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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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(COMMISSION FILE NUMBER: 0-23717)
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GLOBAL TELESYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-3068423
(State of incorporation) (I.R.S. Employer Identification No.)
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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)
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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 October 31, 1998, there were outstanding 60,502,708 shares of common
stock of the registrant.
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TABLE OF CONTENTS
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PAGE
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PART I Financial Information.......................................
Item 1A Financial Statements of Global TeleSystems Group, Inc....... 3
Condensed Consolidated Balance Sheets as of December 31,
1997 and September 30, 1998............................... 4
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1998... 5
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1997 and 1998... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 1B Financial Statements of EDN Sovintel........................ 13
Condensed Balance Sheets as of December 31, 1997 and
September 30, 1998........................................ 14
Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1998.................. 15
Condensed Statements of Cash Flows for the Three and Nine
Months Ended September 30, 1997 and 1998.................. 16
Notes to Condensed Financial Statements..................... 17
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
PART II Other Information...........................................
Item 2 Changes in Securities and Use of Proceeds................... 34
Item 5 Other Information........................................... 34
Item 6 Exhibits and Reports on Form 8-K............................ 34
Signatures............................................................. 35
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1A. FINANCIAL STATEMENTS OF GLOBAL TELESYSTEMS GROUP, INC.
Condensed Consolidated Balance Sheets as of December 31, 1997 and September
30, 1998
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows for the Three and Nine Months
Ended September 30, 1997 and 1998
Notes to Condensed Consolidated Financial Statements
3
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GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
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<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
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CURRENT ASSETS
Cash and cash equivalents................................. $ 318,766 $ 993,928
Accounts receivable, net.................................. 17,079 59,822
Restricted cash........................................... 30,486 42,047
Prepaid expenses.......................................... 14,101 22,122
Other assets.............................................. 6,707 12,539
--------- ----------
TOTAL CURRENT ASSETS.............................. 387,139 1,130,458
Property and equipment, net................................. 236,897 436,019
Investments in and advances to ventures..................... 76,730 61,705
Goodwill and intangible assets, net......................... 43,284 161,893
Restricted cash and other noncurrent assets................. 36,411 24,818
--------- ----------
TOTAL ASSETS...................................... $ 780,461 $1,814,893
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 61,984 $ 135,565
Debt maturing within one year............................. 6,390 23,741
Current portion of capital lease obligations.............. 21,490 31,130
Related party debt maturing within one year............... 5,708 --
Other current liabilities................................. 6,301 32,408
--------- ----------
TOTAL CURRENT LIABILITIES......................... 101,873 222,844
Long-term debt, less current portion........................ 408,330 962,232
Long-term portion of capital lease obligations.............. 117,645 187,900
Related party long-term debt, less current portion.......... 79,796 3,530
Taxes and other non-current liabilities..................... 14,595 27,378
--------- ----------
TOTAL LIABILITIES................................. 722,239 1,403,884
COMMITMENTS AND CONTINGENCIES
Minority interest......................................... 18,766 43,957
Common stock, subject to repurchase (797,100 and 463,489
shares outstanding at December 31, 1997 and September
30, 1998, respectively)................................ 12,489 15,643
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 60,495,446 shares issued and
outstanding, net of 195,528 and 96,375 shares of
treasury stock at December 31, 1997 and September 30,
1998, respectively).................................... 3,761 6,050
Additional paid-in capital................................ 274,359 696,574
Accumulated other comprehensive loss...................... (8,269) (7,496)
Accumulated deficit....................................... (242,884) (343,719)
--------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 26,967 351,409
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 780,461 $1,814,893
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES, NET:
Telecommunication and other services............ $ 10,691 $ 61,405 $ 26,547 $ 111,195
Equipment sales................................. 2,230 2,429 3,669 6,104
-------- -------- -------- ---------
12,921 63,834 30,216 117,299
-------- -------- -------- ---------
OPERATING COSTS AND EXPENSES:
Cost of revenues:
Telecommunication and other services......... 13,361 37,045 25,169 77,525
Equipment sales.............................. 2,028 1,804 3,183 4,542
Selling, general and administrative............. 22,441 30,645 46,203 75,150
Depreciation and amortization................... 2,078 8,368 4,404 13,953
Non-income taxes................................ 452 3,820 1,452 5,140
-------- -------- -------- ---------
40,360 81,682 80,411 176,310
Write-off of venture-related assets............... 1,673 -- 1,673 --
Equity in losses/(earnings) of ventures........... 8,067 3,485 18,234 (4,142)
-------- -------- -------- ---------
LOSS FROM OPERATIONS.............................. (37,179) (21,333) (70,102) (54,869)
OTHER INCOME (EXPENSE):
Interest income................................. 3,116 13,858 5,278 28,110
Interest expense................................ (13,923) (22,009) (21,086) (52,603)
Foreign currency losses......................... (135) (7,333) (1,094) (10,364)
-------- -------- -------- ---------
(10,942) (15,484) (16,902) (34,857)
-------- -------- -------- ---------
Net loss before income taxes, minority interest
and extraordinary loss.......................... (48,121) (36,817) (87,004) (89,726)
Income taxes...................................... 1,021 770 1,838 2,151
-------- -------- -------- ---------
Net loss before minority interest and
extraordinary loss.............................. (49,142) (37,587) (88,842) (91,877)
Minority interest................................. 957 109 970 3,746
-------- -------- -------- ---------
Net loss before extraordinary loss................ (48,185) (37,478) (87,872) (88,131)
Extraordinary loss -- extinguishment of debt...... -- -- -- (12,704)
-------- -------- -------- ---------
NET LOSS.......................................... $(48,185) $(37,478) $(87,872) $(100,835)
======== ======== ======== =========
Loss per share before extraordinary loss.......... $ (1.34) $ (0.62) $ (2.49) $ (1.65)
Extraordinary loss per share...................... -- -- -- (0.24)
-------- -------- -------- ---------
Net loss per share................................ $ (1.34) $ (0.62) $ (2.49) $ (1.89)
======== ======== ======== =========
Weighted average common shares outstanding........ 35,928 60,182 35,242 53,253
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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GLOBAL TELESYSTEMS GROUP, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................. $(48,185) $(37,478) $(87,872) $(100,835)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED
IN) PROVIDED BY OPERATING ACTIVITIES:
Extraordinary loss.................................. -- -- -- 12,704
Depreciation and amortization....................... 4,695 17,060 9,173 33,544
Amortization of discount on note payable............ 1,288 -- 3,665 477
Equity in losses (earnings) of ventures, net of
dividends received............................... 8,067 3,485 18,234 (4,142)
Deferred interest................................... 4,273 -- 8,142 1,826
Fair value adjustment for foreign currency
instruments...................................... -- 18,016 -- 21,240
Write-off of venture-related assets................. 1,673 -- 1,673 --
Non-cash compensation............................... 3,390 493 3,390 493
Minority interest................................... (949) (79) (970) (7,924)
Other............................................... 1,741 6,779 2,325 9,684
Changes in assets and liabilities, excluding effects
of acquisitions and ventures:
Accounts receivable.............................. (2,843) (6,826) (5,723) (27,959)
