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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
(COMMISSION FILE NUMBER: 0-23717)
GLOBAL TELESYSTEMS, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
DELAWARE 94-3068423
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
4121 WILSON BOULEVARD
8TH FLOOR
ARLINGTON, VIRGINIA 22203
(Address of principal executive office)
(703) 236-3100
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At October 31, 2000 there were 203,371,856 outstanding shares of common
stock of the registrant.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements of Global TeleSystems, Inc. (unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999................................ 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999............. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 3 Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................ 21
Signatures........................................................... 22
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including current restricted
cash................................................... $ 806.7 $ 1,341.4
Accounts receivable, net.................................. 253.0 239.0
Other current assets...................................... 131.0 106.5
--------- ---------
TOTAL CURRENT ASSETS.............................. 1,190.7 1,686.9
Property and equipment, net................................. 1,429.0 1,004.5
Goodwill and intangible assets, net......................... 1,178.6 1,172.9
Other non-current assets.................................... 127.2 137.5
--------- ---------
TOTAL ASSETS...................................... $ 3,925.5 $ 4,001.8
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 311.5 $ 198.6
Accrued expenses.......................................... 258.8 295.3
Current portion of debt and capital lease obligations..... 48.2 122.2
Deferred revenue and other current liabilities............ 76.6 86.6
--------- ---------
TOTAL CURRENT LIABILITIES......................... 695.1 702.7
Long-term debt and capital lease obligations................ 2,568.0 2,430.0
Deferred revenue and other non-current liabilities.......... 175.5 123.9
--------- ---------
TOTAL LIABILITIES................................. 3,438.6 3,256.6
COMMITMENTS AND CONTINGENCIES
Minority interest........................................... 108.0 114.6
Redeemable preferred stock, $0.0001 par value (10,000,000
shares authorized; 100,000 shares issued and
outstanding).............................................. 502.3 502.3
SHAREHOLDERS' EQUITY
Common stock, $0.10 par value (540,000,000 shares
authorized; 203,679,823 and 184,472,884 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively)............................................. 20.4 18.4
Additional paid-in capital.................................. 1,488.2 1,280.8
Notes receivable due from shareholder....................... -- (10.4)
Accumulated deficit......................................... (1,632.0) (1,160.5)
--------- ---------
TOTAL SHAREHOLDERS' (DEFICIT)/EQUITY.............. (123.4) 128.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 3,925.5 $ 4,001.8
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.............................................. $ 259.8 $ 227.9 $ 770.8 $ 599.1
Operating expenses:
Access and network services......................... 164.2 140.2 479.6 356.1
Selling, general and administrative................. 105.1 95.9 336.4 265.2
Depreciation and amortization....................... 70.6 59.2 208.4 146.8
Merger and restructuring costs...................... 26.1 19.8 26.1 83.5
------- ------- -------- -------
Total operating expenses.................... 366.0 315.1 1,050.5 851.6
Loss from operations.................................. (106.2) (87.2) (279.7) (252.5)
Other income (expense):
Interest expense.................................... (58.4) (51.2) (177.1) (148.2)
Interest income..................................... 18.3 19.6 64.1 50.6
Foreign currency gains (losses)..................... (31.8) 12.6 (66.3) (1.6)
Other income (expense).............................. (0.1) (4.0) 1.0 (15.1)
------- ------- -------- -------
Total other expenses........................ (72.0) (23.0) (178.3) (114.3)
------- ------- -------- -------
Loss before income taxes.............................. (178.2) (110.2) (458.0) (366.8)
Income taxes.......................................... 5.1 2.6 13.5 10.6
------- ------- -------- -------
Net Loss.............................................. (183.3) (112.8) (471.5) (377.4)
------- ------- -------- -------
Preferred dividends................................... (9.1) (9.1) (27.2) (16.6)
------- ------- -------- -------
Net loss applicable to common shareholders............ $(192.4) $(121.9) $ (498.7) $(394.0)
======= ======= ======== =======
Net loss per common share............................. $ (0.95) $ (0.70) $ (2.54) $ (2.35)
======= ======= ======== =======
Weighted average common shares outstanding............ 201.9 173.6 196.2 167.8
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES....................... $(165.3) $(203.3)
------- -------
INVESTING ACTIVITIES
Purchases of property and equipment....................... (567.1) (221.5)
Restricted cash and other investing activities............ 66.9 30.9
Investments in and advances to ventures, net of
repayments............................................. (7.6) (31.7)
Acquisitions, net of cash acquired........................ -- (332.2)
------- -------
NET CASH USED IN INVESTING ACTIVITIES.................. (507.8) (554.5)
------- -------
FINANCING ACTIVITIES
Proceeds from debt, net of debt issue costs............... 172.0 292.3
Repayments of debt and capital lease obligations.......... (84.8) (68.1)
Net proceeds from issuance of securities.................. 7.1 507.3
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 94.3 731.5
------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... 63.1 7.7
------- -------
Net decrease in cash and cash equivalents................... (515.7) (18.6)
Cash and cash equivalents at beginning of period............ 1,082.9 998.5
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 567.2 $ 979.9
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalization of leases.................................. $ 170.5 $ 108.0
======= =======
Issuance of common shares or notes for interest in
business ventures...................................... $ 136.8 $ 229.1
======= =======
Conversion of debt into common shares..................... $ 79.0 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Global TeleSystems, Inc. ("GTS" or "the Company"), is a provider of
e*Business and borderless broadband services across Europe, serving businesses
and carriers in European countries with a range of broadband, Internet/IP and
voice services. The Company operates a cross-border fiber-optic network and a
Tier-1 IP backbone (GTS Ebone). Also, GTS is the majority owner of Golden
Telecom, Inc. ("Golden Telecom"), which offers a variety of fixed-line, data and
mobile telecommunications services in Russia, Ukraine and other former Soviet
nations.
