<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 JUNE 30, 1998
(COMMISSION FILE NUMBER: )
GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3068423
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
1751 PINNACLE DRIVE, NORTH TOWER, 12TH FLOOR
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 918-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At July 31, 1998, there were outstanding 60,297,763 shares of common stock
of the registrant.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. Financial Information
Item 1A Financial Statements of Global TeleSystems Group, Inc....... 3
Condensed Consolidated Balance Sheets as of December 31,
1997 and June 30, 1998.................................... 4
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1998......... 5
Condensed Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 1997 and 1998......... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 1B Financial Statements of EDN Sovintel........................ 11
Condensed Balance Sheets as of December 31, 1997 and June
30, 1998.................................................. 12
Condensed Statements of Operations for the Three and Six
Months Ended June 30, 1997 and 1998....................... 13
Condensed Statements of Cash Flows for the Three and Six
Months Ended June 30, 1997 and 1998....................... 14
Notes to Condensed Financial Statements..................... 15
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
PART II. Other Information
Item 2 Changes in Securities and Use of Proceeds................... 30
Item 4 Submission of Matters to a Vote of Security Holders......... 30
Item 5 Other Information........................................... 30
Item 6 Exhibits and Reports on Form 8-K............................ 30
Signatures............................................................ 31
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1A. FINANCIAL STATEMENTS OF GLOBAL TELESYSTEMS GROUP, INC.
Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30,
1998
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows for the Three and Six Months
Ended June 30, 1997 and 1998
Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
--------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 318,766 $ 477,996
Accounts receivable, net.................................. 17,079 50,228
Restricted cash........................................... 30,486 44,783
Prepaid expenses.......................................... 14,101 19,293
Other assets.............................................. 6,707 13,291
--------- ----------
TOTAL CURRENT ASSETS.............................. 387,139 605,591
Property and equipment, net................................. 236,897 330,847
Investments in and advances to ventures..................... 76,730 76,885
Goodwill and intangible assets, net......................... 43,284 82,693
Restricted cash............................................. 36,411 38,094
--------- ----------
TOTAL ASSETS...................................... $ 780,461 $1,134,110
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 61,984 $ 101,835
Debt maturing within one year............................. 6,390 --
Current portion of capital lease obligations.............. 21,490 9,028
Related party debt maturing within one year............... 5,708 17,380
Other current liabilities................................. 6,301 21,466
--------- ----------
TOTAL CURRENT LIABILITIES......................... 101,873 149,709
Long-term debt, less current portion........................ 408,330 495,042
Long-term portion of capital lease obligations.............. 117,645 158,700
Related party long-term debt, less current portion.......... 79,796 3,530
Taxes and other non-current liabilities..................... 14,595 13,679
--------- ----------
TOTAL LIABILITIES................................. 722,239 820,660
COMMITMENTS AND CONTINGENCIES
Minority interest........................................... 18,766 39,466
Common stock, subject to repurchase (797,100 and 336,630
shares outstanding at December 31, 1997 and June 30, 1998,
respectively)............................................. 12,489 16,411
SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value (10,000,000 shares
authorized; none issued and outstanding).................. -- --
Common stock, $0.10 par value (135,000,000, shares
authorized; 37,606,814 and 57,241,716 shares issued and
outstanding, net of 195,528 and 603,929 shares of treasury
stock at December 31, 1997 and June 30, 1998,
respectively)............................................. 3,761 5,724
Additional paid-in capital.................................. 274,359 567,573
Accumulated other comprehensive loss........................ (8,269) (9,483)
Accumulated deficit......................................... (242,884) (306,241)
--------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 26,967 257,573
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 780,461 $1,134,110
========= ==========
</TABLE>
4
<PAGE> 5
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services............. $ 7,899 $ 28,998 $ 15,856 $ 49,790
Equipment sales.................................. 1,009 1,650 1,439 3,675
-------- -------- -------- --------
8,908 30,648 17,295 53,465
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of revenues:
Telecommunication and other services.......... 6,258 23,013 11,808 40,480
Equipment sales............................... 281 1,182 1,155 2,738
Selling, general and administrative.............. 12,274 24,756 23,762 44,505
Depreciation and amortization.................... 1,080 3,390 2,326 5,585
Non-income taxes................................. 713 578 1,000 1,320
-------- -------- -------- --------
20,606 52,919 40,051 94,628
Equity in losses/(earnings) of ventures.......... 6,747 (4,215) 10,167 (7,627)
-------- -------- -------- --------
LOSS FROM OPERATIONS............................... (18,445) (18,056) (32,923) (33,536)
OTHER INCOME (EXPENSE):
Interest income.................................. 866 7,186 2,162 14,252
Interest expense................................. (3,495) (14,128) (7,163) (30,594)
Foreign currency losses.......................... (465) (1,637) (959) (3,031)
-------- -------- -------- --------
(3,094) (8,579) (5,960) (19,373)
-------- -------- -------- --------
Net loss before income taxes, minority interest and
extraordinary loss............................... (21,539) (26,635) (38,883) (52,909)
Income taxes....................................... 452 829 817 1,381
-------- -------- -------- --------
Net loss before minority interest and extraordinary
loss............................................. (21,991) (27,464) (39,700) (54,290)
Minority interest.................................. 37 1,284 13 3,637
-------- -------- -------- --------
Net loss before extraordinary loss................. (21,954) (26,180) (39,687) (50,653)
Extraordinary loss -- extinguishment of debt....... -- -- -- (12,704)
-------- -------- -------- --------
NET LOSS........................................... $(21,954) $(26,180) $(39,687) $(63,357)
======== ======== ======== ========
Loss per share before extraordinary loss........... $ (0.63) $ (0.48) $ (1.14) $ (1.02)
Extraordinary loss per share....................... -- -- -- (0.25)
-------- -------- -------- --------
Net loss per share................................. $ (0.63) $ (0.48) $ (1.14) $ (1.27)
======== ======== ======== ========
Weighted average common shares outstanding......... 35,093 54,028 34,899 49,789
======== ======== ======== ========
</TABLE>
5
<PAGE> 6
GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(21,954) $(26,180) $(39,687) $(63,357)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED
IN OPERATING ACTIVITIES:
Extraordinary loss............................... -- -- -- 12,704
Depreciation and amortization.................... 2,354 9,334 4,478 16,484
Amortization of discount on note payable......... 1,220 -- 2,377 477
Equity in losses (earnings) of ventures, net of
dividends received............................ 6,747 (4,215) 10,167 (7,627)
Deferred interest................................ 2,063 190 3,869 1,826
Minority interest................................ (45) (1,284) (21) (7,845)
Other............................................ 329 3,141 584 2,905
Changes in assets and liabilities, excluding
effects of acquisitions and ventures:
Accounts receivable........................... (621) (18,971) (2,880) (21,133)
Prepaid expenses.............................. 185 (5,577) (618) (6,738)
Accounts payable and accrued expenses......... (1,476) 19,895 (3,324) 19,121
Other changes in assets and liabilities....... 1,303 16,381 1,803 18,510
-------- -------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES.... (9,895) (7,286) (23,252) (34,673)
INVESTING ACTIVITIES
Investments in and advances to ventures, net of
repayments.................................... (2,453) 4,565 (12,873) 6,935
Purchases of property and equipment.............. (1,538) (25,454) (3,127) (39,842)
Restricted cash.................................. 77 (5,626) 315 (15,983)
Goodwill and other intangibles................... (1,636) (2,985) (1,428) (17,619)
Acquisitions -- cash acquired.................... -- 13,352 -- 13,352
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.... (5,550) (16,148) (17,113) (53,157)
FINANCING ACTIVITIES
Proceeds from debt............................... 483 -- 483 105,300
Repayments of debt............................... -- (6,660) (175) (98,015)
Payment of debt issue costs...................... -- (1,286) -- (5,243)
Common stock repurchased for treasury............ (433) -- (433) --
Net proceeds from issuance of common stock....... -- -- -- 235,620
Other financing activities....................... 295 2,272 (99) 9,471
-------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES............................. 345 (5,674) (224) 247,133
Effect of exchange rate changes on cash and cash
equivalents...................................... (1,006) (791) (2,698) (73)
-------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (16,106) (29,899) (43,287) 159,230
Cash and cash equivalents at beginning of period... 30,693 507,895 57,874 318,766
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 14,587 $477,996 $ 14,587 $477,996
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
The financial statements of Global TeleSystems Group, Inc. (the "Company"
or "GTS") 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. 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; however, other
adjustments may have been required had an audit been performed. 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 1997 audited
consolidated financial statements and the notes related thereto. The results of
operations for the three and six months ended June 30, 1998 may not be
indicative of the operating results for the full year.