Prepaid expenses................................. 5,005 (2,417) 4,387 (9,155)
Accounts payable and accrued expenses............ 10,710 16,473 7,386 35,594
Other changes in assets and liabilities.......... (4,546) 13,743 (2,743) 29,029
-------- -------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES................................ (15,681) 29,249 (38,933) (5,424)
INVESTING ACTIVITIES
Investments in and advances to ventures, net of
repayments....................................... 10,716 8,120 (2,157) 15,055
Purchases of property and equipment................. (10,734) (71,892) (13,861) (111,734)
Restricted cash..................................... (56,128) 16,815 (55,813) 832
Goodwill and other intangibles...................... (798) (42,743) (2,226) (60,362)
Acquisitions -- cash acquired....................... 1,050 -- 1,050 13,352
-------- -------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES....... (55,894) (89,700) (73,007) (142,857)
FINANCING ACTIVITIES
Proceeds from debt.................................. 415,678 470,134 416,161 575,434
Repayments of debt.................................. (6,013) (175) (104,028)
Payment of debt issue costs......................... (24,178) (16,014) (24,178) (21,257)
Common stock repurchased for treasury............... -- -- (433) --
Net proceeds from issuance of common stock.......... 36,527 127,109 36,527 362,729
Other financing activities.......................... (25) -- (124) 9,471
-------- -------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 428,002 575,216 427,778 822,349
Effect of exchange rate changes on cash and cash
equivalents......................................... (4,173) 1,167 (6,871) 1,094
-------- -------- -------- ---------
Net increase in cash and cash equivalents............. 352,254 515,932 308,967 675,162
Cash and cash equivalents at beginning of period...... 14,587 477,996 57,874 318,766
-------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $366,841 $993,928 $366,841 $ 993,928
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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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 nine months ended September 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 exercising 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. RUSSIAN ECONOMIC CRISIS
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of sovereign securities
were suspended; subsequently, secondary trading therein was halted. Since many
Russian banks had substantial investments in these securities, severe liquidity
problems resulted for the banks. 2) The value of the ruble was allowed to
fluctuate below the ruble/US dollar exchange rate corridor that the government
had previously committed to support; this represented an effective devaluation
of the ruble. 3) A 90-day moratorium on offshore credit repayments was issued.
The 90-day moratorium was not extended when it expired on November 16, 1998 and
it is anticipated that the ruble will continue to be devalued. Due to the
devaluation and the end of the 90-day moratorium, there is an ongoing risk that
many Russian banks may be declared bankrupt. Deposits held at Russian banks,
other than Sberbank, are not insured. The official exchange rate as of September
30, 1998 was 16.0645 per US dollar. The last official exchange rate prior to the
suspension of trading on August 17, 1998 was 6.2725 rubles per US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $13.1 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net
7
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monetary assets with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks.
3. 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 $50.3 million and $92.7
million for the three and nine months ended September 30, 1997, respectively,
and was comprised of net losses of $48.2 million and $87.9 million and foreign
currency translation adjustments of $2.2 million and $4.9 million for the three
and nine months ended September 30, 1997, respectively. Comprehensive loss was
$35.5 million and $100.1 million for the three and nine months ended September
30, 1998, respectively, and was comprised of net losses of $37.5 million and
$100.8 million and foreign currency translation income of $2.0 million for the
three months ended September 30, 1998 and foreign currency transaction income of
$0.8 million for the nine months ended September 30, 1998.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and 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 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 September 1997 condensed,
consolidated financial statements in order to conform to the 1998 presentation.
4. 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, under the symbol "GTSG", 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.
In July 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.
Pursuant to a purchase agreement that the Company has with a venture
partner, the Company issued 336,630 and 126,859 shares of common stock to the
partner in April 1998 and July 1998, respectively. In
8
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with the purchase agreement, if such entity is unable to sell these
shares, the Company is obligated to assist the seller in locating a purchaser
for the Common Stock, and if the Company is 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 September 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.
5. DEBT OBLIGATIONS
In February 1998, the Company issued aggregate principal amount of $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
were placed in escrow for the first four semi-annual 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 nine-month
period ended September 30, 1998, a total of $25.4 million of the Bonds were
converted into approximately 1.3 million common shares of the Company's common
stock.
In July 1998, 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 8.5 million common shares 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.
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 were 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.
6. OTHER TRANSACTIONS
In July 1998, a wholly-owned subsidiary of the Company purchased the
remaining 47.36% interest in GTS Vox Limited, which resulted in the Company's
beneficial ownership in TCM increasing from 50% to 95%. The total consideration
paid for the additional interest in GTS Vox Limited was $40.5 million. 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 126,859 shares of common stock to such partner was
accelerated to July 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 assumptions for GTS Vox Limited's
consolidated subsidiary. As a result of the purchase of the remaining 47.36% of
GTS Vox Limited, the Company accounts
9
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for GTS Vox Limited and TCM 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 approximately $33.4 million, which has
been recorded as goodwill and is being amortized, on a straight-line basis, over
ten years.
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 were offered the right to buy
shares of Ebone in the third quarter of 1998; however, HER's ownership interest
in Ebone was not reduced as a result of the offer.
In March 1998, the Company purchased an additional 10.3% interest in 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 price 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.
10
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GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FOREIGN CURRENCY TRANSACTIONS
On April 19, 1998, HER entered into a foreign currency swap transaction
agreement (the "Swap") with Rabobank International ("Rabo") in order to minimize
the foreign currency exposure resulting from the issuance in August 1997 of $265
million aggregate principal amount 11.5% Senior Notes due 2007 (the "Notes").
HER has marked the Swap to its fair value as of September 30, 1998 and the
resulting adverse change in the fair value of $20.4 million has been recorded as
a Noncurrent Liability on the balance sheet and recognized as a foreign currency
loss in the statement of operations. In addition, in July 1998, HER entered into
several forward exchange contracts, with terms ranging from thirty to ninety
days, to limit HER's exposure to foreign currency transactions. HER has marked
the outstanding contracts to their fair value as of September 30, 1998 and the
resulting adverse change in the fair value of $2.1 million has been recorded as
an Other Current Liability on the balance sheet and recognized as a foreign
currency loss in the statement of operations.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Capitalization of leases.................................. $42,950 $93,188
Exercise of warrants...................................... -- 31,110
Conversion of the Bonds into common stock................. -- 25,385
Additional consideration in relation to purchase of
interest in a CIS region subsidiary..................... 5,973 19,522
Reclassification of common stock subject to repurchase.... -- 12,489
Conversion of note payable into common stock.............. -- 8,635
Reclassification of accrued interest on the Bonds......... -- 5,052
</TABLE>
No significant non-cash activities were incurred for the three and nine
months ended September 30, 1997.