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Material intercompany account transactions have been eliminated. In
the opinion of management, the financial statements reflect all adjustments of a
normal and recurring nature necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the Company's 1999
audited consolidated financial statements and the notes related thereto. The
results of operations for the three and nine months ended September 30, 2000 may
not be indicative of the operating results for the full year.
Certain reclassifications have been made to the 1999 condensed consolidated
financial statements in order to conform to the 2000 presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended in June 1999. The Company
expects to adopt the new statement effective January 1, 2001. The statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the statement will
have a significant effect on its results of operations or financial position.
3. EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding preferred shares using the "if-converted" method and
outstanding stock options using the "treasury stock" method.
6
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table is being presented for informational purposes only and
is not representative of the Company's diluted earnings per share, since the
Company has a net loss for the periods presented. The items identified within
the table reflect the dilutive effect of all outstanding common share equivalent
securities of the Company for the periods presented. The components of basic and
diluted earnings per share were as follows:
EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
Net loss(A).................................... $(183.3) $(112.8) $(471.5) $(377.4)
Preferred stock dividends...................... (9.1) (9.1) (27.2) (16.6)
------- ------- ------- -------
Net loss applicable to common
shareholders(B)......................... $(192.4) $(121.9) $(498.7) $(394.0)
======= ======= ======= =======
Weighted average outstanding of:
Common stock shares(C)....................... 201.8 173.6 196.1 167.8
Contingently issuable shares -- Restricted
stock (vested)............................ 0.1 -- 0.1 --
------- ------- ------- -------
201.9 173.6 196.2 167.8
Dilutive effect of:
Common shares issuable upon debt
conversion................................ 17.0 27.5 17.0 27.5
Preferred stock.............................. 14.5 14.5 14.5 14.5
Warrants..................................... 4.0 8.8 6.2 8.8
Employee stock options....................... 0.4 21.8 1.0 21.8
Restricted shares, unvested.................. 0.1 0.2 0.1 0.2
------- ------- ------- -------
Common stock and common stock
equivalents(D).......................... 237.9 246.4 235.0 240.6
Interest on convertible stock, net of taxes
(E).......................................... $ 7.0 $ 8.9 $ 20.1 $ 26.8
------- ------- ------- -------
Earnings per share:
Basic(B/C)................................... $ (0.95) $ (0.70) $ (2.54) $ (2.35)
======= ======= ======= =======
Diluted ((A+E)/D)............................ $ (0.74) $ (0.42) $ (1.92) $ (1.46)
======= ======= ======= =======
</TABLE>
4. COMPREHENSIVE LOSS
The following table reflects the calculation of comprehensive loss for GTS
for the three and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net loss....................................... $(183.3) $(112.8) $(471.5) $(377.4)
Other comprehensive loss
Preferred dividends.......................... (9.1) (9.1) (27.2) (16.6)
Foreign currency translation adjustments..... (48.1) (10.3) (19.8) (15.7)
------- ------- ------- -------
Comprehensive loss............................. $(240.5) $(132.2) $(518.5) $(409.7)
======= ======= ======= =======
</TABLE>
7
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT FINANCING TRANSACTIONS
On July 14, 2000, a subsidiary of the Company executed an eight year, $550
million, multi-currency bank facility ("the Bank Facility"). The Bank Facility
will be applied to the purchase of additional network assets; to construct the
Company's proposed hosting centers and city enterprise networks; to pursue
business development opportunities in the telecommunications field; and for
general corporate purposes in the telecommunications business. Of the $550
million committed under the Bank Facility, $275 million is currently available,
of which, as of September 30, 2000, the subsidiary has borrowed E200 million, or
$175.9 million. The remaining $275 million of commitment will be available when
certain licenses and rights of way relating to the Company's network have been
transferred to the subsidiary (collectively, the "Conditions Subsequent"). The
Company currently expects that the Conditions Subsequent will be completed
during the time period required by the lenders under the Bank Facility (nine
months from entry into the Bank Facility in the case of licenses and rights of
way in France and the United Kingdom and six months from entry into the Bank
Facility in the case of licenses and rights of way in other countries), but
borrowed funds will have to be repaid and any outstanding bank guarantees
discharged, and commitments to lend under the Bank Facility will be reduced to
zero, upon the expiration of a 90-day period following each of the above-
described six-and nine-month periods (as applicable) if the Conditions
Subsequent are not satisfied.
6. EQUITY TRANSACTIONS
On July 26, 2000, the Company exchanged 3,166,528 of its common shares for
3,283 of Global TeleSystems Europe B.V's., formerly Hermes Europe Railtel B.V.
("GTS Europe B.V.") common shares, pursuant to an exchange agreement that the
Company had entered into, on October 15, 1999, with the minority interest
holders of GTS Europe B.V., who were grantees of GTS Europe B.V.'s stock
options. The July 26, 2000 exchange of GTS common shares was based on the fair
market value of GTS Europe B.V. as of the date of the exchange, and the
transaction resulted in excess purchase price over the fair value of assets
acquired of approximately $37.2 million, which was recorded in July 2000.
In September 2000, the remaining 318 options of GTS Europe BV were
exercised. As a result of this transaction, as of September 2000, the Company
owns 99.8% of the outstanding shares of GTS Europe BV. The Company is obligated
to exchange its Common Stock for the resulting 318 shares of GTS Europe BV stock
in 2001.