The Company's operations are carried out through alliances with strategic
local partners in the form of venture arrangements. Wholly-owned subsidiaries
and majority-owned ventures where the Company has unilateral operating and
financial control are consolidated within the Company's financial results and
operations. Those ventures where the Company exercises significant influence,
but does not exercise unilateral operating and financial control, are accounted
for by the equity method. The Company has certain majority-owned investments
that are accounted for by the equity method as a result of minority shareholder
rights, super-majority voting conditions or other governmentally imposed
uncertainties so severe that they prevent the Company from obtaining unilateral
control of the venture. If the Company has little ability to exercise
significant influence over the ventures, those ventures are accounted for by the
cost method. All significant intercompany accounts and transactions are
eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recorded have been recovered.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income
(loss) is defined as the change in equity of a business enterprise during a
period from nonowner sources. Comprehensive loss was $23.0 million and $42.4
million for the three and six months ended June 30, 1997, respectively, and was
comprised of net losses of $22.0 million and $39.7 million and foreign currency
translation adjustments of $1.0 million and $2.7 million for the three and six
months ended June 30, 1997, respectively. Comprehensive loss was $25.5 million
and $64.6 million for the three and six months ended June 30, 1998,
respectively, and was comprised of net losses of $26.2 million and $63.4 million
and foreign currency translation income of $0.7 million for the three months
ended June 30, 1998 and foreign currency loss of $1.2 million for the six months
ended June 30, 1998.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and fully diluted earnings per share for
all periods presented. The Company's net loss per share calculation (basic and
diluted) is based upon the weighted average common shares issued. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee
7
<PAGE> 8
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options, warrants, and convertible debt instruments have been excluded
from the net loss per share calculation because their effect would be
anti-dilutive.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which will be
required to be adopted by January 1, 2000. This statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company is currently assessing the impact of this new statement on its
consolidated financial position and results of operations.
Certain reclassifications have been made to the June 1997 condensed,
consolidated financial statements in order to conform to the 1998 presentation.
3. SHAREHOLDERS' EQUITY
In February 1998, the Company completed an initial public offering of 12.8
million shares of common stock at $20.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's common stock being
listed in the United States on the National Association of Securities Dealers
Automated Quotation Market and internationally on the European Association of
Securities Dealers Automated Quotation Market. Net proceeds from the Stock
Offering were approximately $235.6 million. As a result of the Stock Offering,
the Company no longer has an obligation to repurchase the 797,100 shares of
common stock that were subject to repurchase at December 31, 1997.
Pursuant to a purchase agreement that the Company has with a venture
partner, the Company issued 336,630 shares of common stock to the partner in
April 1998. In accordance with the purchase agreement, the Company is obligated
to assist the seller in locating a purchaser for the Common Stock, and if unable
to do so, to repurchase the issued common stock. The shares issued are
restricted and therefore, have been classified as common stock subject to
repurchase as of June 30, 1998.
In June 1998, pursuant to the Debt Obligation described below, 3,333,333
warrants were exercised at an exercise price of $9.33 per common share. An
additional 4,444,444 warrants to purchase the Company's common stock expire in
the first and second quarters of 2002.
4. DEBT OBLIGATIONS
In February 1998, the Company issued aggregate principal amount $105.0
million of 9.875% senior notes due 2005 (the "Notes Offering" and together with
the Stock Offering, the "Offerings"). Net proceeds from the Notes Offering were
approximately $100.5 million. Approximately $19.6 million of the net proceeds
was placed in escrow for the first four semiannual interest payments, commencing
August 15, 1998.
As a result of the completion of the Stock Offering, the interest rate on
the $144.8 million aggregate principal amount of 8.75% senior subordinated
convertible bonds due 2000, which were issued in July 1997 (the "Bonds") will
remain at 8.75% until maturity and the approximately $5.1 million of the 6.25%
additional interest that was previously accrued through the date of the Stock
Offering has been reflected as an increase to additional paid-in capital. Upon
completion of the Stock Offering, the Bonds became convertible into 7.2 million
common shares at a conversion price of $20.00 per share. During the second
quarter of 1998, $19.0 million of the Bonds were converted into approximately
1.0 million common shares of the Company's common stock for a total of $25.4
million converted into 1.3 million common shares for the six months ended June
30, 1998.
8
<PAGE> 9
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company entered into long-term obligations ("Debt
Obligations") totaling $70.0 million with lenders that are affiliated with and
are considered related parties to the Company as a result of their ownership of
the Company's common stock. In February 1998, approximately $85.2 million of the
net proceeds of the Offerings was used to repay the Debt Obligations plus
accrued interest. In addition, the unamortized discount costs and debt issuance
costs on the Debt Obligations were written off at the time of repayment,
resulting in the Company recording an extraordinary loss of $12.7 million.
5. OTHER TRANSACTIONS
In June 1998, the Company completed the restructuring of the capital and
ownership of Bancomsvyaz, one of its equity method investees, which resulted in
the Company's beneficial ownership increasing from approximately 25% to
approximately 57%. Prior to the restructuring, Bancomsvyaz was 49% owned by GTS
Ukrainian TeleSystems LLC ("UTS"), another equity method investee which was 60%
owned by the Company and 40% owned by a shareholder of the Company (the
"Shareholder"). The total consideration paid for the additional interest in
Bancomsvyaz was $11.4 million. In conjunction with this restructuring, the
Shareholder exercised its right to receive 0.7 million shares of the Company's
common stock in lieu of their ownership interest in UTS, and as a result, the
Company reclassified an $8.6 million short-term obligation as additional paid-in
capital. Further, the Shareholder contributed an additional $5.8 million for a
25% interest in UTS. As a result of the restructuring, as of June 30, 1998, UTS
and Bancomsvyaz are accounted for by the consolidation as opposed to the equity
method of accounting. The purchase price has been allocated to the net assets
based on the fair value at the date of acquisition. The excess purchase price
over the fair value of the net assets acquired was $1.2 million, which has been
recorded as goodwill and is being amortized, on a straight-line basis over five
years.
In June 1998, Hermes Europe Railtel B.V. ("HER") completed the acquisition
for ECU 90 million (approximately $99.5 million) from Ebone Holding Association
(the "Association") of a 75% interest in Ebone A/S ("Ebone"), a Tier 1 Internet
backbone provider, principally serving as a carriers' carrier for European
internet service providers. As part of the transaction, Ebone will purchase,
under a transmission capacity agreement, long-term rights on HER's network
valued at ECU 90 million. The purchase price has been allocated to the net
assets based on the fair value at the date of acquisition. The excess purchase
price over the fair value of the net assets acquired was $17.2 million, which
has been recorded as goodwill and is being amortized, on a straight-line basis
over five years. The members of the Association have the right to buy shares of
Ebone in a future issuance to occur by the end of 1998, which could reduce HER's
ownership in Ebone from 75% to not less than 54%.
In March 1998, the Company purchased an additional 10.3% interest in Hermes
Europe Railtel B.V. ("HER") from an existing shareholder of HER for ECU 13.5
million (approximately $14.6 million). As a result of the purchase, the Company
owns approximately 89.4% of HER. The purchase price has been allocated to the
net assets based on the fair value at the date of acquisition. The excess
purchase prices over the fair value of the net assets acquired was $10.2
million, which has been recorded as goodwill and is being amortized, on a
straight-line basis over five years.
In February 1998, the Company acquired the remaining 33% interest in Sovam
Teleport from its minority partner and as a result Sovam became a wholly-owned
subsidiary of the Company and in 1998 is accounted for by the consolidation as
opposed to the equity method of accounting. The Company paid a nominal amount
for the 33% interest.
9
<PAGE> 10
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
THREE
MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Capitalization of leases.................................... $23,374 $50,238
Exercise of warrants........................................ 31,110 31,110
Conversion of the Bonds into common stock................... 19,035 25,385
Additional consideration in relation to purchase of interest
in a CIS region subsidiary................................ 13,549 --
Reclassification of common stock subject to repurchase...... -- 12,489
Conversion of note payable into common stock................ 8,625 8,635
Note receivable from shareholder for additional
consideration in relation to purchase of a venture........ 5,750 5,750
Reclassification of accrued interest on the Bonds........... -- 5,052
</TABLE>
No significant non-cash activities were incurred for the three and six
months ended June 30, 1997.
7. SUBSEQUENT EVENTS
In July 1998, a wholly-owned subsidiary of the Company purchased the
remaining 47.36% interest in GTS Vox Limited for $40.0 million, which will be
paid in installments. In connection with this buy-out, a modification was made
to the original stock purchase agreement with the Company's partner in GTS Vox,
in which the Company's obligation to issue 224,190 shares of common stock to
such partner will be accelerated to 1998. Under the stock purchase agreement,
the Company is also obligated to assist the former partner in locating a buyer
for these shares of common stock and if unable to do so, the Company will
repurchase the shares of common stock. In addition to the above payments, the
purchase agreement includes guarantees of certain cash flow assumption for GTS
Vox Limited's consolidated subsidiary.
