs"), application service providers ("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 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"), and has retained an investment bank
to assist in the sale of these assets.
These actions are intended to simplify the organization and operations of
the GTS. 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 $75 million to $80 million, most of which is anticipated to be
non-cash, prior to any proceeds that may result from the intended sales
transactions. As a result of the intended sale of the Business Services
businesses, certain affiliate transactions may be reduced.
Consent Solicitation
On November 13, 2000, GTS commenced soliciting consents from holders of its
9 7/8% Senior Notes due 2005 (the "Notes") to amendments of certain provisions
of the indenture governing the Notes. The purpose of
6
<PAGE> 9
GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 its
Global TeleSystems (Europe) Limited subsidiary (formerly, Esprit Telecom Group
plc) ("Esprit Telecom"), and address the indebtedness represented by Esprit
Telecom's publicly traded debt securities and long-term debt owed to the Company
by Esprit Telecom. 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
Esprit Telecom and its subsidiaries. The amendments sought in the consent
solicitation would remove as events of default under the indenture default
sunder any indebtedness of, judgment's against, and bankruptcy, insolvency and
related filings and other events of, Esprit Telecom or any of its direct or
indirect subsidiaries. The consent solicitation will expire at 5:00 p.m., New
York City time, on November 21, 2000, unless extended by GTS prior to that date.
GTS will make a payment equal to 1% of the principal amount of the Notes ($10 in
cash for each $1,000 principal amount of Notes) to each holder of Notes whose
consent is received and accepted prior to the expiration date. The record date
of the consent solicitation is November 17, 2000. GTS will pay this consent
payment promptly after the execution of a supplemental indenture (the
"Supplemental Indenture") effecting the amendments described above.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the Company's financial
condition and results of operations for the three and nine months ended
September 30, 2000 and 1999 and of 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 herein under
"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 made
by us or on behalf of us, 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, the Company cannot assess the impact of
each such factor on its 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 is a leading European provider of managed bandwidth services
and related telecommunications services to telecommunications carriers, Internet
service providers and other bandwidth-intensive customers. As of September 30,
2000, the Company operated a centrally managed fiber optic network in Europe
over approximately 17,500 kilometers connecting 38 cities in 14 European
countries, with service to the United States provided through capacity leased on
transatlantic cables.
8
<PAGE> 11
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 of
its interest in its SME-focused Business Services of GTS. 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 $75
million to $80 million, most of which is anticipated to be non-cash, prior to
any proceeds that may result from the intended sales transactions. As a result
of the intended sale of the Business Service businesses, certain affiliate
transactions may be reduced.
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............................ 47.3 29.0 42.8 30.5
Selling, general and administrative.................... 25.7 16.1 24.7 16.9
Depreciation and amortization.......................... 24.7 20.8 24.1 21.2
Merger and restructuring costs......................... 2.8 -- 1.0 --
----- ----- ----- -----
Income (loss) from operations.......................... (0.5) 34.0 7.4 31.5
Interest expense....................................... (26.1) (22.4) (26.6) (25.4)
Interest income........................................ 10.0 8.4 11.1 7.3
Foreign currency gains/(losses)........................ (3.5) (0.7) (1.3) (0.8)
----- ----- ----- -----
Income (loss) before income taxes...................... (20.1) 19.3 (9.4) 12.5
Income taxes........................................... 1.2 1.1 0.9 2.2
----- ----- ----- -----
Net income (loss)...................................... (21.2)% 18.2% (10.3)% 10.4%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared To The Three Months Ended
September 30, 1999
Revenue. Consolidated revenues for the three months ended September 30,
2000 were $120.0 million as compared to $90.1 million for the comparable period
in 1999. The growth in revenue is attributable to the continued deployment of
the Company's network, increased customer base as well as the result of the
inclusion of the financial results associated with the acquired GTS affiliated
companies during fiscal year 2000.
Access and Network Services. Telecommunications services costs for the
three months ended September 30, 2000 were $56.8 million or 47.3% of revenues as
compared to $26.1 million or 29.0% of revenues for the comparable period in
1999. The increase in telecommunications services costs for the three months
ended September 30, 2000 was due to increased costs related to operating and
maintaining the network as it continues to be deployed, increases in local
access costs as required for customer connectivity, as well as the result of the
inclusion of the financial results associated with the acquired GTS affiliated
companies during fiscal year 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 were $30.8
million or 25.7% of revenues as compared to $14.5 million or 16.1% of revenues
for the same period in 1999. The increase in selling, general and administrative
expenses is reflective of the growth of the Company's business operations and
support personnel, as well as the result of the inclusion of the financial
results associated with the acquired GTS affiliated companies during fiscal year
2000.