9. SUBSEQUENT EVENTS
On October 16, 1998, the Company initiated an offer (the "Offer") to
acquire the outstanding shares of NetSource Europe ASA ("NetSource Europe"), a
limited liability company organized under the laws of Norway for aggregate
consideration consisting of (i) 4,037,500 shares of Company common stock and
(ii) cash consisting of (A) $15 million and (B) the value in cash of 712,500
shares of Company common stock on the closing date of the Offer. An additional
$35 million (in cash or Company common stock, at the Company's election) may be
paid to the NetSource Europe shareholders and certain NetSource Europe managers
if NetSource Europe meets or exceeds certain quarterly and annual revenue,
operating margin and cashflow targets in calendar year 1999.
The boards of directors of both the Company and NetSource Europe have
approved the transaction and the NetSource Europe board of directors has
recommended to its shareholders that they accept the Offer. The Company's
consummation of the Offer is subject to acceptance of the Offer by holders of
not less than 67 percent of NetSource Europe's shares on a fully diluted basis,
completion of due diligence by the Company and NetSource Europe, receipt of
applicable regulatory approvals, and satisfaction of certain other conditions.
As of the end of the acceptance period, October 31, 1998, 90.2% (on a fully
diluted basis) of the shareholders of NetSource Europe had accepted the offer.
The Offer may be terminated by the Company or the above-
11
<PAGE> 12
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
referenced holders of NetSource Europe stock if the Offer has not been
consummated by November 30, 1998. During the course of the Company's due
diligence investigation, which is ongoing, the Company has identified certain
issues which are being discussed with NetSource Europe and certain of its
shareholders and which must be resolved to the parties satisfaction prior to the
consummation of the transaction. NetSource Europe is a European
telecommunications services company engaged primarily in the business of
reselling voice communications services with executive offices in Birmingham,
England and sales and operating offices in seven European countries.
The shares of Company common stock offered to NetSource Europe's
shareholders will not be registered under the Securities Act; however, GTS has
agreed to register, as soon as reasonably practicable, the shares of Company
common stock that will be issued as consideration to the NetSource Europe
shareholders.
On October 16, 1998, 6,248 shares of common stock were issued as a result
of certain employees exercising vested options under the Company's stock option
plan. On October 31, 1998, GTS Hermes, Inc. acquired AB Swed Carrier's ownership
interest of 6,551 common shares in the Company for approximately $5.8 million.
In connection with this purchase, GTS Hermes, Inc. paid approximately $5.3
million to a company, which is affiliated with a board member, for negotiating
with AB Swed Carrier and SNCB/NMBS on behalf of GTS Hermes, Inc., to purchase
their respective ownership interest in the Company. Further, on October 26,
1998, the name of GTS Hermes, Inc. was changed to GTS Carrier Services, Inc.
The ownership of the Company as a result of the subsequent events is as
follows:
<TABLE>
<CAPTION>
SHARES OWNERSHIP %
------- -----------
<S> <C> <C>
GTS Carrier Services, Inc. ................................. 176,858 89.9
NMBS........................................................ 13,610 6.9
Employees................................................... 6,248 3.2
------- -----
196,716 100.0%
======= =====
</TABLE>
12
<PAGE> 13
ITEM 1B. FINANCIAL STATEMENTS OF EDN SOVINTEL
Condensed Balance Sheets As of December 31, 1997 and September 30, 1998
Condensed Statements of Operations For the Three and Nine Months Ended
September 30, 1997 and 1998
Condensed Statements of Cash Flows For the Three and Nine Months Ended
September 30, 1997 and 1998
Notes to Condensed Financial Statements
13
<PAGE> 14
EDN SOVINTEL
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 5,620 $ 2,012
Accounts receivable, less allowance for doubtful accounts
of $643 and $1,927 at December 31, 1997 and September
30, 1998............................................... 16,223 23,108
Restricted cash........................................... 485 205
Due from affiliated companies............................. 1,586 2,210
Inventory................................................. 1,697 1,906
Deferred tax asset........................................ 186 186
Prepaid expenses and other assets......................... 5,318 10,149
------- -------
TOTAL CURRENT ASSETS.............................. 31,115 39,776
Property and equipment, net of accumulated depreciation of
$14,557 and $19,361 at December 31, 1997 and September 30,
1998...................................................... 38,709 48,919
Deferred expenses........................................... 945 844
------- -------
TOTAL ASSETS...................................... $70,769 $89,539
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 5,725 $ 9,770
Accrued expenses.......................................... 3,194 4,318
Due to affiliated companies............................... 10,104 17,312
Note payable to shareholder............................... 39
Taxes and other liabilities............................... 2,438 1,979
------- -------
TOTAL LIABILITIES................................. 21,500 33,379
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Contributed capital....................................... 2,000 2,000
Retained earnings......................................... 47,269 54,160
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 49,269 56,160
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $70,769 $89,539
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 15
EDN SOVINTEL
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1998 1997 1998
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES, NET:......................................... $27,890 $32,391 $82,029 $99,498
COST OF REVENUES:...................................... 18,212 21,176 51,048 65,779
------- ------- ------- -------
Gross margin........................................... 9,678 11,215 30,981 33,719
OPERATING EXPENSES:
Selling, general and administrative.................. 2,740 5,731 8,175 12,093
Depreciation and amortization........................ 239 467 452 858
Non-income taxes..................................... 1,230 1,667 3,697 4,702
------- ------- ------- -------
TOTAL OPERATING EXPENSES..................... 4,209 7,865 12,324 17,653
Income from operations................................. 5,469 3,350 18,657 16,066
OTHER (EXPENSE) INCOME:
Interest income...................................... 72 59 176 157
Interest expense..................................... (173) -- (447) --
Foreign currency losses.............................. (18) (5,197) (87) (5,490)
------- ------- ------- -------
(119) (5,138) (358) (5,333)
------- ------- ------- -------
Net income (loss) before taxes......................... 5,350 (1,788) 18,299 10,733
Income taxes........................................... 864 960 4,084 3,842
------- ------- ------- -------
NET INCOME (LOSS)............................ $ 4,486 $(2,748) $14,215 $ 6,891
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 16
EDN SOVINTEL
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ 4,486 $(2,748) $ 14,215 $ 6,891
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization...................... 1,590 1,995 3,817 4,905
Provision for doubtful accounts.................... (225) 1,511 (577) 1,284
Income tax benefit................................. (665) -- (665) --
Changes in assets and liabilities:
Accounts receivable............................. 7,845 (3,185) 1,126 (8,169)
Inventory....................................... (965) (563) (1,087) (209)
Prepaid expenses and other assets.................. (687) 1,740 (2,216) (5,455)
Accounts payable and accrued expenses.............. (2,186) 538 1,937 4,710
------- ------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................... 9,193 (712) 16,550 3,957
INVESTING ACTIVITIES
Purchases of property and equipment................ (2,773) (7,893) (11,329) (15,014)
Restricted cash.................................... 6 263 (16) 280
------- ------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES...... (2,767) (7,630) (11,345) (14,734)
FINANCING ACTIVITIES
Repayment of shareholder note...................... (1,523) -- (2,251) (39)
Due to affiliated companies........................ (2,022) 7,089 (519) 7,208
------- ------- -------- --------
Net cash (used in) provided by financing
activities......................................... (3,545) 7,089 (2,770) 7,169
------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................................ 2,881 (1,253) 2,435 (3,608)
Cash and cash equivalents at beginning of period..... 3,160 3,265 3,606 5,620
------- ------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 6,041 $ 2,012 $ 6,041 $ 2,012
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
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 September 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
rubles or dollars. All payments from Russian companies are made in rubles.