Subsequent to June 30, 1998, the Company completed a secondary public
offering of 2.8 million shares of common stock at $45.50 per common share. Net
proceeds from the offering were approximately $119.9 million. In addition, in
conjunction with such offering, shareholders of the Company sold 11.7 million
shares of the Company's common stock. The Company did not realize any of the
proceeds of such sale. In addition, the Company issued aggregate principal
amount of $466.9 million of 5.75% convertible senior subordinated debentures
(the "Debentures") that mature July 1, 2010 and will be redeemable from July 1,
2001 at the option of the Company, at redemption prices as set forth in the
Debentures agreement. Net proceeds from the Debentures offering were
approximately $452.1 million. The Debentures are convertible into shares of
common stock at any time prior to maturity or redemption at a conversion price
of $55.05 per common share. Interest on the Debentures will be payable
semi-annually on January 1 and July 1, commencing January 1, 1999. The
Debentures are subordinated to all existing and future indebtedness of the
Company, except for the Bonds, with which they rank pari passu in right of
payment.
10
<PAGE> 11
ITEM 1B. FINANCIAL STATEMENTS OF EDN SOVINTEL
Condensed Balance Sheets As of December 31, 1997 and June 30, 1998
Condensed Statements of Operations For the Three and Six Months Ended June
30, 1997 and 1998
Condensed Statements of Cash Flows For the Three and Six Months Ended June
30, 1997 and 1998
Notes to Condensed Financial Statements
11
<PAGE> 12
EDN SOVINTEL
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 5,620 $ 3,265
Accounts receivable, less allowance for doubtful accounts
of $643 and $870 at December 31, 1997 and June 30,
1998................................................... 16,223 20,980
Restricted cash........................................... 485 468
Due from affiliated companies............................. 1,586 2,066
Inventory................................................. 1,697 1,343
Deferred tax asset........................................ 186 186
Prepaid expenses and other assets......................... 5,318 12,033
------- -------
Total current assets.............................. 31,115 40,341
Property and equipment, net of accumulated depreciation of
$14,557 and $17,467 at December 31, 1997 and June 30,
1998...................................................... 38,709 42,920
Deferred expenses........................................... 945 878
------- -------
TOTAL ASSETS...................................... $70,769 $84,139
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 5,725 $ 9,163
Accrued expenses.......................................... 3,194 4,502
Due to affiliated companies............................... 10,104 9,702
Note payable to shareholder............................... 39 --
Taxes and other liabilities............................... 2,438 1,864
------- -------
TOTAL LIABILITIES................................. 21,500 25,231
Commitments and contingencies
SHAREHOLDERS' EQUITY
Contributed capital......................................... 2,000 2,000
Retained earnings........................................... 47,269 56,908
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 49,269 58,908
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $70,769 $84,139
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 13
EDN SOVINTEL
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1998 1997 1998
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES, net:........................................ $28,977 $34,703 $54,139 $67,107
COST OF REVENUES:..................................... 18,073 22,646 32,836 44,603
------- ------- ------- -------
Gross margin.......................................... 10,904 12,057 21,303 22,504
OPERATING EXPENSES:
Selling, general and administrative................. 2,739 3,335 5,435 6,362
Depreciation and amortization....................... 53 214 213 391
Non-income taxes.................................... 1,468 1,593 2,467 3,035
------- ------- ------- -------
Total operating expenses.................... 4,260 5,142 8,115 9,788
Income from operations................................ 6,644 6,915 13,188 12,716
OTHER (EXPENSE) INCOME:
Interest income..................................... 49 61 104 98
Interest expense.................................... (115) -- (274) --
Foreign currency losses............................. (31) (73) (69) (293)
------- ------- ------- -------
(97) (12) (239) (195)
Net income before taxes............................... 6,547 6,903 12,949 12,521
Income taxes.......................................... 1,512 1,609 3,220 2,882
------- ------- ------- -------
Net income.................................. $ 5,035 $ 5,294 $ 9,729 $ 9,639
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 14
EDN SOVINTEL
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1998 1997 1998
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 5,035 $ 5,294 $ 9,729 $ 9,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 1,114 1,409 2,227 2,910
Provision for doubtful accounts...................... (504) (384) (352) (227)
Changes in assets and liabilities:
Accounts receivable............................... (2,103) (1,284) (6,719) (4,984)
Inventory......................................... (415) 354 (122) 354
Prepaid expenses and other assets................. (929) (5,210) (1,529) (7,195)
Accounts payable and accrued expenses............. 2,437 1,319 4,123 4,172
------- ------- ------- -------
Net cash provided by operating activities.... 4,635 1,498 7,357 4,669
INVESTING ACTIVITIES
Purchases of property and equipment.................. (5,015) (3,621) (8,556) (7,121)
Restricted cash...................................... 9 6 (22) 17
------- ------- ------- -------
Net cash used in investing activities........ (5,006) (3,615) (8,578) (7,104)
FINANCING ACTIVITIES
Repayment of shareholder note, net................... (932) -- (728) (39)
Due to affiliated companies, net..................... 2,464 (1,574) 1,503 119
------- ------- ------- -------
Net cash (used in) provided by financing activities.... 1,532 (1,574) 775 80
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents... 1,161 (3,691) (446) (2,355)
Cash and cash equivalents at beginning of period....... 1,999 6,956 3,606 5,620
------- ------- ------- -------
Cash and cash equivalents at end of period............. $ 3,160 $ 3,265 $ 3,160 $ 3,265
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 15
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
In the opinion of management, the accompanying unaudited condensed
financial statements of EDN Sovintel (the "Company") contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Company's financial position as of December 31, 1997 and June 30, 1998, and the
results of operations and cash flows for the periods indicated.
The Company was established as a competitive local exchange carrier (CLEC)
in August 1990. Through the design, construction, and operation of a
telecommunications network in Moscow, the Company provides its customers,
principally major hotels, business offices and mobile communications companies,
with an alternative to the local telephone company for worldwide communications
services. Telecommunications services are subject to local licensing. The
Company's license for international, intercity and local calls was most recently
renewed on November 4, 1996 and is valid until May 1, 2000. The Company received
a license for leased lines on September 20, 1996 valid for 5 years. The Company
began operating in December 1991, providing services under long-term contracts
payable in US dollars. Currently, customers have the option of being billed in
roubles or dollars. All payments from Russian companies are made in roubles.
The venture is a Russian limited liability partnership. The Company is 50%
owned by Open Joint Stock Company "Rostelecom," an intercity and long-distance
carrier which is 38% owned by Svyazinvest, and 50% owned by Sovinet, a US
general partnership, which is owned by two wholly-owned Global TeleSystems
Group, Inc. ("GTS") subsidiaries.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded; however,
other adjustments may have been required had an audit been performed. It is
suggested that these financial statements be read in conjunction with the
Company's 1997 audited financial statements and the notes related thereto. The
results of operations for the three and six months ended June 30, 1998 may not
be indicative of the operating results for the full year.
The Company also maintains its records and prepares its financial
statements in Russian roubles in accordance with the requirements of Russian
accounting and tax legislation. The accompanying financial statements differ
from the financial statements used for statutory purposes in Russia in that they
reflect certain adjustments, not recorded on the Company's Russian statutory
books, which are appropriate to present the financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). The principal
adjustments are related to certain accrued revenue and expenses, foreign
currency translation, deferred taxation, and depreciation and valuation of
property and equipment. The preparation of financial statements, in conformity
with US GAAP, requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
nonowner sources. For the three and six months ended June 30, 1997 and 1998,
comprehensive income for the Company is equal to net income.
15
<PAGE> 16
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTINGENCIES
Legislation and regulations regarding taxation, foreign currency
transactions and licensing of foreign currency loans in the Russian Federation
continues to evolve as the central government manages the transformation from a
command to a market-oriented economy. The various legislation and regulations
are not always clearly written and their interpretation is subject to the
opinions of the tax inspectors, Central Bank officials and the Ministry of
Finance. Instances of inconsistent opinions between local, regional and national
tax authorities and between the Central Bank and Ministry of Finance are not
unusual.
The Company believes that it has paid or accrued all taxes that are
applicable. Where practice concerning the provision of taxes is unclear, the
Company has accrued tax liabilities based on management's best estimate. The
Company's policy is to accrue contingencies in the accounting period in which a
loss is deemed probable and the amount is reasonably determinable.
Because of the uncertainties associated with the Russian tax and legal
systems, the ultimate amount of taxes, penalties and interest, if any, assessed
may be in excess of the amount expensed to date and accrued at December 31, 1997
and June 30, 1998.
The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation and tax regulations. The Company does not
believe that these contingencies, as related to its operations, are any more
significant than those of similar enterprises in Russia.
16
<PAGE> 17
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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,
(iii) changes in the Company's competitive environment and (iv) the performance
of future equity-method investments, 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.