Depreciation and Amortization. Depreciation and amortization expense for
the three months ended September 30, 2000 was $29.6 million as compared to $18.8
million for the comparable period in 1999. The
9
<PAGE> 12
increase in depreciation and amortization expense is attributable to an increase
in depreciation of network assets due to the continued deployment of the
Company's network.
Merger & August 2000 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. As
a result of these initiatives, the Company has recorded a charge of
approximately $3.4 million in its third quarter 2000 financial results, since
this plan of restructuring will have an impact on the Company's current business
operations.
Interest. Interest expense for the three months ended September 30, 2000
was $31.3 million as compared to $20.2 million for the comparable period in
1999. The increase was primarily attributable to the interest associated with
the issuance of the 1999 New Senior Notes.
Interest income for the three months ended September 30, 2000 was $12.0
million as compared to $7.5 million in the comparable period in 1999. The
increase is due to the interest earned from the Company's short-term investments
that have increased as a result of the investment of the proceeds from the
issuance of the 1999 New Senior Notes.
Nine Months Ended September 30, 2000 Compared To The Nine Months Ended
September 30, 1999
Revenue. Consolidated revenues for the nine months ended September 30,
2000 were $352.6 million as compared to $213.0 million for the comparable period
in 1999. The growth in revenue is attributable to the continued deployment of
the Company's network, increased customer base as well as the result of the
inclusion of the financial results associated with the acquired GTS affiliated
companies during fiscal year 2000.
Access and Network Services. Telecommunications services costs for the
nine months ended September 30, 2000 were $151.1 million or 42.8% of revenues as
compared to $64.9 million or 30.5% of revenues for the comparable period in
1999. The increase in telecommunications services costs for the nine months
ended September 30, 2000 was due to increased costs related to operating and
maintaining the network as it continues to be deployed, increases in local
access costs as required for customer connectivity, as well as the result of the
inclusion of the financial results associated with the acquired GTS affiliated
companies during fiscal year 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2000 were $87.1
million or 24.7% of revenues as compared to $35.9 million or 16.9% of revenues
for the same period in 1999. The increase in selling, general and administrative
expenses is reflective of the growth of the Company's business operations and
support personnel, as well as the result of the inclusion of the financial
results associated with the acquired GTS affiliated companies during fiscal year
2000.
Depreciation and Amortization. Depreciation and amortization expense for
the nine months ended September 30, 2000 was $85.0 million as compared to $45.2
million for the comparable period in 1999. The increase in depreciation and
amortization expense is attributable to an increase in depreciation of network
assets due to the continued deployment of the Company's network.
Merger & August 2000 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. As
a result of these initiatives, the Company has recorded a charge of
approximately $3.4 million in its third quarter 2000 financial results, since
this plan of restructuring will have an impact on the Company's current business
operations.
Interest. Interest expense for the nine months ended September 30, 2000
was $93.8 million as compared to $54.2 million for the comparable period in
1999. The increase was primarily attributable to the interest associated with
the issuance of the 1999 New Senior Notes.
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<PAGE> 13
Interest in come for the nine months ended September 30, 2000 was $39.2
million as compared to $15.5 million in the comparable period in 1999. The
increase is due to the interest earned from the Company's short-term investments
that have increased as a result of the investment of the proceeds from the
issuance of the 1999 New Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES:
Execution of the Company's strategy has been capital intensive. The Company
currently expects that it will incur additional cash capital expenditures of
approximately $150.0 million through December 31, 2000, to expand the reach and
capacity of its network, and to construct intracity fiber networks and data- and
Web-hosting centers in the its target metropolitan markets. The Company's cash
capital expenditure program for 2001 is anticipated to be between $350.0 and
$400.0 million. Further, as a result of the reorganization measures discussed
above, we expect that the cash capital expenditure requirements are likely to
decrease as the Company continues to evaluate its capital expenditure program in
light of the proposed sale of those business units. The Company believes
existing cash balances and the Company's projected internally generated funds,
as well as funding available through the multi-currency bank credit facility,
described below, should be sufficient to fund currently identified capital
expenditures, at least through December 31, 2001, including payments on the
long-term fiber lease arrangements. However, the actual amount and timing of the
Company's future requirements may differ materially from estimates. Any failure
to obtain necessary financing may require the Company to delay or abandon its
plans for expanding the reach and capacity of the network, and constructing its
planned intracity fiber networks and data- and Web-hosting centers which could
jeopardize the Company's viability.