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 nine months ended September 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 rubles 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. RUSSIAN ECONOMIC CRISIS
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of sovereign securities
were suspended; subsequently, secondary trading therein was halted. Since many
Russian banks had substantial investments in these securities, severe liquidity
problems resulted for the banks. 2) The value of the ruble was allowed to
fluctuate below the ruble/US dollar exchange rate corridor that the government
had previously committed to support; this represented an effective devaluation
of the ruble. 3) A 90-day moratorium on offshore credit repayments was issued.
The 90-day moratorium was not extended when it expired on November 16, 1998 and
it is anticipated that the ruble will continue to be devalued. Due to the
devaluation and the end of the 90-day moratorium, there is an ongoing risk that
many Russian banks may be
17
<PAGE> 18
EDN SOVINTEL
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
declared bankrupt. Deposits held at Russian banks, other than Sberbank, are not
insured. The official exchange rate as of September 30, 1998 was 16.0645 per US
dollar. The last official exchange rate prior to the suspension of trading on
August 17, 1998 was 6.2725 rubles per US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $7.4 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
3. 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 nine months ended September 30, 1997 and
1998, comprehensive income for the Company is equal to net income (loss).
4. 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 September 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.
18
<PAGE> 19
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 continuing to develop and operate 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
19
<PAGE> 20
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 exercising
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 September 30, 1998, $8.3
million and $7.6 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, 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.
20
<PAGE> 21
The following table, as of September 30, 1998, summarizes the accounting
methodology for the principal business ventures through which the Company
conducts its business.
<TABLE>
<CAPTION>
EFFECTIVE
COUNTRY/REGION GTS ACCOUNTING
COMPANY NAME OF OPERATIONS OWNERSHIP METHODOLOGY
------------ -------------- --------- -----------
<S> <C> <C> <C>
CIS
Sovintel............................. Russia 50% Equity
TCM.................................. Russia 95%(1) Consolidated(1)
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) During the quarter ended September 30, 1998, the Company purchased the
remaining 47.36% interest in GTS Vox Limited, the intermediate holding
company of TCM. As a result, effective July 1998, the Company will have a
95% indirect interest in TCM and will also account for its interest in TCM
using 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 (3) 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 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 100% 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-
21
<PAGE> 22
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. In
addition, in March 1998 and October 1998, GTS's ownership interest in HER
increased 10% and .5%, respectively.
(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 sold its interest in EuroHivo in August 1998. The closing of
this transaction did not have a material effect on the Company's results
from operations and financial condition.
Russian Economic Crisis. The Company recorded a $13.1 million pre-tax
charge to earnings in its third quarter 1998 financial results that resulted
from the devaluation of the ruble and the consequences of the banking and
economic crisis within Russia. See "Liquidity and Capital Resources".
Further, as identified in the preceding table that summarizes the
accounting methodology for the Company's principal business ventures, several of
the Company's business ventures within Russia are accounted for under the equity
method of accounting. Accordingly, the $13.1 million pre-tax charge; that is
mainly comprised of foreign currency exchange losses for ruble-denominated net
monetary assets with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks, is
primarily reflected in the "equity in losses/(earnings) of ventures" line item
with the remainder in the "foreign currency losses" and "selling, general and
administrative" line items within the Company's Condensed, Consolidated
Statements of Operations.
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, TCM, Bancomsvyaz, HER,
GTS-Hungary and the Czech Companies. Although the Company was not able to follow
the consolidation method of accounting for Sovam, TCM and Bancomsvyaz in the
three and nine months ended September 30, 1997, and TCM and Bancomsvyaz for the
first six months of 1998, the Company has included, for comparative purposes, a
discussion of their financial performance for the three and nine months ended
September 30, 1997, and nine months ended September 30, 1998, respectively, 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, TeleRoss Ventures, GTS Cellular and GTS-
Monaco Access.
Revenue. The Company's consolidated revenue was $63.8 million and $117.3
million for the third quarter and year to date ended September 30, 1998,
respectively, which was $50.9 million and $87.1 million above the same periods
in 1997. The growth in revenue was primarily attributable to the inclusion of
HER, TeleRoss, Sovam, TCM and Bancomsvyaz in the Company's consolidated
financial results, who contributed $42.9 million, $22.2 million, $18.8 million,
$12.3, and $7.0 million, respectively, for the nine months ended September 30,
1998. TCM and Bancomsvyaz third quarter revenues are included in the Company's
consolidated revenues for the third quarter and year to date ended September 30,
1998.
The CIS region's consolidated revenue increased 345.1% and 237.1% to $31.6
million and $60.0 million for the three and nine months ended September 30,
1998, respectively, from the comparable periods in 1997. TeleRoss Operating
Company generated revenue of $6.8 million and $22.2 million, representing 21.5%
and 37.0% of the CIS region's consolidated revenue for the three and nine months
ended September 30, 1998, respectively. The growth in TeleRoss Operating Company
revenue of 35.4% for the year to date 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 $6.4 million and $18.8 million for the three and
nine months ended September 30, 1998, respectively. The 30.6% and 45.7% 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.)
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TCM's revenue for the three and nine months ended September 30, 1998
increased 57.7% and 63.8% to $12.3 million and $33.9 million, respectively, from
the comparable periods in 1997. This increase was primarily due to increases in
local and international/long distance traffic revenue and increases in monthly
port charges and the sale of additional local access lines. (TCM was an equity
method company prior to July 1, 1998.)