OVERVIEW
Business. GTS is a provider of a broad range of telecommunications services
to businesses, other telecommunications service providers and consumers in
Russia and the CIS, Central Europe and Asia. In Western Europe, through HER, GTS
is developing and operating the initial segments of a pan-European high capacity
fiber optic network which is designed to interconnect a majority of the largest
Western and Central European cities and to transport international voice, data
and multimedia/image traffic for other carriers throughout Western and Central
Europe. GTS's strategy to develop its businesses generally has been to establish
joint ventures with a strong local partner or partners while maintaining a
significant degree of operational control. The Company's business activities
consist of the ownership and operation of (i) international long distance
businesses, which operate through international gateways that provide
international switching services and transmission capacity, (ii) local access
networks, which provide local telephone service, (iii) cellular networks, which
provide wireless telecommunications services, (iv) a domestic long distance
business, (v) data networks and (vi) carriers' carrier networks, which provide
high volume transmission capacity to other carriers.
The Company began to acquire interests in numerous telecommunications
ventures beginning in 1994 and continued to acquire such interests throughout
1995 and 1996. Ventures with significant financial results in 1994 included
Sovintel (an international long distance and domestic and local access
telecommunications service provider) and GTS-Hungary (a VSAT network
telecommunications service provider); ventures that incurred start-up costs
associated with building out their business infrastructure in 1994 included
Sovam (a data and internet telecommunications service provider) and EuroHivo (a
paging telecommunications service provider). In 1995, TeleRoss (a domestic long
distance telecommunications service provider) and GTS Cellular (a basic cellular
telecommunications service provider) began operations and expanded into numerous
regions within the CIS by the end of 1996. Telecommunications of Moscow ("TCM")
(a local access telecommunications service provider) began operations in 1996.
HER (a carriers' carrier telecommunications service provider) began its network
build-out in 1995, began limited operations at the end of 1996 and expects to
continue to develop its network during 1998 and beyond. The fact that these
ventures are in various stages of development affects the discussion of
comparative results below.
GTS has invested significantly in its ventures through capital
contributions and loans. In addition, the Company has made a significant
commitment to its businesses and ventures through the provision of management
assistance and training. GTS has also incurred significant expenses in
identifying, negotiating and pursuing new telecommunications opportunities. GTS
and certain of its ventures are experiencing continuing losses and negative
operating cash flow primarily because the businesses are in the developmental
and start-up phases of operations. Management recognizes that the Company must
generate additional capital resources in order to continue its operations and
meet its new development initiatives. The ultimate recoverability of the
Company's investments in and advances to ventures is dependent on many factors
including, but not limited to, the ability of the Company to obtain sufficient
financing to continue to meet its capital and operational commitments, the
economies of the countries in which it does business and the ability of the
Company to maintain the necessary telecommunications licenses.
The Company's businesses are developing rapidly. Some of the businesses
operate in countries with emerging economies which have uncertain economic,
political and regulatory environments. The general risks of operating businesses
in the CIS and other developing countries include the possibility for rapid
change in
17
<PAGE> 18
government policies including telecommunications regulations, economic
conditions, the tax regime and foreign currency regulations.
ACCOUNTING METHODOLOGY
Accounting for Business Ventures. Wholly-owned subsidiaries and
majority-owned ventures where the Company has unilateral operating and financial
control are consolidated. Those ventures where the Company exercises significant
influence, but does not exercise unilateral operating and financial control, are
accounted for by the equity method. The Company has certain majority-owned
ventures that are accounted for by the equity method as a result of minority
shareholder rights, super-majority voting conditions or other governmentally
imposed uncertainties so severe that they prevent the Company from obtaining
unilateral control of the venture.
Profit and Loss Accounting. The Company recognizes profits and losses in
accordance with its underlying ownership percentage or allocation percentage as
specified in the agreements with its partners; however, the Company recognizes
100% of the losses in ventures where the Company bears all of the financial risk
(which includes all of the Company's significant ventures except for Sovintel
and, historically, HER). Accordingly, the portion of the losses that would
normally be assigned to the minority interest partner ("Excess Losses") is
recognized by the Company. When such ventures become profitable, the Company
recognizes 100% of the profits until such time as the Excess Losses previously
recognized by the Company have been recovered. As of June 30, 1998, $5.3 million
and $9.0 million represent the net unrecovered Excess Losses for the Company's
consolidated and equity method investments, respectively, that is expected to
favorably benefit future period results from operations upon the Company's
existing business ventures becoming profitable. This accounting policy was
adopted prior to 1995; however, 1995 was the first year that the excess loss
amount was deemed material for recognition within the Company's accounting
records. For the period from January 1, 1997, through August 31, 1997, the
Company recognized 100% of HER's losses due to GTS being the financing partner
during this period. As a result of HER's issuance in August 1997, of $265
million aggregate principal amount of 11.5% senior notes due 2007 (of which
$56.6 million was placed in escrow for the first two years' interest payments)
the Company no longer considers itself as the financing partner.
Inter-Affiliate Transactions. Several of the Company's ventures have
entered into business arrangements through which they provide integrated
solutions for their customers by leveraging each others' telecommunications
infrastructure. These arrangements have historically been focused primarily
within a region; however, as GTS has increased its geographic coverage and
telecommunication capabilities, these arrangements have expanded between
regions. In accordance with generally accepted accounting principles, all
significant intercompany accounts and transactions are eliminated upon
consolidation.
Turnover Taxes. The Company's ventures within the CIS region incur a 4%
turnover tax that is based on the revenues earned. The Company includes these
taxes as a component of its operating expenses, since these taxes are incidental
to the revenue cycle.
18
<PAGE> 19
The following table summarizes the accounting methodology for the principal
business ventures through which the Company conducts its business.
<TABLE>
<CAPTION>
COUNTRY/REGION EFFECTIVE GTS ACCOUNTING
COMPANY NAME OF OPERATIONS OWNERSHIP METHODOLOGY
------------ -------------- ------------- -----------
<S> <C> <C> <C>
CIS
Sovintel.............................. Russia 50% Equity
TCM................................... Russia 50%(1) Equity
TeleRoss Operating Company............ Russia 100%(2) Consolidated
TeleRoss Ventures..................... Russia 50%(3) Equity
Sovam................................. Russia 100%(4) Consolidated(4)
GTS Cellular.......................... CIS 50%-75%(5) Equity/Consolidated
Western Europe
HER................................... Western Europe 89%(6) Consolidated(6)
GTS-Monaco Access..................... Monaco 50% Equity
Central Europe
GTS-Hungary........................... Hungary 99% Consolidated
EuroHivo.............................. Hungary 70%(7) Equity
CzechNet.............................. Czech Republic 100% Consolidated
CzechCom.............................. Czech Republic 100% Consolidated
Asia
V-Tech................................ China 75% Equity
Beijing Tianmu........................ China 47% Equity
CDI................................... India 100% Consolidated
</TABLE>
- ---------------
(1) Subsequent to June 30, 1998, the Company purchased the remaining minority
ownership interest in GTS-Vox Limited. As a result, effective July 1998, the
Company will have a 95% indirect interest in TCM and TCM will be accounted
for by the consolidation as opposed to the equity method of accounting.
(2) The TeleRoss Operating Company is comprised of a wholly-owned subsidiary
that operates a domestic long distance network and holds the applicable
operating license for TeleRoss and performs the customer invoicing and
collection functions for telecommunications services. TeleRoss Operating
Company is accounted for under the consolidation method of accounting
because GTS has unilateral control over the operations and management
decisions. TeleRoss Operating Company's operations are further discussed in
"-- Results of Operations -- Consolidated Ventures" and "Business -- Russia
and the CIS -- TeleRoss." A significant portion of TeleRoss Operating
Company's costs of revenue consists of settlement fees paid to the TeleRoss
Ventures [as defined in (4) below], with such fees being recorded as revenue
by the TeleRoss Ventures. To date, all of the TeleRoss Ventures' revenue was
derived from such fees. Any decline in the business or operations of the
TeleRoss Ventures would have a material adverse effect on the results of
TeleRoss Operating Company.
(3) TeleRoss Ventures is comprised of fourteen joint ventures that are 50%
beneficially owned by GTS, which originate traffic and provide local
termination of calls through agency arrangements with TeleRoss Operating
Company. GTS does not exercise unilateral control over the TeleRoss
Ventures, and therefore they are appropriately accounted for under the
equity method of accounting. TeleRoss Ventures' operations are further
discussed in "-- Results of Operations -- Non-Consolidated Ventures."
(4) GTS purchased the remaining 33% interest in Sovam in February 1998 and as a
result, effective February 1998, Sovam is accounted for by the consolidation
as opposed to the equity method of accounting.