7. MERGER AND RESTRUCTURING COSTS
In August 2000, the Board of Directors of the Company approved management's
plan to exit from its residential and pre-paid card businesses, and streamline
its operations by, among other things, consolidating its headquarters functions,
reducing or redeploying headcount, centralizing finance and billing operations
and consolidating sales offices. As a result of these initiatives, the Company
has recorded a charge of approximately $26.1 million in its third quarter 2000
financial results. The components of the charge include approximately $14.7
million for severance related costs associated with termination of personnel,
cancellation of facility leases and anticipated office closure costs in Western
Europe and approximately $11.4 million for severance costs under the terms of
separation with the Company's former Chairman and Chief Executive Officer and
severance and termination costs in connection with consolidation of its
headquarters functions, including its Northern Virginia web-hosting center. In
addition, the Company has reclassified within its balance sheet the $10.0
million loan amount that was due from its former Chairman and Chief Executive
Officer from the equity section to a non-current asset, as the Company expects
the amount to be collected under the terms of his separation agreement.
Of the $26.1 million charge, $18.7 million remains as an accrual, at
September 30, 2000, for additional cash payments that the Company expects to
incur as a part of its plan of restructuring.
8
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, the Company recorded $142.5 million in charges to earnings
attributable to merger and restructuring costs. Of the $142.5 million, $63.7
million, $19.8 million and $59.0 million were recorded in the first quarter,
third quarter and fourth quarter of 1999, respectively.
The $63.7 million first quarter 1999 charge was attributable to the
transactional and other costs associated with the acquisition and integration of
Global TeleSystems (Europe) Ltd. (formerly Esprit Telecom Group plc). Of the
$63.7 million, $0.5 million remains as an accrual, at September 30, 2000, for
additional transactional costs to be paid.
The $19.8 million third quarter 1999 charge was a result of the Company's
decision that the allocation of sufficient resources to support certain cellular
ventures in Russia was not consistent with the Company's strategic plans.
Accordingly, the Company decided to abandon certain cellular ventures and
decided to cease to provide any further financial assistance to these ventures
other than the assumption of certain debt obligations. Golden Telecom, a
subsidiary of the Company, which holds these cellular ventures, is seeking to
sell its ownership interests in these assets in furtherance of the plan of
abandonment. In September 2000, Golden Telecom entered into an agreement to
acquire 18 percent of MCT Corp. in exchange for Golden Telecom's ownership
interest in its Russian mobile operations, including the abandoned celluar
ventures. Initially, Golden Telecom will acquire 24 percent of the outstanding
common stock of MCT which Golden Telecom expects to be subsequently diluted to
18 percent as a result of an equity offering being contemplated by MCT. Golden
Telecom expects to close this transaction in the fourth quarter of 2000 subject
to regulatory approvals and completion of due diligence. Of the $19.8 million
charge, $4.5 million remains as an accrual, at September 30, 2000, for cash
payments that the Company expects to incur as part of the plan of abandonment.
The $59.0 million fourth quarter 1999 charge reflects a charge of $40.1
million for the integration and rationalization of the Company's switched-voice
assets as well as $18.9 million for certain employee-related reorganization
costs. These charges were incurred principally as a result of the acquisitions
and organizational consolidations that the Company effected in 1999. Of the
$59.0 million, $23.5 million remains as an accrual, at September 30, 2000, for
additional cash payments that the Company expects to incur as part of its plan
of restructuring.
8. SEGMENT INFORMATION
Based on the Company's organizational structure, the Company operated in
two reportable segments: Europe and Golden Telecom. The Company's reportable
segments represent business units that primarily offer similar products and
services to communications carriers, Internet service providers and other
high-usage customers; however, the business units are managed separately due to
the geographic dispersion of their operations.
The Company's product and service offering includes the provision of
broadband, internet, data and voice services to its customers.
9
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about the Company's segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Revenue:
Europe...................................... $ 230.6 $ 202.8 $ 690.7 $ 526.6
Golden Telecom.............................. 29.2 25.1 80.1 72.5
------- ------- -------- --------
Total Revenue................................. 259.8 227.9 770.8 599.1
Income (loss) from operations:
Europe...................................... (102.1) (62.9) (268.8) (223.9)
Golden Telecom.............................. (4.1) (24.3) (10.9) (28.6)
------- ------- -------- --------
Total loss from operations.................... (106.2) (87.2) (279.7) (252.5)
Unallocated other income/(expense):
Interest, net............................... (40.1) (31.6) (113.0) (97.6)
Other income (expenses), net................ (31.9) 8.6 (65.3) (16.7)
------- ------- -------- --------
Loss before income taxes................. $(178.2) $(110.2) $ (458.0) $ (366.8)
======= ======= ======== ========
Assets:
Europe...................................... $3,559.4 $3,304.9
Golden Telecom.............................. 366.1 225.9
-------- --------
Total assets.................................. $3,925.5 $3,530.8
======== ========
</TABLE>
9. SUPPLEMENTAL INFORMATION
Due to the significance of the Company's activities that are transacted in
the Euro (E) foreign currency, the Company believes that it is appropriate to
provide supplemental Euro reporting currency financial results. Further, the
Company is currently evaluating whether the Euro (E) foreign currency is a more
appropriate reporting currency for its SEC reported consolidated financial
statements and disclosures and anticipates that will have completed its analysis
by the end of December 31, 2000.