On July 14, 2000, a subsidiary of the Company executed an eight year, $550
million, multi-currency bank credit facility ("the Bank Facility"). The Bank
Facility will be applied to the purchase of additional network assets; to
construct the Company's proposed hosting centers and city enterprise networks;
to pursue business development opportunities in the telecommunications field;
and for general corporate purposes in the telecommunications business. Of the
$550 million committed under the Bank Facility, $275 million is currently
available, of which, as of September 30, 2000, the subsidiary has borrowed E200
million, or $175.9 million. The remaining $275 million of commitment will be
available when certain licenses and rights of way relating to the Company's
network have been transferred to the subsidiary (collectively, the "Conditions
Subsequent"). The Company currently expects that the Conditions Subsequent will
be completed during the time period required by the lenders under the Bank
Facility (nine months from entry into the Bank Facility in the case of licenses
and rights of way in France and the United Kingdom and six months from entry
into the Bank Facility in the case of licenses and rights of way in other
countries), but borrowed funds will have to be repaid and any outstanding bank
guarantees discharged, and commitments to lend under the Bank Facility will be
reduced to zero, upon the expiration of a 90-day period following each of the
above-described six-and nine-month periods (as applicable) if the Conditions
Subsequent are not satisfied.
The Company had a positive working capital of $354.0 million and $563.9
million as of September 30, 2000 and December 31, 1999, respectively. The
Company had cash and cash equivalents of $370.8 million and $565.4 million at
September 30, 2000 and December 31, 1999, respectively. The Company had $22.0
million and $18.4 million of restricted cash at September 30, 2000 and December
31, 1999, respectively. The restricted cash primarily relates to cash held in
escrow for bank guarantees issued in connection with fiber and office leases.
During the nine months ended September 30, 2000, the Company provided
$104.0 million cash from operating activities compared with providing $19.2
million for the comparable period in 1999. Investing activities used cash of
$413.2 million for the nine months ended September 30, 2000 as compared to using
cash of $96.8 million for the comparable period in 1999.
The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk. The Company continuously
evaluates the materiality of foreign exchange exposures in different countries
and the financial instruments available to mitigate these exposures. The Company
has designed and implemented reporting processes to monitor the potential
exposure on an ongoing basis and the Company will
11
<PAGE> 14
use the output of this process to execute financial hedges to cover foreign
exchange exposure when practically and economically justified.
INTRODUCTION 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 the Company's business, financial condition and results of operations.
However, the Company does not expect the Euro to have a material effect on the
Company's 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 DISCLOSURE ABOUT MARKET RISK
The only significant change since December 31, 1999 is the execution in
July 2000 by a subsidiary of the Company of an eight year, $550 million,
multi-currency bank facility. Of the $550 million committed under the bank
facility, $275 million is currently available, of which, as of September 30,
2000, the subsidiary has borrowed E200 million, or $175.9 million. The bank
facility exposes us to changes in interest and foreign exchange rates.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In September 2000, we issued stock that was not registered under the
Securities Act of 1993, as amended, pursuant to the exercise by certain
employees of options to purchase 318 shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter 2000, the Registrant's shareholders unanimously
authorized the transfer of 23,458 shares of the Registrant from Global
TeleSystems, Inc. to GTS Carrier Services, Inc. GTS Carrier Services, Inc. is a
wholly owned subsidiary of Global TeleSystems, Inc.
During the third quarter 2000, Robert Amman was appointed to, and Brian
Thompson resigned from the Supervisory Board with effect from October 4, 2000.
Vimal Agarwal was appointed to the Management Board with effect from June
6, 2000. Maurice Woolf and Mikel Williams were appointed to, and Robert Amman,
Mr G Caccappolo and Mr P Nemirovsky resigned from the Management Board with
effect from October 4, 2000.
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<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.1 -- Loan agreement dated 14 July 2000 among Global
Telesystems Europe Holdings B.V. and Bank of America
International Limited, Deutsche Bank AG London, Dresdner
Bank AG London Branch and the other parties named
therein.
27 -- Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
<C> <S>
None
</TABLE>
13
<PAGE> 16
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 B.V.
(Registrant)
By: /s/ JEFFREY H. VON DEYLEN
----------------------------------
Name: Jeffrey H. Von Deylen
Title: Senior Vice President,
Finance
(Principal Accounting Officer)
Date: November 14, 2000
14
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.1 -- Loan agreement dated 14 July 2000 among Global
Telesystems Europe Holdings B.V. and Bank of America
International Limited, Deutsche Bank AG London, Dresdner
Bank AG London Branch and the other parties named
therein.
27 -- Financial Data Schedule
</TABLE>