(5) GTS conducts its cellular operations through (i) Vostok Mobile, a wholly
owned GTS venture that owns between 50% and 70% of a series of thirteen
cellular joint ventures in various regions in Russia, (ii) PrimTelefone, a
50% owned venture in Vladivostok, Russia and (iii) Bancomsvyaz, an
approximately 57% beneficially owned venture in Kiev, Ukraine. The Company
completed a restructuring of the capital and ownership of Bancomsvyaz on
June 30, 1998, which results in GTS beneficially owning approxi-
19
<PAGE> 20
mately 57% of Bancomsvyaz. As a result, effective June 30, 1998, Bancomsvyaz
is accounted for by the consolidation as opposed to equity method of
accounting.
(6) As of July 16, 1997, HER is accounted for by the consolidation as opposed to
the equity method of accounting. In addition, in March 1998, GTS acquired an
additional 10% interest in HER.
(7) The Company has reached a definitive agreement to sell its ownership
interest in EuroHivo. The closing of this transaction is anticipated to
occur by the end of August 1998, but is conditioned upon the Ministry's
approval of the share transfer. The Company does not anticipate that the
closing of this transaction will have a material effect on the Company's
results from operations and financial condition.
RESULTS OF OPERATIONS -- CONSOLIDATED VENTURES
Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, Sovam, GTS-Hungary, the Czech
Companies and HER. Although the Company was not able to follow consolidation
method of accounting for Sovam and HER in the three and six months ended June
30, 1997, the Company has included, for comparative purposes, a discussion of
their financial performance for the three and six months ended June 30, 1997 in
our discussion of "Results of Operations -- Consolidated Ventures". See "Results
of Operations -- Non-Consolidated Ventures (Equity Investees)" for a discussion
of the operating results of Sovintel, TCM, TeleRoss Ventures, GTS Cellular and
GTS-Monaco Access.
Revenue. The Company's consolidated revenue was $30.6 million and $53.5
million for the second quarter and year to date ended June 30, 1998,
respectively, which was $21.8 million and $36.2 million above the same periods
in 1997. The growth in revenue was primarily attributable to the inclusion of
Sovam and HER in the Company's consolidated financial results, who contributed
$12.4 million and $15.9 million in revenue, respectively, for the six months
ended June 30, 1998. The remaining revenue growth was attributable to the
TeleRoss Operating Company, as its revenue increased $5.5 million year over
year.
The CIS region's consolidated revenue increased 165.5% and 165.4% to $14.6
million and $28.4 million for the three and six months ended June 30, 1998,
respectively, from the comparable periods in 1997. TeleRoss Operating Company
generated revenue of $8.3 million and $15.4 million, representing 56.8% and
54.2% of the region's consolidated revenue for the three and six months ended
June 30, 1998, respectively. The growth in TeleRoss Operating Company revenue of
50.9% and 55.6% for the second quarter and year to date, respectively, from the
same periods last year was the result of the increase in traffic volume
generated by the TeleRoss Ventures due to the increase in the number of cities
and number of VSAT's installed at customer locations outside of cities in which
they have a presence. Sovam generated revenue of $6.5 million and $12.4 million
for the three and six months ended June 30, 1998, respectively. The 51.2% and
55.0% increase from prior year periods in Sovam revenue is primarily
attributable to the expansion of Sovam's network throughout Russia and the CIS
and the wider variety of service offerings. (Sovam was an equity method company
in 1997.)
HER generated $11.2 million and $15.9 million of revenue in the three and
six months ended June 30, 1998, respectively, compared to $0.4 million and $0.6
million, respectively, in the same periods in 1997 (HER was an equity method
company prior to July 1997). The growth in revenue is attributable to the
continued deployment of the HER network. HER commenced commercial service over
the Brussels-Amsterdam route in late 1996, the London-Paris portion in November
1997 and Frankfurt, Zurich, Geneva, Stuttgart, Dusseldorf and Munich were added
in the second quarter of 1998.
The Central Europe region's consolidated revenue increased 30.3% and 34.4%
to $4.3 million and $8.2 million for the three and six months ended June 30,
1998, respectively, from the comparable periods in 1997. This growth is
attributable to the expansion of the customer base and product offerings of
these businesses.
Gross Margin. GTS's consolidated gross margin was $6.5 million and $10.2
million, or 21.2% and 19.1% of revenue, for the three and six months ended June
30, 1998, respectively, and $2.3 million and $4.3 million, or 25.8% and 24.9% of
revenue, for the three and six months ended June 30, 1997, respectively.
20
<PAGE> 21
Sovam represented 49.2% and 58.8% of the consolidated gross margin for the
three and six months ended June 30, 1998, respectively. (Sovam was an equity
method company in 1997). Sovam had gross margin as a percentage of revenues of
49.2% and 48.4% for the three and six months ended June 30, 1998, respectively.
The increase of 12.0% and 12.1% in gross margin as a percentage of revenue in
comparison to the same periods in 1997 reflects the higher margin service
offerings that Sovam is currently providing and also management's focus to
improve its cost structure; i.e., the negotiation of improved channel costs from
suppliers and controlled growth in both personnel and capital expenditures. The
TeleRoss Operating Company represented 12.3% and 17.5% of the consolidated gross
margin for the three and six months ended June 30, 1998, respectively, and 0.0%
and 34.9% for the three and six months ended June 30, 1997, respectively.
TeleRoss had gross margin as a percentage of revenue of 9.6% and 11.7% for the
three and six months ended June 30, 1998, respectively. The decrease of 3.5% in
margin as a percentage of revenue for the six months ended June 30,1998 in
comparison to the comparable period in 1997 reflects the high fixed cost
component of its network hub in Moscow. The Central European region had gross
margin as a percentage of revenue of 34.9% and 34.1% for the three and six
months ended June 30, 1998, respectively. The decrease of 1.5% and 6.8% in gross
margin as a percentage of revenue in comparison to the comparable periods in
1997 primarily reflects the startup activities of the GTS Net product offering
in Hungary. HER had a favorable effect on consolidated gross margins of $0.4
million for the three months ended June 30, 1998, and an unfavorable effect on
consolidated gross margins of $(1.0) million for the six months ended June 30,
1998. For comparative purposes, HER had an unfavorable gross margin of $(1.1)
million and $(2.7) million for the three and six months ended June 30, 1997 (HER
was an equity method company prior to July 1997.)
Operating Expenses. Consolidated operating costs were $28.7 million and
$51.4 million for the three and six months ended June 30, 1998, respectively, a
104.2% and 89.8% increase above the comparable periods in 1997. The increase in
operating costs is attributable to the inclusion of HER and Sovam in the
Company's consolidated financial results, the growth in expenditures associated
with building business infrastructure for primarily the TeleRoss Operating
Company and costs attributable to increasing the corporate staff.
Equity in (Losses)/Earnings of Ventures. GTS recognized earnings of $4.2
million and $7.6 million for its investments in non-consolidated ventures in the
three and six months ended June 30, 1998, respectively, as compared to
recognizing losses of $6.7 million and $10.2 million in the comparable periods,
respectively, in 1997. This improvement was primarily the result of HER no
longer being an equity method investee, the Company's exclusion of the
unfavorable financial results of several of its businesses as a result of its
write-off of certain investments in and advances to ventures in Asia and Central
Europe in the third quarter of 1997 and TCM's year over year net income
improvement. Included in the quarter ended June 30, 1998 was $0.1 million of
additional losses as a result of excess losses recognized. For the six months
ended June 30, 1998, excess losses recognized were minimal. Included in the
quarter and year to date results for June 30, 1997 were $5.1 million and $7.8
million of additional losses as a result of the application of the Company's
previously discussed profit and loss accounting. Sovintel and TCM generated
combined earnings of $5.3 million and $9.4 million for the three and six months
ended June 30, 1998, respectively, and $4.2 million and $8.1 million for the
three and six months ended June 30, 1997, respectively, which offset the losses
generated by other ventures that are in the early stages of operations. See
"Results of Operations -- Non-Consolidated Ventures (Equity Investees) for a
discussion of the results of operations of the Company's significant equity
investees.
Interest, Net. GTS incurred interest expense of $14.1 million and $30.6
million for the three and six months ended June 30, 1998, respectively, which
was 304.2% and 327.1% above the comparable periods in 1997. The significant
increase in interest expense was due to the $409.8 million increase in debt
raised in 1997 and $105.0 million raised in 1998. See "-- Liquidity and Capital
Resources."
GTS earned interest income of $7.2 million and $14.3 million for the three
and six months ended June 30, 1998, respectively, a 729.8% and 559.2% increase
over the same periods in 1997, primarily as a result of investing the proceeds
from the Company's 1997 and 1998 capital raise efforts. See "-- Liquidity and
Capital Resources."
Provision for Income Taxes. The Company's consolidated tax provision was
$0.8 million and $1.4 million for the three and six months ended June 30, 1998
and $0.5 million and $0.8 million for the three and six
21
<PAGE> 22
months ended June 30, 1997, respectively. The Company's financial statements do
not reflect any provision for benefits that might be associated with the U.S.
and non-U.S. loss carryforwards. There can be no assurance that such non-U.S.
loss carryforwards will be allowed, in part or in full, by local tax authorities
against future income.