Accordingly, the following table reflects the Company's financial results,
for the periods presented, with the Euro as the reporting currency as compared
to the US Dollar:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
-------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues...................................... E 286.9 E217.2 E 819.2 E 560.5
Operating expenses:
Access and network services................. 180.9 133.6 509.5 333.1
Selling, general and administrative......... 115.6 91.4 356.4 248.0
Depreciation and amortization............... 77.6 56.4 221.0 137.6
Merger and restructuring costs.............. 29.9 18.9 29.9 76.2
------- ------ ------- -------
Total operating expenses............ 404.0 300.3 1,116.8 794.9
Loss from operations.......................... E(117.1) E(83.1) E(297.6) E(234.4)
======= ====== ======= =======
</TABLE>
10
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS
Agreement to Sell Interest in FLAG Atlantic Joint Venture
On October 31, 2000, the Company announced that it has reached an agreement
whereby it planned to sell its 50% equity interest in FLAG Atlantic Limited to
FLAG Telecom while retaining ownership over certain infrastructure, including
the dedicated fiber pair on the FLAG Atlantic-1 transatlantic link, previously
purchased from the joint venture. FLAG Atlantic Limited is a 50/50 joint venture
established by the Company and FLAG Telecom to build FLAG Atlantic-1, a major
subsea fiber network connecting the US and Europe. Further, in October 2000,
prior to the closing of the Company's sale of its equity interest in Flag
Atlantic Limited, the Company made its required $100 million equity contribution
into the joint venture.
The total value of the transaction is $175 million. Under the terms of the
agreement, the Company will receive $135 million in cash from FLAG Telecom and
will receive infrastructure and subsea capacity valued at $40 million in avoided
future costs. Subject to the satisfaction of certain customary conditions
precedent, the Company anticipates that it will receive $130 million of the $135
million in cash from Flag Telecom during the fourth quarter 2000, with the
remaining $5 million received upon the resolution of certain regulatory matters.
Organizational Structure Change
On November 10, 2000, the Board of Directors' approved a plan by which the
Company will focus on providing broadband services to traditional carriers,
Internet service providers ("ISPs"), application service providers ("ASPs"),
other Web-centric entities and data intensive pan-European corporations. The
objective of the restructuring is to position the Company as a data
services-only provider that the Company expects will generate positive earnings
before interest, taxes, depreciation and amortization ("EBITDA").
As part of this plan, the Company will immediately restructure into four
"stand alone" business units -- GTS Broadband Services; GTS Business Services;
GTS Central Europe; and Golden Telecom, Inc. The Company intends to sell the
portion of its Business Services and Central Europe units focused on serving
small-to-medium-sized enterprises ("SMEs"), and has retained an investment bank,
to assist in the sale of these assets.
These actions are intended to simplify the organization and operations of
the Company. As a result of these initiatives, the Company expects that it will
incur a charge for severance, shut-down activities, legal and professional fees
as well as the write-off of certain intangible assets, including goodwill
related to the Business Services businesses. This charge is expected to be in
the range of $800 million to $850 million, of which $750 million to $775 million
is anticipated to be non-cash, prior to any proceeds that may result from the
intended sales transactions. Of this amount, approximately $700 million to $750
million is anticipated to be non-cash related charges for goodwill and other
asset write-downs.
Preferred Stock Dividend
On November 13, 2000, the Company announced that the Board of Directors had
determined that it is in the best interests of the Company and all its
shareholders to discontinue at this time the payment of dividends on its 7.25%
Cumulative Convertible Preferred Stock (the "Preferred Stock"). The Company's
payment of dividends on the Preferred Stock represents a non-cash item to the
Company since the Company has previously paid common stock dividends on the
Preferred Stock. A market agent has sold the dividended shares of common stock
on behalf of a depositary to provide the applicable cash payment to the
Preferred Stock holders. The Preferred Stock is represented by Depositary
Shares, each representing 1/100 of a share of the Preferred Stock.
11
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consent Solicitation
On November 13, 2000, the Company commenced soliciting consents from
holders of its 9 7/8% Senior Notes due 2005 (the Notes") to amendments of
certain provisions of the indenture governing the Notes. The purpose of the
consent solicitation is to permit the Company to modify the "Event of Default"
provisions of the indenture governing the Notes in order to provide the Company
with greater flexibility to, among other things, restructure the operations of
its Global TeleSystems (Europe) Limited subsidiary (formerly, Esprit Telecom
Group plc) ("Esprit Telecom"), and address the indebtedness represented by
Esprit Telecom's publicly traded debt securities and long-term debt owed to the
Company by Esprit Telecom. Such additional flexibility is sought to reduce the
possibility that actions taken to restructure such operations or address such
indebtedness may negatively impact the creditworthiness of the Company, other
than Esprit Telecom and its subsidiaries. The amendments sought in the consent
solicitation would remove as events of default under the indenture defaults
under any indebtedness of, judgments against, and bankruptcy, insolvency and
related filings and other events of, Esprit Telecom or any of its direct or
indirect subsidiaries. The consent solicitation will expire at 5:00 p.m., New
York City time, on November 21, 2000, unless extended by GTS prior to that date.
GTS will make a payment equal to 1% of the principal amount of the Notes ($10 in
cash for each $1,000 principal amount of Notes) to each holder of Notes whose
consent is received and accepted prior to the expiration date. The record date
of the consent solicitation is November 17, 2000. GTS will pay this consent
payment promptly after the execution of a supplemental indenture (the
"Supplemental Indenture") effecting the amendments described above.
12
<PAGE> 13
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the financial condition
and results of operations of the Company for the three and nine months ended
September 30, 2000 and 1999 and of certain factors that management believes are
likely to affect the Company's prospective financial condition. This information
should be read in conjunction with the Company's Condensed Consolidated
Financial Statements and the notes related thereto appearing elsewhere in this
document.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
those concerning (i) projected traffic volume, (ii) future revenues and costs,
(iii) changes in the Company's competitive environment and (iv) the Company's
external funding contain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this report. Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Report.
The factors described in this report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements of
the Company made by or on behalf of the Company, and investors, therefore,
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors may emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
OVERVIEW
On November 10, 2000, the Board of Directors' approved a plan by which the
Company will focus on providing broadband services to traditional carriers,
ISPs, ASPs, other Web-centric entities and data intensive pan-European
corporations. The objective of the restructuring is to position the Company as a
data services-only provider that the Company expects will generate positive
EBITDA.
