<PAGE> 1
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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 MARCH 31, 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 Identification No.)
incorporation or organization)
</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] [ ]
At April 28, 2000, there were outstanding 200,316 shares of common stock of
the registrant.
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GLOBAL TELESYSTEMS EUROPE B.V.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements of Global TeleSystems Europe
B.V. (unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 2000 and
December 31, 1999............................. 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2000 and
1999............................................. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and
1999............................................. 5
Notes to Condensed Consolidated Financial
Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations.................................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. 11
Signatures.................................................. 12
</TABLE>
2
<PAGE> 3
PART 1 FINANCIAL INFORMATION
ITEM I. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS EUROPE B.V.
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................................. $ 455,060 $ 565,402
Restricted cash........................................... 18,969 18,385
Accounts receivable, net.................................. 159,956 83,267
Other current assets...................................... 23,980 74,423
---------- ----------
Total current assets.............................. 657,965 741,477
Property and equipment, net................................. 810,024 756,452
Goodwill and intangible assets, net......................... 331,787 268,577
Other non-current assets.................................... 20,416 17,441
---------- ----------
TOTAL ASSETS...................................... $1,820,192 $1,783,947
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 139,833 $ 100,301
Deferred revenue.......................................... 61,672 66,170
Current portion of capital lease obligations.............. 22,480 11,120
---------- ----------
Total current liabilities......................... 223,985 177,591
Long-term debt, less current portion...................... 1,026,606 1,057,975
Long term portion of capital lease obligations............ 183,566 171,861
Deferred revenue and other non-current liabilities........ 133,857 118,132
---------- ----------
TOTAL LIABILITIES................................. 1,568,014 1,525,559
SHAREHOLDERS' EQUITY
Common stock, 1000 guilders par value (297,000 shares
authorized; 200,316 shares issued and outstanding at
March 31, 2000 and December 31, 1999................... 101,518 101,518
Additional paid-in capital................................ 237,610 237,610
Accumulated other comprehensive loss...................... (6,436) (5,548)
Accumulated deficit....................................... (80,514) (75,192)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 252,178 258,388
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $1,820,192 $1,783,947
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GLOBAL TELESYSTEMS EUROPE B.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $114,767 $ 55,727
Operating expenses:
Access and network services............................... 43,905 19,306
Selling, general and administrative....................... 27,451 11,137
Depreciation and amortization............................. 26,957 10,873
-------- --------
Total operating expenses.................................... 98,313 41,316
Income from operations...................................... 16,454 14,411
Other expense:
Interest, net............................................. (17,964) (13,435)
Foreign currency losses................................... (2,253) (1,569)
Other expenses............................................ (60) (130)
-------- --------
(20,277) (15,134)
-------- --------
Net loss before income taxes................................ (3,823) (723)
Income taxes................................................ 1,499 1,145
-------- --------
Net loss.................................................... $ (5,322) $ (1,868)
======== ========
Net loss per share.......................................... $ (26.57) $ (9.50)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GLOBAL TELESYSTEMS EUROPE B.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES......... 27,583 (28,223)
INVESTING ACTIVITIES
Purchases of property and equipment....................... (75,560) (17,427)
Restricted cash........................................... (4,425) 15,860
Acquisitions, net of cash acquired........................ (34,559) --
--------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (114,544) (1,567)
FINANCING ACTIVITIES
Proceeds from debt........................................ 302,450
Repayments of debt........................................ (5,167) (13,189)
Payment of debt issue costs............................... -- (9,973)
Due to affiliated companies, net.......................... (4,108) (13,489)
--------- --------
NET CASH PROVIDED BY/(USED IN) FINANCING
ACTIVITIES...................................... (9,275) 265,799
Effect of exchange rate changes on cash and cash
equivalents............................................... (14,105) 7,768
--------- --------
Net (decrease) increase in cash and cash equivalents........ (110,341) 243,777
Cash and cash equivalents at beginning of period............ 565,402 130,081
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 455,061 $373,858
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalization of leases.................................. $ 27,705 $ 37,300
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
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 a
Tier 1 Internet backbone network that connects European service providers to the
Internet.
The Company was formed on July 6, 1993 and is 98.4% owned by GTS Carrier
Services, Inc., a wholly owned subsidiary of Global TeleSystems Group, 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 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 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.
GTS has been realigning its legal organizational 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 organizational structure.
GTS has obtained appraisals from an independent appraisal firm to support the
sale of net assets, at fair market value, between the GTS affiliates.
Certain reclassifications have been made to the prior period consolidated
financial statements presented in order to conform to the March 31, 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.
6
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GLOBAL TELESYSTEMS EUROPE B.V.
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 months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Net loss................................................. $(27,532) $ (867)
Other comprehensive income (loss)........................
Foreign currency translation adjustments................. (888) (1,895)
-------- -------
Comprehensive loss............................. $(28,420) $(2,762)
======== =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company had receivable and payable balances from affiliates of GTS of
$79.1 million and $88.1 million, respectively, at March 31, 2000.
The Company derived revenue from affiliates of $5.8 million for the three
months ended March 31, 2000. Costs of revenue from affiliates were $18.3 million
for the three months ended March 31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to our financial condition
and results of operations 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 our competitive environment, contain forward-looking
statements concerning our 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 our results of operations are the
potential risk of delay in implementing our business plan; the political,
economic and legal aspects of the markets in which we operate; competition and
our 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.