Revenue for Bancomsvyaz was $7.0 million and $16.9 million for the three
and nine months ended September 30, 1998, respectively, which represents a
218.2% and 322.5% increase from the comparable periods in 1997. The growth in
revenue was primarily attributable to the increase in cellular subscribers.
(Bancomsvyaz was an equity method company prior to July 1, 1998.)
HER generated $27.0 million and $42.9 million of revenue in the three and
nine months ended September 30, 1998, respectively, compared to $1.7 million and
$2.3 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 as well as the inclusion of Ebone, whose
revenue was $7.4 million for the three months ended September 30, 1998. HER
commenced commercial service over the Brussels-Amsterdam route in late 1996, the
London-Paris portion in November 1997, Frankfurt, Zurich, Geneva, Stuttgart,
Dusseldorf and Munich were added in the second quarter of 1998, and Milan was
added during the third quarter of 1998.
The Central Europe region's consolidated revenue increased 29.4% and 32.6%
to $4.4 million and $12.6 million for the three and nine months ended September
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 $25.0 million and $35.2
million, or 39.2% and 30.0% of revenue, for the three and nine months ended
September 30, 1998, respectively, and ($2.4) million and $1.9 million, or
(18.6%) and 6.3% of revenue, for the three and nine months ended September 30,
1997, respectively.
Sovam represented 11.2% and 25.0% of the consolidated gross margin for the
three and nine months ended September 30, 1998, respectively. (Sovam was an
equity method company in 1997.) Sovam had gross margin as a percentage of
revenues of 43.8% and 46.8% for the three and nine months ended September 30,
1998, respectively. The increase of 0.9% and 8.0% 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 1.2% and 6.0% of the
consolidated gross margin for the three and nine months ended September 30,
1998, respectively, and 20.8% and 52.6% for the three and nine months ended
September 30, 1997, respectively. TeleRoss had gross margin as a percentage of
revenue of 4.4% and 9.5% for the three and nine months ended September 30, 1998,
respectively. The increase of 12.1% and 3.4% in margin as a percentage of
revenue in comparison to the comparable periods in 1997 reflects the overall
increase in revenue as discussed above.
TCM represented 36.0% of the consolidated gross margin for the third
quarter 1998 (TCM was an equity method company prior to July 1, 1998). TCM had
gross margin as a percentage of revenues of 73.2% and 73.5% for the three and
nine months ended September 30, 1998, respectively. Gross margin as a percentage
of revenue decreased 1.2% and 3.8% in comparison to the same period in 1997 as a
result of higher infrastructure and settlement costs.
Bancomsvyaz represented 17.6% of the consolidated gross margin for the
third quarter 1998 (Bancomsvyaz was an equity method company prior to July 1,
1998). Bancomsvyaz's gross margin was 62.9% and 58.6% of revenue for the three
months ended September 30, 1998 compared to gross margin of 54.5% and 37.5% of
total revenue for the comparable periods during 1997.
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HER had a favorable effect on consolidated gross margins of $7.3 million
and $6.3 million for the three months and nine months ended September 30, 1998.
For comparative purposes, HER had an unfavorable gross margin of ($1.0) million
and ($3.7) million for the three and nine months ended September 30, 1997 (HER
was an equity method company prior to July 1997). HER represented 29.2% and
17.9% of the consolidated gross margin for the three and nine months ended
September 30, 1998. The improvement in gross margins in 1998 as compared to 1997
is reflective of the increased utilization of the network as well as the
inclusion of Ebone, whose gross margin was $3.9 million for the three months
ended September 30, 1998.
The Central European region had gross margin as a percentage of revenue of
31.8% and 33.3% for the three and nine months ended September 30, 1998,
respectively. The decrease of 3.5% and 5.6% 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.
Operating Expenses. Consolidated operating costs were $42.8 million and
$94.2 million for the three and nine months ended September 30, 1998,
respectively, a 71.5% and 81.0% increase above the comparable periods in 1997.
The increase in operating costs is attributable to the inclusion of HER, Sovam,
TCM and Bancomsvyaz 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 (losses)/earnings
of ($3.5) million and $4.1 million for its investments in non-consolidated
ventures in the three and nine months ended September 30, 1998, respectively, as
compared to recognizing losses of $8.1 million and $18.2 million in the
comparable periods, respectively, in 1997. This improvement was primarily the
result of HER and Bancomsvyaz no longer being equity method investees offset by
a $7.7 million charge to earnings associated with the Company's business
operations in Russia as a result of the deterioration of the economic conditions
in Russia during the quarter. The $7.7 million charge is principally comprised
of foreign exchange losses with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks. In addition, the Company's third quarter 1997 financial results were
unfavorably affected by management's decision to write-off certain investments
in and advances to ventures in Asia and Central Europe. As a result of the
application of the Company's previously discussed profit and loss accounting,
additional losses of $1.6 million were recognized for the three and nine months
ended September 30, 1998. Included in the quarter and year to date results for
September 30, 1997 were $3.1 million and $10.9 million of additional losses. 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 earned interest income of $13.9 million and $28.1
million for the three and nine months ended September 30, 1998, respectively, a
344.7% and 432.6% 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."
GTS incurred interest expense of $22.0 million and $52.6 million for the
three and nine months ended September 30, 1998, respectively, which was 58.1%
and 149.5% above the comparable periods in 1997. The significant increase in
interest expense was due to the $571.9 million increase in debt raised in 1998
and the $409.8 million debt raised in 1997. See "-- Liquidity and Capital
Resources."
Foreign Currency Losses. GTS recognized foreign currency losses of $7.3
million and $10.4 million for the three and nine months ended September 30,
1998. These losses are primarily attributable to the devaluation of the Russian
ruble and foreign currency exposure at HER. HER has recorded foreign exchange
losses due to its foreign exchange exposure associated with its issuance in
August 1997 of aggregate principal $265 million U.S. dollar denominated debt,
other U.S. dollar denominated cash and payable balances, losses on several
forward exchange contracts and the weakening of the U.S. dollar versus European
currencies in the third quarter of 1998. See "-- Liquidity and Capital
Resources -- Liquidity Analysis" for further discussion.
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Provision for Income Taxes. The Company's consolidated tax provision was
$0.8 million and $2.2 million for the three and nine months ended September 30,
1998 and $1.0 million and $1.8 million for the three and nine months ended
September 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 $32.4 million and $99.5 million for the
third quarter and year to date ended September 30, 1998, which increased $4.5
million and $17.5 million over revenues for the comparable periods in 1997. The
growth in revenue was primarily the result of telecommunications service
revenue, which increased 8.3% and 14.3% to $21.8 million and $70.2 million for
the three and nine months ended September 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
35.4% and 28.7% increase in outgoing international and domestic revenues for the
three and nine months ended September 30, 1998, as compared with the same
periods a year ago. Revenue from incoming international minutes decreased by
55.1% and 38.5% to $1.5 million and $6.1 million for the three and nine months
ended September 30, 1998, respectively, from the same periods in 1997.