As part of this plan, the Company will immediately restructure into four
"stand alone" business units -- GTS Broadband Services; GTS Business Services;
Central Europe; and Golden Telecom, Inc. The Company intends to sell its
SME-focused Business Services and Central Europe units, and has retained an
investment bank to assist in the sale of these assets.
The GTS Broadband Services unit will focus on being the premier provider of
broadband network solutions and services in Europe. The unit will expand its
services to address the pan-European corporate market, and will continue to
provide carriers, ISPs, ASPs and Web-centric customers with managed bandwidth
and data products. Expanded services include IP virtual private networks,
dedicated hosting, high-
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<PAGE> 14
capacity direct Internet access as well as a host of new high-end data
applications, such as streaming media services. Included in this unit will be
the following:
1. GTS's pan-European fiber optic network;
2. GTS Ebone, the Company's Tier-1 IP Backbone;
3. The transatlantic fiber network on FA-1;
4. GTS's multi-duct, fiber-rich City Enterprise Networks; and
5. Four existing Western European hosting centers
RESULTS OF OPERATIONS
Organizational Structure Change
The financial results for the three and nine month period that is reflected
below is not indicative of the financial results of the Company upon the sale of
its interest in its SME-focused Business Services and Central Europe units. In
addition, as a result of these initiatives, the Company expects that it will
incur a charge for severance, shut-down activities, legal and professional fees
as well as the write-off of certain intangible assets, including goodwill
related to the Business Services businesses. This charge is expected to be in
the range of $800 million to $850 million, of which $750 million to $775 million
is anticipated to be non-cash, prior to any proceeds that may result from the
intended sales transactions.
The following table sets forth the statement of operations as a percentage
of revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0% 100.0%
Access and network services...................... 63.2 61.5 62.2 59.4
Selling, general and administrative.............. 40.5 42.1 43.6 44.3
Depreciation and amortization.................... 27.2 25.9 27.0 24.5
Merger and restructuring costs................... 10.0 8.7 3.4 13.9
----- ----- ----- -----
Loss from operations............................. (40.9) (38.2) (36.2) (42.1)
Interest expense................................. (22.5) (22.5) (23.0) (24.7)
Interest income.................................. 7.0 8.6 8.3 8.4
Foreign currency losses.......................... (12.2) 5.5 (8.6) (0.3)
Other income/(expense)........................... -- (1.7) 0.1 (2.5)
----- ----- ----- -----
Loss before income taxes......................... (68.6) (48.3) (59.4) (61.2)
Income taxes..................................... 2.0 1.2 1.8 1.8
----- ----- ----- -----
Net loss......................................... (70.6)% (49.5)% (61.2) (63.0)%
===== ===== ===== =====
Preferred dividends.............................. (3.5) (4.0) (3.5) (2.8)
----- ----- ----- -----
Net loss applicable to common shareholders....... (74.1)% (53.5)% (64.7)% (65.8)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue. Consolidated revenue increased to $259.8 million, or 14.0%, for
the three months ended September 30, 2000 as compared to $227.9 million for the
three months ended September 30, 1999. Components of revenue for the three
months ended September 30, 2000 were Europe ($230.6 million) and Golden Telecom
($29.2 million). Revenue for the three months ended September 30, 1999 was
comprised of Europe ($202.8 million) and Golden Telecom ($25.1 million). The
growth in revenue in Europe was due to the increase in customer traffic on the
Company's network, which resulted from the Company's increased customer base and
the expansion of the network. The Company expects that its revenues will decline
as a result of the restructuring measures initiated in 2000.
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<PAGE> 15
Access and Network Services. Access and network services costs for the
three months ended September 30, 2000 increased to $164.2 million or 63.2% of
revenues as compared to $140.2 million or 61.5% of revenues for the three months
ended September 30, 1999. The increase in access and network services costs as a
percentage of revenues in the third quarter of 2000 is attributable to increased
settlement and interconnect costs paid to third parties and direct network
operating and maintenance costs. The Company is continuing to incur substantial
capital and operating costs related to the implementation of its business
strategy, including the expansion of its network with which the Company expects
to better serve its customer needs. The Company initiated these investments to
increase operating efficiency and reduce the amounts paid to third parties for
settlement and interconnect costs, thereby lowering access and network services
costs going forward. In addition, the Company expects that its access and
network services costs will decline as a result of the restructuring measures
initiated in 2000.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended September 30, 2000 increased to $105.1
million or 40.5% of revenues as compared to $95.9 million or 42.1% of revenues
for the three months ended September 30, 1999. While selling, general and
administrative expenses as a percentage of revenue declined slightly; there was
a significant increase in these costs. The dollar increase in selling, general
and administrative expenses is attributable to the following: additional
expenses related to acquired entities; an increase in the Company's sales and
marketing efforts; additional building rent expense related to the increased
office space due to growth in the Company's infrastructure; increased
administrative costs required for the Company's increased customer base and the
development of the Company's new brand identity. The Company expects that these
costs will decrease in future periods as a result of the restructuring measures
initiated in 2000.
Depreciation and Amortization. Depreciation and amortization increased to
$70.6 million or 27.2% of revenues for the three months ended September 30, 2000
as compared to $59.2 million or 25.9% of revenues for the three months ended
September 30, 1999. The substantial increase in depreciation and amortization
costs is attributable to the depreciation related to the expansion of the
Company's network infrastructure that has been undertaken over the past several
years.