7
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GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 we
undertake 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, we cannot assess the impact of each such factor on our
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
We are 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. As of March 31, 2000,
we operated a centrally managed fiber optic network in Europe over approximately
17,000 kilometers connecting 30 cities in 12 European countries, with service to
the United States provided through capacity leased on transatlantic cables.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations as a percentage
of revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
2000 1999
----- -----
<S> <C> <C>
Revenues.................................................... 100.0% 100.0%
Access and network services................................. 38.3 34.6
Selling, general and administrative......................... 23.9 20.0
Depreciation and amortization............................... 23.5 19.5
----- -----
Income/(loss) from operations............................... 14.3 25.9
Interest, net............................................... (15.7) (24.1)
Other non-operating expenses................................ (2.0) (3.0)
----- -----
Net loss before income taxes................................ (3.3) (1.3)
Income taxes................................................ 1.3 2.1
----- -----
Net loss.................................................... (4.6)% (3.4)%
===== =====
Net loss applicable to common shareholders.................. (4.6)% (3.4)%
===== =====
</TABLE>
Three Months Ended March 31, 2000 Compared To The Three Months Ended March 31,
1999
Revenue. Our consolidated revenues for the three months ended March 31,
2000 were $114.8 million as compared to $55.7 million for the comparable period
in 1999. The growth in revenue is attributable to the continued deployment of
our network and increased customer base.
Access and Network Services. Our telecommunications services costs for the
three months ended March 31, 2000 were $43.9 million or 38.3% of revenues as
compared to $19.3 million or 34.6% of revenues for the comparable period in
1999. The increase in telecommunications services costs for the three months
ended March 31, 2000 was primarily due to increased costs related to operating
and maintaining the network as it continues to be deployed, as well as the
increase in local access costs.
8
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GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2000 were $27.5
million or 23.9% of revenues as compared to $11.1 million or 20.0% of revenues
for the same period in 1999. The increase in selling, general and administrative
expenses is reflective of the growth of our business operations and support
personnel.
Depreciation and Amortization. Depreciation and amortization expense for
the three months ended March 31, 2000 was $27.0 million as compared to $10.9
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 our network. In addition, we have
experienced an increase in amortization expense associated with goodwill that
has resulted from our acquisition activities.
Interest. Interest expense for the three months ended March 31, 2000 was
$31.9 million as compared to $17.2 million for the comparable period in 1999.
The increase was primarily attributable to the interest associated with the
issuance in November 1999 of $500.0 million aggregate principal amount of senior
notes.
Interest income for the three months ended March 31, 2000 was $14.0 million
as compared to $3.8 million in the comparable period in 1999. The increase is
due to the interest earned through our short-term investments that have
increased as a result of the investment of the proceeds from the issuance of the
new senior notes due 2009.
LIQUIDITY AND CAPITAL RESOURCES
Development of our network has been capital intensive. We currently expect
that through December 31, 2000, we will incur a total of between $700.0 million
and $800.0 million in capital expenditures, including capital lease obligations,
to expand the reach and capacity of our network, and to construct intracity
fiber networks and data- and Web-hosting centers in our target metropolitan
markets. We believe existing cash balances and our projected internally
generated funds, should be sufficient to fund our currently identified capital
expenditures, at least through December 31, 2000, including payments on the
long-term fiber lease arrangements. However, the actual amount and timing of our
future requirements may differ materially from our estimates. Any failure to
obtain necessary financing may require that we delay or abandon our plans for
expanding the reach and capacity of our network, and constructing our planned
intracity fiber networks and data- and Web-hosting centers which could
jeopardize our viability.
We are currently evaluating entering into, through a wholly owned
subsidiary, a new credit facility (the "New Credit Facility") with one or more
institutional lenders in an aggregate amount of up to $500 million in the second
quarter of 2000. The New Credit Facility would be used for the development of
our network.
We had a positive working capital of $434.0 million and $563.9 million as
of March 31, 2000 and December 31, 1999, respectively. We had cash and cash
equivalents of $455.1 million and $565.4 million at March 31, 2000 and December
31, 1999, respectively. We had $19.0 million and $18.4 million of restricted
cash at March 31, 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 three months ended March 31, 2000, our operating activities
provided cash of $27.6 million whereas our operating activities used cash of
$28.2 million for the comparable period in 1999. Investing activities used cash
of $114.5 million for the three months ended March 31, 2000 as compared to using
cash of $1.6 million for the comparable period in 1999.
We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We continuously evaluate the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate these exposures. We have designed and implemented
reporting processes to monitor the potential exposure on an ongoing basis and we
will use the output of this process to execute financial hedges to cover foreign
exchange exposure when practically and economically justified.
9
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GLOBAL TELESYSTEMS EUROPE B.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no significant changes since December 31, 1999.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
None
11
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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 B.V.
(Registrant)
By: /s/ JEFFREY H. VON DEYLEN
------------------------------------
Name: Jeffrey H. Von Deylen
Title: Senior Vice President,
Finance
(Principal Accounting
Officer)
Date: May 15, 2000
12
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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> 455,060
<SECURITIES> 0
<RECEIVABLES> 169,489
<ALLOWANCES> (9,533)
<INVENTORY> 254
<CURRENT-ASSETS> 657,965
<PP&E> 914,760
<DEPRECIATION> (104,736)
<TOTAL-ASSETS> 1,820,192
<CURRENT-LIABILITIES> 223,985
<BONDS> 1,372,485
0
0
<COMMON> 101,518
<OTHER-SE> 150,660
<TOTAL-LIABILITY-AND-EQUITY> 1,820,192
<SALES> 0
<TOTAL-REVENUES> 114,767
<CGS> 0
<TOTAL-COSTS> 43,905
<OTHER-EXPENSES> 54,408
<LOSS-PROVISION> 3,184
<INTEREST-EXPENSE> 31,950
<INCOME-PRETAX> (3,823)
<INCOME-TAX> 1,499
<INCOME-CONTINUING> (5,322)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,322)
<EPS-BASIC> (26.57)
<EPS-DILUTED> (26.57)
</TABLE>