Extraordinary Loss. The Company recognized a $12.7 million extraordinary
charge to earnings in the first quarter of 1998, as a result of the Company's
early extinguishment of certain related party debt obligations. The nature of
the charge is comprised of the write-off of $11.6 million of unamortized debt
discount and $1.1 million of unamortized debt issuance costs that were deferred
as financing costs and were being amortized over the original maturity of the
debt.
RESULTS OF OPERATIONS -- NON-CONSOLIDATED VENTURES (EQUITY INVESTEES)
Russia -- CIS
Sovintel. Sovintel's revenue was $34.7 million and $67.1 million for the
second quarter and year to date ended June 30, 1998, which increased $5.7
million and $13.0 million over revenues for the comparable periods in 1997. The
growth in revenue was primarily the result of telecommunications service
revenue, which increased 10.4% and 17.2% to $24.6 million and $48.4 million for
the three and six months ended June 30, 1998, respectively, from comparable
periods in 1997, due to the Moscow customer base growth and traffic from other
GTS ventures that generated increased volume of outgoing international and
domestic minutes carried by Sovintel. Sovintel realized a 69.3% and 80.4%
increase in outgoing international and domestic minutes for the three and six
months ended June 30, 1998, as compared with the same periods a year ago.
Revenue from incoming international minutes decreased by 45.8% and 29.9% to $2.1
million and $4.6 million for the three and six months ended June 30, 1998,
respectively, from the same periods in 1997.
Sovintel's non-traffic-related revenue increased 51.3% and 45.9% to $10.1
million and $18.7 million for three and six months ended June 30, 1998,
respectively, over the comparable periods in 1997, which was primarily
attributable to port sales and monthly port fees revenue.
Sovintel's gross margin as a percentage of revenues was 34.7% and 33.5%,
for the three and six months ended June 30, 1998, and was 37.6% and 39.4% for
comparable periods in 1997. The decrease in gross margin as a percentage of
revenue for the respective periods in 1998 and 1997, was attributable to a
general price decrease in international and domestic revenue due to competitive
pressures and a higher percentage of domestic minutes, which yield a lower
margin.
Operating expenses were $5.2 million and $9.8 million, or 15.0% and 14.6%
of total revenue, for the three and six months ended June 30, 1998. The increase
of 21.3% and 20.9% in operating expenses in comparison to the same periods in
1997 was related to increases in turnover taxes associated with revenues and
also increased personnel, advertising and sales force costs required to support
Sovintel's growth.
TCM. TCM's revenue for the three and six months ended June 30, 1998
increased 83.5% and 66.9% to $12.1 million and $21.6 million, respectively, from
the comparable periods in 1997. These increases were primarily due to increases
in local and international/long-distance traffic revenue. TCM had gross margin
as a percentage of revenues of 74.4% and 73.6% for the three and six months
ended June 30, 1998, respectively. Gross margin as a percentage of revenue
decreased 7.8% and 5.5% in comparison to the same periods in 1997 as a result of
higher infrastructure and settlement costs. TCM had operating expenses of $1.0
million and $1.9 million, or 8.3% and 8.8% of total revenue, for the three and
six months ended June 30, 1998, respectively, which represents decreases of 1.5%
and 0.9% in operating expenses as a percentage of revenue in comparison to the
same periods in 1997.
TeleRoss Ventures. Revenue for the TeleRoss Ventures increased 97.6% and
77.4% to $2.6 million and $5.0 million for the three and six months ended June
30, 1998, respectively, from the comparable periods in 1997. Revenues were
primarily resulted from settlement fees charged to TeleRoss Operating Company.
The growth in revenue reflects the growth of the customer base.
22
<PAGE> 23
Gross margin as a percentage of revenue was 69.2% and 70.0% for the three
and six months ended June 30, 1998, respectively, compared to 84.6% and 82.1%
for the three and six months ended June 30, 1997, respectively due to the
increase in settlement costs. Operating expenses were $1.2 million and $2.2
million, or 46.2% and 44.0% of revenue, for the three and six months ended June
30, 1998, respectively, compared to 92.3% and 64.3% of revenue, for the
comparable periods in 1997.
GTS Cellular. The Company operates three cellular networks through
differing ownership structures: Vostok Mobile, PrimTelefone and Bancomsvyaz.
Revenue for Vostok Mobile was $7.4 million and $14.7 million for the three
and six months ended June 30, 1998, respectively, which represented a 28.0% and
36.4% increase from the comparable periods in 1997. The growth in revenue was
primarily attributable to subscriber growth.
Vostok Mobile's gross margin was 48.3% and 49.4% of revenue, for the three
and six months ended June 30, 1998, respectively, compared to 50.7% and 53.3% of
revenue, for the comparable periods in 1997. Operating expenses were $3.6
million and $6.2 million, or 48.6% and 42.2% of revenue, for the three and six
months ended June 30, 1998, respectively, compared to $3.0 million and $5.0
million, or 51.3% and 46.7% of revenue, for the comparable periods in 1997.
Revenue for PrimTelefone was $3.6 million and $7.3 million for the three
and six months ended June 30, 1998, respectively, which represented a 44.0% and
46.0% increase from the comparable periods in 1997. The growth in revenue was
primarily attributable to the subscriber growth.
PrimTelefone's gross margin was 58.3% and 57.5% of total revenue, and
operating expenses were $1.2 million and $2.3 million for the three and six
months ended June 30, 1998, respectively, compared to gross margin of 64.0% and
66.0% of total revenue, and operating expenses of $0.9 million and $1.5 million,
respectively, for the comparable periods in 1997.
Revenue for Bancomsvyaz was $5.7 million and $9.9 million for the three and
six months ended June 30, 1998, respectively, which represented a 376.5% and
443.9% increase from the comparable periods in 1997. The growth in revenue was
primarily attributable to the increase in cellular subscribers.
Bancomsvyaz's gross margin was 53.6% and 55.7% of total revenue, and
operating expenses were $2.3 million and $4.1 million for the three and six
months ended June 30, 1998, respectively, compared to gross margin of 28.3% and
18.5% of total revenue, and operating expenses of $2.1 million and $2.2 million,
respectively, for the comparable periods in 1997.
Western Europe
GTS-Monaco Access: Total revenue was $7.4 million and $11.9 million for the
three and six months ended June 30, 1998, respectively, which represented a
179.6% and 164.7% increase from the comparable periods in 1997. Gross margin was
$0.8 million and $1.0 million, or 10.8% and 8.4% of revenue, for the three and
six months ended June 30, 1998, respectively, compared to $0.1 million and $0.1
million, or 4.4% and 3.1% of revenue, for the comparable periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Corporate
The telecommunications business is capital intensive. The Company generally
is the primary source of funding for its ventures, both for working capital and
capital expenditures. Under a typical arrangement, GTS's venture partner
contributes the necessary licenses or permits under which the venture will
conduct its business, office space and other equipment. GTS's contribution is
generally cash and equipment, but may consist of other specific assets as
required by the joint venture agreement.
The Company has raised capital through the issuance of equity securities
and through various debt agreements. The issuance of equity securities has
raised $238.7 million, $36.4 million, $107.7 million, $42.1 million and $62.1
million in the first six months of 1998, and in the full years of 1997, 1996,
1995 and
23
<PAGE> 24
1994, respectively, net of placement fees, for a total of $487.0 million. In
addition, the Company and HER received $105.0 million, $409.8 million, $60.0
million and $23.3 million in gross proceeds in the first six months of 1998, and
in the full years of 1997, 1996 and 1995, respectively, for a total of $598.1
million under various debt agreements. Included within the debt proceeds
identified above, the Company received $3.5 million, $60.0 million and $10.0
million in 1997, 1996 and 1995, respectively, from lenders who are affiliated
with, and are considered related parties to, the Company as a result of their
(or their affiliates) ownership of the Company's Common Stock, of which $70.0
million was repaid in 1998.
The Company had working capital of $455.9 million and $0.6 million as of
June 30, 1998 and 1997, respectively. The Company had an accumulated deficit of
$306.2 million as of June 30, 1998, including net losses of approximately $63.4
million and $26.2 million for the three and six months ended June 30, 1998 and
$22.0 million and $39.7 million for the three and six months ended June 30,
1997, respectively. During 1998, the Company has incurred and expects to
continue to incur substantial expenditures to fund the working capital
requirements of its ventures, to provide capital equipment for certain of its
ventures, and to engage in new development and acquisitions.
GTS will require substantial capital investment to execute its business
plans and to fund expected operating losses. Management expects that GTS and its
ventures will incur over $500.0 million of capital expenditures and investments
in ventures during the next three years, of which approximately $100.0 million
will be incurred in the last two quarters of 1998. The Company obtained funds in
1998 through a variety of financing arrangements, including (i) the Company
raised approximately $255.3 million in gross proceeds from an initial public
stock offering of 12.8 million common shares at $20.00 per share, and (ii) the
Company issued $105.0 million in gross proceeds of 9.875% senior notes due
February 15, 2005, of which $19.6 million was placed in escrow to fund the first
two years' interest payments. The initial public offering constituted a
"complying public equity offering" under the Company's 8.75% Senior Subordinated
Convertible Bonds due 2000 (the "Bonds"). As a result, the conversion price of
the Bonds is $20 per share.