Merger and Restructuring Costs. In August 2000, the Board of Directors of
the Company approved management's plan to exit from its residential and pre-paid
card businesses, and streamline its operations by, among other things,
consolidating its headquarters functions, reducing or redeploying headcount,
centralizing finance and billing operations and consolidating sales offices. As
a result of these initiatives, the Company has recorded a charge of
approximately $26.1 million in its third quarter 2000 financial results. The
components of the charge include approximately $14.7 million for severance
related costs associated with termination of personnel, cancellation of facility
leases and anticipated office closure costs in Western Europe and approximately
$11.4 million for severance costs under the terms of separation with the
Company's former Chairman and Chief Executive Officer and severance and
termination costs in connection with consolidation of its headquarters
functions, including its Northern Virginia web-hosting center.
For the three months ended September 1999, the Company recognized an $18.5
million charge to earnings as a result of the abandonment of certain of the
Company's cellular ventures in Russia. In addition, the Company also recognized
a $1.3 million charge to earnings in the third quarter of 1999, which is
associated with cancellation fees that were attributable to certain transmission
capacity that will not be required in future periods.
Interest Expense. Interest expense increased to approximately $58.4
million for the three months ended September 30, 2000 as compared to $51.2
million for the three months ended September 30, 1999. This increase in interest
expense is attributable to the interest associated with the issuance in November
1999 of E500.0 million aggregate principal amount of senior notes, partially
offset by an increase in capitalized interest resulting from the construction of
the Company's network.
Interest Income. Interest income decreased to approximately $18.3 million
for the three months ended September 30, 2000 as compared to $19.6 million for
the three months ended September 30, 1999. The decrease in interest income is
attributable to the decline of interest earned on short-term investments as a
result of a reduction in the short-term investment balances during the
respective time periods.
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<PAGE> 16
Foreign Currency Loss. The Company recognized foreign currency losses of
$31.8 million in the three months ended September 30, 2000 as compared to gains
of $12.6 million in the three months ended September 30, 1999. This increase is
primarily due to the impact of foreign currency fluctuations on the Company's
unhedged debt obligations.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue. Consolidated revenue increased to $770.8 million, or 28.7%, for
the nine months ended September 30, 2000 as compared to $599.1 million for the
nine months ended September 30, 1999. Components of revenue for the nine months
ended September 30, 2000 were Europe ($690.7 million) and Golden Telecom ($80.1
million). Revenue for the nine months ended September 30, 1999 was comprised of
Europe ($526.6 million) and Golden Telecom ($72.5 million). The growth in
revenue in Europe was due to the increase in customer traffic on the Company's
network, which resulted from the Company's increase customer base, the expansion
of the Company's network and the acquisitions that were completed in 1999. The
Company expects that its revenues will decline as a result of the restructuring
measures initiated in 2000.
Access and Network Services. Access and network services costs for the
nine months ended September 30, 2000 increased to $479.6 million or 62.2% of
revenues as compared to $356.1 million or 59.4% of revenues for the nine months
ended September 30, 1999. The increase in access and network services costs as a
percentage of revenues in the third quarter of 2000 is attributable to increased
settlement and interconnect costs paid to third parties and direct network
operating and maintenance costs. The Company is continuing to incur substantial
capital and operating costs related to the implementation of its business
strategy, including the expansion of its network with which the Company expects
to better serve its customer needs. The Company initiated these investments to
increase operating efficiency and reduce the amounts paid to third parties for
settlement and interconnect costs, thereby lowering access and network services
costs going forward. In addition, the Company expects that its access and
network services costs will decline as a result of the restructuring measures
initiated in 2000.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended September 30, 2000 increased to $336.4
million or 43.6% of revenues as compared to $265.2 million or 44.3% of revenues
for the nine months ended September 30, 1999. While selling, general and
administrative expenses as a percentage of revenue remained essentially flat,
there was a significant increase in these costs. The significant dollar increase
in selling, general and administrative expenses is attributable to the
following: additional expenses related to acquired entities; related costs from
the recruitment and hiring of additional staff associated with business growth;
an increase in the Company's sales and marketing efforts; additional building
rent expense related to the increased office space due to growth in the
Company's infrastructure; increased administrative costs required for the
Company's increased customer base and the development of the Company's new brand
identity. The Company expects that these costs will decrease in future periods
as a result of the restructuring measures initiated in 2000.
Depreciation and Amortization. Depreciation and amortization increased to
$208.4 million or 27.0% of revenues for the nine months ended September 30, 2000
as compared to $146.8 million or 24.5% of revenues for the nine months ended
September 30, 1999. The substantial increase in depreciation and amortization
costs is attributable to the depreciation related to the expansion of the
Company's network infrastructure that has been undertaken over the past several
years. Additionally, the Company has experienced an increase in amortization
expense associated with goodwill that has resulted from its acquisition
activities.
Merger and Restructuring Costs. In August 2000, the Board of Directors of
the Company approved management's plan to exit from its residential and pre-paid
card businesses, and streamline its operations by, among other things,
consolidating its headquarters functions, reducing or redeploying headcount,
centralizing finance and billing operations and consolidating sales offices. As
a result of these initiatives, the Company has recorded a charge of
approximately $26.1 million in its third quarter 2000 financial results. The
components of the charge include approximately $14.7 million for severance
related costs associated with termination of personnel, cancellation of facility
leases and anticipated office closure costs in Western Europe and approximately
$11.4 million for severance costs under the terms of separation with the
Company's former
16
<PAGE> 17
Chairman and Chief Executive Officer and severance and termination costs in
connection with consolidation of its headquarters functions, including its
Northern Virginia web-hosting center.
For the nine months ended September 30, 1999, in connection with the
business combination of Global TeleSystems (Europe) Ltd., the Company recognized
a $63.7 million charge to earnings for transaction and integration costs.
Additionally, as previously discussed the write-off of $19.8 million in merger
and restructuring costs is related to the Company's September 1999 decision to
abandon certain cellular ventures in Russia.