Sovintel's non-traffic-related revenue increased 36.6% and 42.4% to $10.6
million and $29.3 million for three and nine months ended September 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 34.6% and 33.9%,
for the three and nine months ended September 30, 1998, and was 34.8% and 37.8%
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 $7.9 million and $17.7 million, or 24.4% and 17.8%
of total revenue, for the three and nine months ended September 30, 1998. The
increase of 9.3% and 2.8% in operating expenses in comparison to the same
periods in 1997 was primarily due to charges related to the Russian financial
crisis, specifically, $1.9 million of uncollectible accounts receivable and $0.4
million in unrecoverable cash.
Sovintel recorded a foreign exchange loss of $5.2 million during the
quarter, of which $5.1 million was attributable to the devaluation of the ruble
in mid-August 1998.
TeleRoss Ventures. Revenue for the TeleRoss Ventures increased 4.3% and
45.1% to $2.4 million and $7.4 million for the three and nine months ended
September 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.
Gross margin as a percentage of revenue was 75.0% and 71.6% for the three
and nine months ended September 30, 1998, respectively, compared to 60.9% and
72.5% for the three and nine months ended September 30, 1997, respectively.
Operating expenses were $1.0 million and $3.2 million, or 41.7% and 43.2% of
revenue, for the three and nine months ended September 30, 1998, respectively,
compared to 30.4% and 49.0% of revenue, for the comparable periods in 1997.
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GTS Cellular. The Company operates three cellular networks through
differing ownership structures: Vostok Mobile, PrimTelefone and Bancomsvyaz
(consolidated for the three months ended September 30, 1998).
Revenue for Vostok Mobile was $6.2 million and $20.9 million for the three
and nine months ended September 30, 1998, respectively, which represented a
47.6% and 39.3% increase from the comparable periods in 1997. The growth in
revenue was primarily attributable to subscriber growth.
Vostok Mobile's gross margin was 40.9% and 46.9% of revenue, for the three
and nine months ended September 30, 1998, respectively, compared to 45.2% and
50.7% of revenue, for the comparable periods in 1997. Operating expenses were
$5.5 million and $11.7 million, or 88.7% and 56.0% of revenue, for the three and
nine months ended September 30, 1998, respectively, compared to ($0.2) million
and $4.8 million, or (4.8%) and 32% of revenue, for the comparable periods in
1997.
Vostok Mobile recorded a foreign exchange loss of $2.4 million during the
third quarter 1998, that resulted primarily from the devaluation of the ruble in
mid-August 1998.
Revenue for PrimTelefone was $2.9 million and $10.2 million for the three
and nine months ended September 30, 1998, respectively, which represented a 9.4%
decrease and a 24.4% increase from the comparable periods in 1997. The decrease
in current period revenue is due to decreases in airtime, subscriber fees and
handset sales during the third quarter of 1998. The growth in year to date
revenue was primarily attributable to the subscriber growth in the first and
second quarters of 1998.
PrimTelefone's gross margin was 58.6% and 57.8% of total revenue, and
operating expenses were $0.9 million and $3.2 million for the three and nine
months ended September 30, 1998, respectively, compared to gross margin of 43.8%
and 57.3% of total revenue, and operating expenses of $1.2 million and $2.7
million, respectively, for the comparable periods in 1997.
Western Europe
GTS-Monaco Access: Total revenue was $6.8 million and $18.7 million for the
three and nine months ended September 30, 1998, respectively, which represented
a 100.0% and 136.7% increase from the comparable periods in 1997. Gross margin
was ($0.3) million and $0.7 million, or (4.4%) and 3.7% of revenue, for the
three and nine months ended September 30, 1998, respectively, compared to $0.3
million and $0.4 million, or 7.7% and 5.1% of revenue, for the comparable
periods in 1997. The decrease in gross margin for the third quarter of 1998 is
primarily the result of service credit recorded in September.
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 $358.6 million, $36.4 million, $107.7 million, $42.1 million and $62.1
million in the first nine months of 1998, and in the full years of 1997, 1996,
1995 and 1994, respectively, net of placement fees, for a total of $606.9
million. In addition, the Company and HER received $571.9 million, $409.8
million, $60.0 million and $23.3 million in gross proceeds in the first nine
months of 1998, and in the full years of 1997, 1996 and 1995, respectively, for
a total of $1,065.0 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.
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The Company had working capital of $907.6 million and $353.4 million as of
September 30, 1998 and 1997, respectively. The Company had an accumulated
deficit of $343.7 million as of September 30, 1998, including net losses of
approximately $37.5 million and $100.8 million for the three and nine months
ended September 30, 1998 and $48.2 million and $87.9 million for the three and
nine months ended September 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 spend over $1.2 billion in cash related to capital expenditures
and investments in ventures during the next three years. The Company obtained
funds in 1998 through a variety of financing arrangements, including (i)
approximately $255.3 million in gross proceeds from an initial public stock
offering of 12.8 million common shares at $20.00 per common share, (ii) $105.0
million in gross proceeds from the sale 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 stocking offering constituted a "complying
public equity offering" under the Company's 8.75% Senior Subordinated
Convertible Bonds due 2000 (the "Bonds"), and as a result, the conversion price
of the Bonds is $20 per share, (iii) approximately $127.4 million in gross
proceeds from a secondary public stock offering of 2.8 million shares of common
stock at $45.50 per common share, and (iv) approximately $466.9 million in gross
proceeds from the sale of 5.75% convertible senior subordinated debentures (the
"Debentures") that mature July 1, 2010. The debentures are redeemable from July
1, 2001 at the option of the Company, at redemption prices set forth in the
Debentures agreement and 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. 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.
The Company believes that its existing cash balances, after giving effect
to a contemplated private offering of $200 million in senior notes at its Hermes
business, which senior notes are on substantially similar terms as HER's
existing senior notes, 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 Company has not yet determined the actual amount and timing of such
financing.
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 political, economic and regulatory changes, changes in technology,
increased competition and various factors such as strikes, weather, and
performance by third parties in connection with 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
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<PAGE> 28
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 the 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. HER has spent approximately $136 million on
network capital expenditures through September 30, 1998 and expects to incur an
additional $654 million through 2000 in order to complete the buildout of the
network. The total capital expenditures required for the build-out of the
network has increased as a result of additional routes being planned, including
transatlantic capacity, and for enhancing the speed and capacity of the network.