Subsequent to June 30, 1998, the Company completed a secondary public
offering of 2.8 million shares of common stock at $45.50 per common share. Net
proceeds from the offering were approximately $119.9 million. In addition, the
Company issued aggregate principal amount $466.9 million of 5.75% convertible
senior subordinated debentures (the "Debentures") that mature July 1, 2010 and
will be redeemable from July 1, 2001 at the option of the Company, at redemption
prices set forth in the Debentures agreement. The Debentures are convertible
into shares of common stock at any time prior to maturity or redemption at a
conversion price of $55.05 per common share. Interest on the Debentures will be
payable semi-annually on January 1 and July 1, commencing January 1, 1999. The
Debentures are subordinated to all existing and future indebtedness of the
Company, except for the Bonds, with which they rank pari passu in right of
payment. Net proceeds from the Debentures offering were approximately $452.1
million.
The Company believes its existing cash balances and cash flow from
operations will be sufficient to fund its expected capital needs under its
current business plan, excluding any funds expended in connection with the
implementation of the Company's European Services Strategy. See "Liquidity and
Capital Resources -- European Services Strategy." The Company contemplates that
it will raise additional debt financing through a newly formed subsidiary of the
Company, the proceeds of which will be applied toward the implementation of the
Company's European Services Strategy. The actual amount and timing of such
financing have not yet been determined by the Company.
The actual amount and timing of the Company's future capital requirements
may differ materially from management's estimates. In particular, the accuracy
of management's estimates is subject to changes and fluctuations in the
Company's revenues, operating costs and development expenses, which can be
affected by the Company's ability to (i) effectively and efficiently manage the
expansion of the HER network and operations, (ii) obtain infrastructure
contracts, rights-of-way, licenses and other regulatory approvals necessary to
complete and operate the HER network, (iii) negotiate favorable contracts with
suppliers, including large volume discounts on purchases of capital equipment
and (iv) access markets, attract sufficient numbers of customers and provide and
develop services for which customers will subscribe. The Company's revenues and
costs are also dependent upon factors that are not within the Company's control
such as regulatory
24
<PAGE> 25
changes, changes in technology, increased competition and various factors such
as strikes, weather, and performance by third parties in connection with the
Company's operations. Due to the uncertainty of these factors, actual revenues
and costs may vary from expected amounts, possibly to a material degree, and
such variations are likely to affect the Company's future capital requirements.
Historically, GTS has experienced liquidity problems resulting in part from the
Company's need to meet the capital requirements of certain of its ventures in
excess of forecast amounts. In addition, certain of the Company's ventures have
not met management's financial performance expectations or have not been able to
secure local country financing and thus have not been able to generate the
expected cash inflows. In addition, if the Company expands its operations at an
accelerated rate or consummates acquisitions, the Company's funding needs will
increase, possibly to a significant degree, and it will expend its capital
resources sooner than currently expected. The Company may also be required to
repay the Bonds upon maturity on June 30, 2000 to the extent such bonds are not
converted into Common Stock. As a result of the foregoing, or if the Company's
capital resources otherwise prove to be insufficient, the Company will need to
raise additional capital to execute its current business plan and to fund
expected operating losses, as well as to consummate future acquisitions and
exploit opportunities to expand and develop its businesses.
There can be no assurances that the Company will be able to consummate
additional financing on favorable terms. As a result, the Company may be subject
to additional or more restrictive financial covenants, its interest obligations
may increase significantly and its existing shareholders may be adversely
diluted. Failure to generate sufficient funds in the future, whether from
operations or by raising additional debt or equity capital, may require the
Company to delay or abandon some or all of its anticipated expenditures, to sell
assets, or both, either of which could have a material adverse effect on the
operations of the Company.
HER
Construction of the HER fiber optic network is one of the Company's most
significant business activities. The buildout of the network is expected to
require approximately $290.0 million of capital expenditures. Through June 30,
1998, approximately $81.9 million has been spent on network capital expenditure.
An additional $194.6 million has been capitalized in connection with long-term
fiber lease arrangements. In August 1997, HER completed the issuance of $265.0
million in gross proceeds of 11.5% Senior Notes (the "Senior Notes") due in
August 2007. The Senior Notes are general unsecured obligations of HER. The
Company believes that the net proceeds of such issuance, combined with HER's
projected internally generated funds, should be enough to fund HER's expected
capital expenditures. However the actual amount and timing of HER's future
capital requirements may differ materially from management's estimates. If the
actual amount and timing of HER's future capital requirements differ materially
from management's estimates, any failure to obtain necessary financing may
require HER to delay or abandon its plans for deploying the remainder of the
network and would jeopardize the viability of HER, or may require the Company to
make additional capital contributions to HER at the expense of the Company's
other operations, either of which could have a material adverse effect on the
operations of the Company. There can be no assurance that GTS or its partners in
HER would have sufficient capital to make contributions to HER, or that they
would be willing to do so.
EUROPEAN SERVICES STRATEGY
The aforementioned discussion of capital requirements does not include any
capital spending that will be required for the implementation of the Company's
European Services Strategy. Due to the preliminary nature of the Company's
business plan for such strategy, the Company cannot estimate with any degree of
certainty the amount and timing of the Company's future capital requirements for
such implementation, which will be dependent on many factors, including the
success of the Company's European services business, the rate at which the
Company expands its networks and develops new networks, the types of services
the Company offers, staffing levels, acquisitions and customer growth, as well
as other factors that are not within the Company's control, including
competitive conditions, regulatory developments and capital costs. Management
believes, however, that if the European Services Strategy is implemented it is
likely that the Company will need to raise additional capital above that raised
through July 31, 1998. The Company expects that it will have
25
<PAGE> 26
significant operating and net losses and will record significant net cash
outflow, before financing, in coming years including in connection with its
European services business. There can be no assurance that the Company's
operations, including the Company's European services business, will achieve or
sustain profitability or positive cash flow in the future.
Liquidity Analysis
The Company had cash and cash equivalents of $478.0 million and $14.6
million as of June 30, 1998 and 1997, respectively. The Company had restricted
cash of $82.9 million and $4.3 million as of June 30, 1998 and 1997,
respectively. The restricted cash at June 30, 1998 primarily represents amounts
held in escrow to pay the first two years interest payments on the $105 million
of the 9.875% Senior Notes due 2005 of the Company and $265 million of the
Senior Notes of HER.
During the three and six months ended June 30, 1998, the Company used $7.3
million and $34.7 million, respectively, of cash for operating activities,
compared to $9.9 million and $23.3 million, respectively, used in the comparable
periods of 1997. Cash used for investing activities was $16.1 million and $53.2
million for the three months and six months ended June 30, 1998 and $5.6 million
and $17.1 million for the three and six months ended June 30, 1997,
respectively. The use of cash in operations and for investing activities
reflected primarily the development and buildout of existing telecommunications
networks and the funding of fully operational ventures. There can be no
assurance that the Company's 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.
In February 1998, the Company used approximately $85.2 million of the net
proceeds from the initial public offering and the $105.0 million Senior Notes to
repay $70.0 million plus accrued interest of debt from lenders who are
affiliated with, and are considered related parties to, the Company as a result
of their (or their affiliates) ownership of the Company's Common Stock.
Substantially all of the Company's operations are in foreign countries and
therefore the Company's consolidated financial results are subject to
fluctuations in currency exchange rates. The Company's consolidated operations
transact their business in the following significant currencies: Russian Ruble,
Hungarian Florint, Belgium Franc and the European Currency Equivalent. For those
operating companies that transact their business in currencies that are not
readily convertible, the Company attempts to minimize its exposure by indexing
its invoices and collections to the applicable dollar/foreign currency exchange
rate to the extent its costs (including interest expense, capital expenditures
and equity) are incurred in U.S. dollars. Although the Company is attempting to
match revenues, costs, borrowing and repayments in terms of their respective
currencies, the Company may experience economic loss and a negative impact on
earnings with respect to holdings solely as a result of foreign currency
exchange rate fluctuations, which include foreign currency devaluations against
the U.S. dollar. Furthermore, certain of the Company's operations have notes
payable and notes receivable which are denominated in a currency other than
their own functional currency or loans linked to the U.S. dollar. The Company
may also experience economic loss and a negative impact on earnings related to
these monetary assets and liabilities.