Interest Expense. Interest expense increased to approximately $177.1
million for the nine months ended September 30, 2000 as compared to $148.2
million for the nine months ended September 30, 1999. This increase in interest
expense is attributable to the interest associated with the issuance in November
1999 of E500.0 million aggregate principal amount of senior notes, partially
offset by an increase in capitalized interest resulting from the construction of
the Company's network.
Interest Income. Interest income increased to approximately $64.1 million
for the nine months ended September 30, 2000 as compared to $50.6 million for
the nine months ended September 30, 1999. This increase was due to the interest
earned from the Company's short-term investment of the proceeds received from
the Company's financing activities.
Foreign Currency Loss. The Company's recognized foreign currency losses of
$66.3 million in the nine months ended September 30, 2000 as compared to losses
of $1.6 million in the nine months ended September 30, 1999. This increase is
primarily due to the impact of foreign currency fluctuations on the Company's
unhedged debt obligations.
LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
The telecommunications industry is capital intensive. The Company
anticipates that its cash capital expenditures will be approximately $800
million for 2000, of which, approximately $567 million has been incurred through
the nine months ended September 30, 2000. In addition, prior to our recently
announced intentions to focus our activities around our core competency of
providing broadband services and to sell our SME-focused Business Services and
Central Europe units, the Company's cash capital expenditure program for 2001
was anticipated to be approximately $500 million. Further, as a result of the
reorganization measures discussed above, we expect that the cash capital
expenditure requirements are likely to decrease as the Company continues to
evaluate its capital expenditure program in light of the proposed sale of these
business units.
On July 14, 2000, a subsidiary of the Company executed an eight year, $550
million, multi-currency bank credit facility ("the Bank Facility"). The Bank
Facility will be applied to the purchase of additional network assets; to
construct the Company's proposed hosting centers and city enterprise networks;
to pursue business development opportunities in the telecommunications field;
and for general corporate purposes in the telecommunications business. Of the
$550 million committed under the Bank Facility, $275 million is currently
available, of which, as of September 30, 2000, the subsidiary has borrowed E200
million, or $175.9 million. The remaining $275 million of commitment will be
available when certain licenses and rights of way relating to the Company's
network have been transferred to the subsidiary (collectively, the "Conditions
Subsequent"). The Company currently expects that the Conditions Subsequent will
be completed during the time period required by the lenders under the Bank
Facility (nine months from entry into the Bank Facility in the case of licenses
and rights of way in France and the United Kingdom and six months from entry
into the Bank Facility in the case of licenses and rights of way in other
countries), but borrowed funds will have to be repaid and any outstanding bank
guarantees discharged, and commitments to lend under the Bank Facility will be
reduced to zero, upon the expiration of a 90-day period following each of the
above-described six- and nine-month periods (as applicable) if the Conditions
Subsequent are not satisfied.
Based on the Company's current existing cash balances, projected internally
generated funds, and the Company's recently announced intentions to sell its SME
focused Business Services and Central Europe
17
<PAGE> 18
business units, we believe that we will be able to address our funding needs.
Further, as the Company's business strategy evolves, the Company will
continuously evaluate its optimal capital structure to ensure that it meets the
Company's overall corporate strategy.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates. In particular, the accuracy
of the estimates is subject to changes and fluctuations in revenues, operating
costs and development expenses, which can be affected by the Company's ability
to (1) effectively and efficiently manage the expansion of its network and
operations and the build-out of its City Enterprise Network infrastructure in
the targeted metropolitan markets, (2) implement its strategy to become a
leading provider of e*business services in Europe, (3) obtain infrastructure
contracts, rights-of-way, licenses, interconnection agreements and other
regulatory approvals necessary to complete and operate its network, construct
its City Enterprise Network infrastructure and implement data and Web-hosting
capability in London, Amsterdam, Frankfurt, Paris and other European cities, (4)
negotiate favorable contracts with suppliers, including large volume discounts
on purchases of capital equipment, (5) access markets, attract sufficient
numbers of customers and provide and develop services for which customers will
subscribe and (6) effectively and efficiently manage the recently announced
restructuring of the Company's business and its initiatives to sell its
SME-focused Business Services and Central Europe business units. The Company's
revenues and costs are also dependent upon factors that are not within its
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 its 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. 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. The Company continues to evaluate its capital
program in light of business needs, expansion plans and market conditions for
acquiring certain assets.
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of $567.2 million and $1.1
billion as of September 30, 2000 and December 31, 1999, respectively. The
Company had restricted cash of $239.5 million and $312.1 million as of September
30, 2000 and December 31, 1999, respectively. The restricted cash relates to
cash held in escrow that is primarily related to the Company's future funding
requirements for the FLAG Atlantic Limited joint venture and for bank guarantees
issued in connection with leases in the ordinary course of business. In the
fourth quarter of 2000, the Company contributed its $100 million required cash
capital contribution into the Flag Atlantic Limited joint venture, which had
been reflected as a restricted cash amount in the Company's balance sheet. As a
result of the Company's recent sale of its equity interest in Flag Atlantic
Limited to Flag Telecom, and subject to the satisfaction of certain customary
conditions precedent, the Company expects to receive approximately $130 million
of the $135 million from Flag Telecom during the fourth quarter of 2000, with
the remaining $5 million received upon the resolution of certain regulatory
matters.
The Company used cash of $165.3 million and $203.3 million for its
operating activities for the nine months ended September 30, 2000 and 1999,
respectively. The Company also used cash of $507.8 million and $554.5 million
for its investing activities in the nine months ended September 30, 2000 and
1999, respectively. The Company cannot assure you that its operations will
achieve or sustain profitability or positive cash flow in the future. If the
Company cannot achieve and sustain operating profitability or positive cash flow
from operations, the Company may not be able to meet its debt service
obligations or working capital requirements.