Additionally, as of September 30, 1998, the Company has capitalized $242.2
million in connection with long-term fiber lease arrangements and expects to
capitalize an additional $181 million through 2000 in order to complete the
buildout of the network. Moreover, subsequent to September 30, 1998, HER entered
into an additional contractual commitment for $36.8 million, payable within
twelve months, to lease an indefeasible right of use to transatlantic capacity
for a term of twenty-five years. 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 from the Senior Notes, and a contemplated
private offering of $200 million in Senior Notes on substantially similar terms
as the Senior Notes, combined with HER's projected internally generated funds,
should be sufficient to fund HER's expected capital expenditures as well as
payments on the long-term fiber lease arrangements and other cash needs. 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
Due to the preliminary nature of the Company's business plan for its
European Services Strategy, the Company cannot estimate with any degree of
certainty the amount and timing of the Company's future capital requirements for
its 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 that 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 significant operating and net losses and will record significant net
cash outflow, before financing, in coming years 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.
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Liquidity Analysis
The Company had cash and cash equivalents of $993.9 million and $366.8
million as of September 30, 1998 and 1997, respectively. The Company had
restricted cash of $66.9 million and $59.8 million as of September 30, 1998 and
1997, respectively. The restricted cash at September 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 nine months ended September 30, 1998, the Company's
operations provided cash of $29.2 million and used $5.4 million, respectively,
compared to a cash use of $15.7 million and $38.9 million, respectively, in the
comparable periods of 1997. Cash used for investing activities was $89.7 million
and $142.9 million for the three months and nine months ended September 30, 1998
and $55.9 million and $73.0 million for the three and nine months ended
September 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 has experienced, and may continue to experience, losses
and a resulting 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.
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government (collectively, the "August 17th
Decision"): 1) The repayment of state securities were suspended; subsequently,
secondary trading therein was halted. Since many Russian banks had substantial
investments in these securities, severe
29
<PAGE> 30
liquidity problems resulted for the banks. 2) The value of the ruble was allowed
to fluctuate below the ruble/US dollar exchange rate corridor that the
government had committed to support; this represented an effective devaluation
of the ruble. 3) A 90-day moratorium on offshore credit repayments was issued.
The 90-day moratorium was not extended when it expired on November 16, 1998 and
it is anticipated that the ruble will continue to be devalued. Due to the
devaluation and the end of the 90-day moratorium, there is an ongoing risk that
many Russian banks may be declared bankrupt. Deposits held at Russian banks,
other than Sberbank, are not insured. The official exchange rate as of September
30, 1998 was 16.0645 per US dollar. The last official exchange rate prior to the
suspension of trading on August 17, 1998 was 6.2725 rubles per US dollar.
As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $13.1 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks. See "Results of Operations -- Consolidated Ventures" and "Results of
Operations -- Non-Consolidated Ventures (Equity Investees)".
Moreover, the Russian government has defaulted on payments, and proposed a
restructuring, of certain sovereign debt obligations which has been criticized
by Western holders of such obligations. As a result, it is likely that the
Russian government and Russian businesses will have difficulty accessing Western
financial markets for the foreseeable future. The consequences of the August 17
Decision and its aftermath remain unclear, but no assurance can be given that
these emergency measures, coupled with the policies of Russia's new government,
will be sufficient to stabilize the currency, enhance liquidity or prevent
further economic dislocation. In particular, there can be no assurance that
there will not be a further significant and sudden decline in the value of the
ruble and consequent increased Company exchange-related losses and increased
loss of investor confidence in the Russian economy. Such consequences coupled
with an overall downturn in the Russian economy and resulting reduced demand for
telecommunication services could have a material adverse effect on the Company
and its financial condition and results of operations and the Russian economy
generally.
YEAR 2000 COMPLIANCE
The Company expects to complete the assessment phase of its year 2000
readiness plans in the fourth quarter of 1998. The assessment phase includes
internal and third party review of potential risks associated with the
availability, integrity and reliability of operational systems necessary to
conduct business after the year 2000. The Company's preliminary observations
from the assessment phase are that most of the Company's telecommunications
equipment and software that has been purchased within the past three years bears
a lower risk of year 2000 non-compliance than equipment and software acquired
prior to that period. In addition, the Company is obtaining confirmations from
the Company's primary telecommunication facility providers, vendors, business
partners, customers and equipment and software vendors as to what plans, if any,
are being developed by them or are already in place to address their ability to
process transactions in the year 2000. Upon the completion of this assessment
phase, the Company intends to commence a detailed planning phase that will be
followed by a remediation and testing phase in early 1999.
The Company expects that it will incur between $2.0 million to $3.5 million
in expenses to complete the assessment, detailed planning and remediation and
testing phases, exclusive of replacement costs for telecommunications equipment
and software, of which approximately $0.6 million has been incurred for the nine
months ended September 30, 1998. It is estimated that between $1.0 million to
$2.0 million of the total expenditure will be required to complete the
remediation and testing phase, excluding the replacement of telecommunications
equipment and software. The Company is currently unable to quantify the costs
that it may incur during the remediation and testing phase, associated with the
replacement of any telecommunications equipment and software due to its early
stage in the year 2000 readiness review. Funding of these costs will be absorbed
from operating cash flows and expensed as incurred. The preceding cost estimates
do not include amounts associated with the accelerated acquisition of
replacement systems, as none are included in the initial assessment during the
third quarter 1998. The Company does not expect that the costs of addressing
30
<PAGE> 31
its year 2000 readiness will have a material effect on the Company's financial
condition or results of operations. However, there can be no assurance that year
2000 non-compliance by the Company's systems or the systems of vendors,
customers, partners or others will not result in a material adverse effect.
The worst case scenario for the Company would be the failing of its
telecommunications equipment, power providers and/or interfaces with other
telecommunication vendors. These cases would create business interruption at
some of the Company's operations and would adversely affect the Company's
revenues. For example, the Moscow power authorities have publicly stated that
they do not intend to address year 2000 issues until problems arise. However,
the Company has operations that are diversified geographically as well as by
line of business; therefore, it is not anticipated that the worst case scenario
would affect worldwide operations concurrently. Additionally, if power failures
occur, the Company has diesel generators at certain of its major sites. Based on
its assessment during the third quarter 1998, the Company does not foresee a
material loss due to these conditions. However, there can be no assurance that
year 2000 non-compliance by the Company's systems or the systems of vendors,
customers, partners or others will not result in a material adverse effect.
The Company is considering a contingency plan to address its worst case
scenario; however, certain of the initiatives are subject to execution risk.
This risk would include the inability to have access to diesel fuel or large
generators should power failures occur, the inability to quickly replace
telecommunications equipment and the inability to contract with alternative
telecommunication providers at reasonable terms. Moreover, the Company is
further limited in resources in certain geographical regions due to the market
volatility and weak economies in which the Company has business operations. See
"Risk Factors -- Risks Relating to Russia and the CIS."