The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk. The Company is currently
evaluating the materiality of foreign exchange exposures in different countries
and the financial instruments available to mitigate this exposure. The Company's
ability to hedge its exposure is limited since certain of its operations are
located in countries whose currencies are not easily convertible. Financial
hedge instruments for these countries are nonexistent or limited and also
pricing of these instruments is often volatile and not always efficient. The
Company is designing reporting processes to monitor the potential exposure on an
ongoing basis and expects to implement this process before the end of 1998. The
Company will use the output of this process to execute financial hedges to cover
foreign exchange exposure when practical and economically justified.
In April 1998, the Company consummated an economic transaction to hedge the
foreign exchange exposure resulting from the issuance of $265 million senior
notes by HER.
26
<PAGE> 27
YEAR 2000 COMPLIANCE
The Company is currently in the process of assessing its year 2000
compliance costs and of converting, where necessary, its internal hardware and
software as well as customer facing telecommunications infrastructure to year
2000 compliance. This process includes obtaining confirmations from the
Company's primary vendors that plans are being developed or are already in place
to address processing of transactions in the year 2000. The Company does not
expect that the cost of converting such systems will be material to its
financial condition or results of operations. The Company currently believes it
will be able to achieve year 2000 compliance by the end of 1999, and currently
does not anticipate any material disruption in its operations as the result of
any failure by the Company to be in compliance or that year 2000 compliance
costs will have a material effect on the Company's earnings.
27
<PAGE> 28
SUPPLEMENTAL INFORMATION -- SELECTED HISTORICAL
FINANCIAL DATA -- COMBINED EQUITY INVESTMENTS
The following unaudited selected historical financial data -- equity
investments for the three and six months ended June 30, 1997 and June 30, 1998,
are derived from the Company's financial records. It is intended to supplement
the unaudited condensed consolidated financial statements. The financial data
set forth below represents 100% of the results of operations for each of the
entities.
The Company believes that this information provides additional insight on
the Company's unconsolidated equity method investments. Generally accepted
accounting principles prescribe inclusion of revenues and expenses of
consolidated interests (generally interests of more than 50%, absent some other
factors), but not for equity interests (generally interests of 20% to 50%) or
cost interests (generally interests of less than 20%). Equity accounting
ordinarily results in the same net income as consolidation; however, the net
operating results are reflected on one line within the income statement.
<TABLE>
<CAPTION>
NET
OWNERSHIP COST OF OPERATING INCOME/
INTEREST(1) REVENUES REVENUES EXPENSES (LOSS)
----------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1997
Sovintel................................. 50% 28,977 18,073 4,260 5,035
TCM...................................... 50% 6,609 1,173 754 3,224
TeleRoss................................. 50% 1,302 266 1,122 (192)
Sovam.................................... 66.7%(4) 4,329 2,724 1,715 (263)
GTS Cellular Companies................... 50%(2) 9,292 4,560 4,815 (1,872)
Other.................................... 50%(2) 3,205 4,753 6,144 (8,719)
-------- -------- -------- ------- --------
Total............................ 53,714 31,549 18,810 (2,787)
Adjustments for Inter-Affiliate
Transactions(3).......................... (3,924) (4,898) (5,707)
THREE MONTHS ENDED JUNE 30, 1998(4)
Sovintel................................. 50% 34,703 22,646 5,169 5,294
TCM...................................... 50% 12,130 3,111 1,005 4,996
TeleRoss................................. 50% 2,648 775 1,254 295
GTS Cellular Companies................... 50%(2) 16,391 7,519 5,928 1,140
Other.................................... 50%(2) 7,512 6,620 1,916 (530)
-------- -------- -------- ------- --------
Total............................ 73,384 40,671 15,272 11,195
Adjustments for Inter-Affiliate
Transactions(3).......................... (8,753) (7,897) 5,529
SIX MONTHS ENDED JUNE 30, 1997
Sovintel................................. 50% 54,139 32,836 8,115 9,730
TCM...................................... 50% 12,935 2,708 1,354 6,134
TeleRoss................................. 50% 2,831 550 1,796 323
Sovam.................................... 66.7%(4) 8,032 5,112 3,074 (381)
GST Cellular Companies................... 50%(2) 17,337 8,225 8,405 (2,749)
Other.................................... 50%(2) 6,466 8,939 10,211 (13,878)
-------- -------- -------- ------- --------
Total............................ 101,740 58,370 32,955 (821)
Adjustments for Inter-Affiliate
Transactions(3).......................... (9,857) (9,658) (8,582)
SIX MONTHS ENDED JUNE 30, 1998(4)
Sovintel................................. 50% 67,107 44,603 9,815 9,639
TCM...................................... 50% 21,586 5,689 1,857 8,843
TeleRoss................................. 50% 5,040 1,492 2,232 620
GTS Cellular Companies................... 50%(2) 31,296 14,294 11,120 2,555
Other.................................... 50%(2) 12,038 10,980 3,040 (1,477)
-------- -------- -------- ------- --------
Total............................ 137,067 77,058 28,064 20,180
Adjustments for Inter-Affiliate
Transactions(3).......................... (17,643) (16,002) 9,687
</TABLE>
28
<PAGE> 29
- ---------------
(1) The ownership interest column indicates the Company's legal ownership
percentage for the respective equity investments. The information is being
provided to assist an investor or analyst in determining the Company's legal
rights associated with the presented financial data.
(2) The Company generally maintains a 50% ownership interest in these equity
investments.
(3) The adjustment amounts represent the effect of inter-affiliate transactions
between the Company's consolidated and equity method ventures. More detailed
information about inter-affiliate transactions is included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology."
(4) As a result of the Company's purchase of the minority partner's 33.3%
interest in Sovam during the first quarter of 1998, the Company accounts for
its ownership interest in Sovam under the consolidation method of
accounting. Prior to this date, the Company accounted for Sovam under the
equity method of accounting.
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In conjunction with the restructuring of Bancomsvyaz, one of the
Company's subsidiaries, on June 30, 1998, the Company issued to an existing
shareholder, in a private placement, 713,311 shares of common stock. This stock
was issued pursuant to a contractual put right held by such shareholder, which
permitted the shareholder to put to the Company its $8.6 million of investment
in GTS Ukrainian TeleSystems LLC in exchange for such stock. See Note 5 to the
Company's unaudited Condensed, Consolidated Financial Statements included in
this report.
Pursuant to a purchase agreement that the Company has with a venture
partner in GTS Vox Limited, the intermediate holding company of TCM, the Company
issued 336,630 shares of common stock to the Partner in April 1998. See Note 3
to the Company's Unaudited Condensed, Consolidated Financial Statements included
in this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1998, the Company held its annual meeting of shareholders. In
connection with the meeting, the Company solicited proxies pursuant to
Regulation 14 under the Securities Exchange Act of 1934 from holders of record
of its common stock as of March 31, 1998. Each of the Company's four nominees
for election to its Board of Directors was elected to a term ending at the
Company's annual meeting of shareholders to be held in 2001. Three additional
proposals were submitted to shareholders for approval and the votes cast on each
such proposal was as follows:
Approval of the Company's Fourth Amended and Restated Stock Option Plan
For 24,925,951 shares Against 6,229,912 shares Abstain 36,095 shares
Approval of certain stock option grants to certain members of the Company's
Board of Directors
For 24,357,024 shares Against 6,796,169 shares Abstain 38,765 shares
Ratification of selection of Ernst & Young LLP as the Company's independent
auditors for 1998
For 30,619,182 shares Against 568,586 shares Abstain 4,190 shares
ITEM 5. OTHER INFORMATION
See Notes 5 and 7 to the Company's unaudited Condensed, Consolidated
Financial Statements included in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<S> <C>
27 -- Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
<S> <C>
None
</TABLE>
30
<PAGE> 31
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 GROUP, INC.
(Registrant)
By: /s/ WILLIAM H. SEIPPEL
----------------------------------
Name: William H. Seippel
Title: Executive Vice President
and
Chief Financial Officer
(Principal
Financial and Accounting
Officer)
Date: August 14, 1998
31
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 6/30/98
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 477,966
<SECURITIES> 0
<RECEIVABLES> 50,228
<ALLOWANCES> 3,997
<INVENTORY> 0
<CURRENT-ASSETS> 605,591
<PP&E> 363,549
<DEPRECIATION> (32,702)
<TOTAL-ASSETS> 1,134,110
<CURRENT-LIABILITIES> 149,709
<BONDS> 683,680
0
0
<COMMON> 5,724
<OTHER-SE> 251,849
<TOTAL-LIABILITY-AND-EQUITY> 1,134,110
<SALES> 3,675
<TOTAL-REVENUES> 53,465
<CGS> 2,738
<TOTAL-COSTS> 43,218
<OTHER-EXPENSES> 46,814
<LOSS-PROVISION> 1,234
<INTEREST-EXPENSE> 30,594
<INCOME-PRETAX> (52,909)
<INCOME-TAX> 1,381
<INCOME-CONTINUING> (50,653)
<DISCONTINUED> 0
<EXTRAORDINARY> (12,704)
<CHANGES> 0
<NET-INCOME> (63,357)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