INTRODUCTION OF THE EURO
On January 1, 1999, certain countries of the European Union are scheduled
to establish fixed conversion rates between their existing sovereign currencies
and a new currency to be called the "Euro." The Euro will then trade on currency
exchanges and be available for non-cash transactions. Thereafter and until
January 1, 2002, the existing sovereign currencies will remain legal tender in
these countries. On January 1, 2002, the Euro is scheduled to replace the
sovereign legal currencies of these countries. Through certain of its
subsidiaries, the Company has significant operations within the European Union,
including many of the countries that are scheduled to adopt the Euro. The
Company is currently evaluating the systems and business issues raised by the
adoption of the Euro, including the need to adapt information systems and the
competitive impact of cross-border pricing transparency. The Company has not yet
completed its evaluation of the potential impact likely to be caused by the Euro
adoption.
31
<PAGE> 32
SUPPLEMENTAL INFORMATION -- SELECTED HISTORICAL
FINANCIAL DATA -- COMBINED EQUITY INVESTMENTS
The following unaudited selected historical financial data -- equity
investments for the three and nine months ended September 30, 1997 and September
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 SEPTEMBER 30, 1997
Sovintel........................................... 50% 27,890 18,212 4,209 4,486
TCM................................................ 50%(2) 7,780 2,025 916 3,519
TeleRoss........................................... 50% 2,282 869 664 189
Sovam.............................................. 66.7%(3) 4,845 2,755 1,561 213
GTS Cellular Companies............................. 50%(4)(5) 12,075 6,002 4,617 3
Other.............................................. 50%(4) 2,394 (539) 15,525 (11,269)
----- ------- ------- ------- -------
Total....................................... 57,266 29,324 27,492 (2,859)
Adjustments for Inter-Affiliate Transactions(6)...... (7,192) (6,195) (2,523)
THREE MONTHS ENDED SEPTEMBER 30, 1998(2)(3)(5)
Sovintel........................................... 50% 32,391 21,176 7,865 (2,748)
TeleRoss........................................... 50% 2,396 671 1,009 (741)
GTS Cellular Companies............................. 50%(4)(5) 8,890 4,443 3,038 (2,097)
Other.............................................. 50%(4) 6,800 7,127 894 (1,114)
----- ------- ------- ------- -------
Total....................................... 50,477 33,417 12,806 (6,700)
Adjustments for Inter-Affiliate Transactions(6)...... (7,358) (7,958) (8,194)
NINE MONTHS ENDED SEPTEMBER 30, 1997
Sovintel........................................... 50% 82,029 51,048 12,324 14,215
TCM................................................ 50%(2) 20,715 4,733 2,270 9,653
TeleRoss........................................... 50% 5,113 1,419 2,460 512
Sovam.............................................. 66.7%(3) 12,877 7,867 4,635 (168)
GST Cellular Companies............................. 50%(4)(5) 29,412 14,227 13,022 (2,746)
Other.............................................. 50%(4) 8,860 8,400 25,736 (25,146)
----- ------- ------- ------- -------
Total....................................... 159,006 87,694 60,447 (3,680)
Adjustments for Inter-Affiliate Transactions(6)...... (17,049) (15,853) (11,105)
NINE MONTHS ENDED SEPTEMBER 30, 1998 (2)(3)(5)
Sovintel........................................... 50% 99,498 65,779 17,653 6,891
TCM................................................ 50%(2) 21,586 5,689 1,857 8,843
TeleRoss........................................... 50% 7,436 2,163 3,241 (121)
GTS Cellular Companies............................. 50%(4)(5) 40,186 18,737 14,158 458
Other.............................................. 50%(4) 18,838 18,107 3,961 (2,591)
----- ------- ------- ------- -------
Total....................................... 187,544 110,475 40,870 13,480
Adjustments for Inter-Affiliate Transactions(6)...... (25,001) (23,960) 1,493
</TABLE>
32
<PAGE> 33
SUPPLEMENTAL INFORMATION -- SELECTED HISTORICAL
FINANCIAL DATA -- COMBINED EQUITY INVESTMENTS -- (CONTINUED)
- ---------------
(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) During the quarter ended September 30, 1998, the Company purchased the
remaining 47.36% interest in GTS Vox Limited, the intermediate holding
company of TCM. As a result, effective July 1998, the Company will have a
95% indirect interest in TCM and will also account for its interest in TCM
using the consolidation as opposed to the equity method of accounting. The
results of TCM for the six months ended June 30, 1998 have been included
within the nine months ended September 30, 1998 presented above.
(3) 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.
(4) The Company generally maintains a 50% ownership interest in these equity
investments.
(5) Prior to July 1, 1998, the Company beneficially owned approximately 25% of
Bancomsvyaz and included its results within the GTS Cellular companies
accounted for under the equity method. During the second quarter of 1998,
the Company completed a restructuring of the capital and ownership of
Bancomsvyaz, which results in GTS beneficially owning approximately 57% of
Bancomsvyaz. As a result, effective June 30, 1998, Bancomsvyaz is accounted
for under the consolidation as opposed to equity method of accounting. The
results of Bancomsvyaz for the three months ended March 31, 1998 have been
included within the nine months ended September 30, 1998 presented above.
(6) 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."
33
<PAGE> 34
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 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
----------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
None.
34
<PAGE> 35
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
----------------------------------
William H. Seippel
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
Date: December 14, 1998
35
<PAGE> 36
INDEX TO EXHIBITS
Exhibits
Designation Description
- ----------- -----------
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 09/30/98 UNAUDITED CONDENSED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 993,928
<SECURITIES> 0
<RECEIVABLES> 64,871
<ALLOWANCES> (5,049)
<INVENTORY> 0
<CURRENT-ASSETS> 1,130,458
<PP&E> 481,399
<DEPRECIATION> (45,380)
<TOTAL-ASSETS> 1,814,893
<CURRENT-LIABILITIES> 222,844
<BONDS> 1,208,533
0
0
<COMMON> 6,050
<OTHER-SE> 345,359
<TOTAL-LIABILITY-AND-EQUITY> 1,814,893
<SALES> 6,104
<TOTAL-REVENUES> 117,299
<CGS> 4,542
<TOTAL-COSTS> 82,067
<OTHER-EXPENSES> 100,465
<LOSS-PROVISION> 3,888
<INTEREST-EXPENSE> 52,603
<INCOME-PRETAX> (89,726)
<INCOME-TAX> 2,151
<INCOME-CONTINUING> (88,131)
<DISCONTINUED> 0
<EXTRAORDINARY> (12,704)
<CHANGES> 0
<NET-INCOME> (100,835)
<EPS-PRIMARY> (1.89)
<EPS-DILUTED> (1.89)
</TABLE>