On November 13, 2000, GTS commenced soliciting consents from holders of its
9 7/8% Senior Notes due 2005 (the "Notes") to amendments of certain provisions
of the indenture governing the Notes. The consent solicitation will expire at
5:00 p.m. New York City time on November 21, 2000, unless extended by GTS prior
to such date.
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<PAGE> 19
GTS will make a payment equal to 1% of the principal amount of the Notes
($10 in cash for each $1,000 principal amount of Notes) to each holder of Notes
whose consent is received and accepted prior to the expiration date. The record
date of the consent solicitation is November 17, 2000. GTS will pay this consent
payment promptly after the execution of a supplemental indenture (the
"Supplemental Indenture") effecting the amendments described below.
The purpose of the consent solicitation is to permit GTS to modify the
"Event of Default" provisions of the indenture governing the Notes in order to
provide GTS with greater flexibility to, among other things, restructure the
operations of its Global TeleSystems (Europe) Limited subsidiary (formerly,
Esprit Telecom Group plc) ("Esprit Telecom") and address the indebtedness
represented by Esprit Telecom's publicly traded debt securities and long-term
debt owed to GTS by Esprit Telecom. Such additional flexibility is sought to
reduce the possibility that actions taken to restructure such operations or
address such indebtedness may negatively impact the creditworthiness of the
Company, other than Esprit Telecom and its subsidiaries. The amendments sought
in the consent solicitation would remove as events of default under the
indenture defaults under any indebtedness of, judgments against, and bankruptcy,
insolvency and related filings and other events of, Esprit Telecom or any of its
direct or indirect subsidiaries.
Through its Business Services division, the Company offers a portfolio of
bundled voice, data and Internet services ("Business Services") to
small-to-medium sized enterprises and pan-European companies in 18 European
countries. The Business Services division is comprised primarily of Esprit
Telecom and its subsidiaries. Esprit Telecom has incurred and is expected to
continue to incur net losses, operating losses, negative cash flow from
operating activities and losses from operations before interest, income taxes,
depreciation and amortization, foreign currency gains (losses), other income
(expense) and non-recurring expenses ("EBITDA"). Esprit Telecom could continue
to generate net losses even after it begins to generate positive EBITDA.
Although Esprit Telecom has experienced revenue growth in each of the last three
years, such growth should not be considered to be indicative of future revenue
growth, if any. Management expects that Esprit Telecom's existing operations
will continue to generate negative cash flows and net losses for at least the
next 12 months.
Esprit Telecom has incurred substantial debt to finance its business. As of
September 30, 2000, the amount of such indebtedness represented by Esprit
Telecom's publicly traded debt securities consisted of $230 million principal
amount of its 11 1/2% Senior Notes due 2007, DM 125 million principal amount of
its 11 1/2% Senior Notes due 2007, $150 million principal amount of its 10 7/8%
Senior Notes due 2008 and DM 150 million principal amount of its 11% Senior
Notes due 2008 and the amount of such indebtedness represented by long-term debt
owed to GTS was $104.2 million.
GTS contributed $87.5 million and $193.8 million to Esprit Telecom in the
form of equity during 1999 and in the first nine months of 2000, respectively.
There can be no assurances that GTS will continue to fund additional amounts
required by Esprit Telecom during the remainder of 2000 or in 2001. If Esprit
Telecom's available sources of funds are insufficient to make principal and
interest payments on Esprit Telecom's debt, it may need to renegotiate the terms
of, or refinance, such debt. If Esprit Telecom fails to make the required
payments or to comply with the covenants under such debt, Esprit Telecom will
default on those debt obligations. An event of default would permit holders of
Esprit Telecom's debt to accelerate the maturity of that debt, which in turn
could, absent GTS's receipt of the consents being solicited in the consent
solicitation to the proposed amendments to the indenture governing the Notes and
execution of the Supplemental Indenture, cause a potential cross-acceleration
under such indenture. Such a cross-acceleration could have a material adverse
effect on the creditworthiness of the Company and could result in a significant
reduction in the value of the Notes.
GTS believes that the proposed amendments to the indenture governing the
Notes will provide it with the flexibility necessary to, among other things,
effectively restructure Esprit Telecom's operations and address the indebtedness
represented by Esprit Telecom's publicly traded debt securities and long-term
debt owed to GTS by Esprit Telecom. GTS is in the process of evaluating the
range of alternatives that will be afforded by such flexibility. The range of
alternatives may include (a) the disposition (via sale, merger, etc.) of Esprit
Telecom and/or the remaining portion of the Company's Business Services
operations; (b) a rationaliza-
19
<PAGE> 20
tion/restructuring of Esprit Telecom and the remaining portion of the Company's
Business Services operations; (c) the negotiation of modifications to, or
restructuring of, the indebtedness represented by Esprit Telecom's publicly
traded debt securities and long-term debt owed to GTS by Esprit Telecom and/or
(d) seeking protection for Esprit Telecom under the insolvency laws of the
United Kingdom, the United States or any other applicable jurisdiction. There
can be no assurance that any such sale, rationalization, restructuring or other
efforts will be successful or that Esprit Telecom will be able to continue to
fund losses resulting from its operations or service the indebtedness
represented by its publicly traded debt securities and long-term debt owed to
GTS by Esprit Telecom. GTS currently intends that Esprit Telecom will continue
to meet its trade obligations consistent with past practices while GTS addresses
its options with regard to Esprit Telecom.
Substantially all of the Company's operations and therefore consolidated
financial results are subject to fluctuations in currency exchange rates. The
Company's operations transact their business in the following significant
currencies: Euro, British Pound Sterling, and the Russian Ruble. For those
operating companies that transact 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 continuously
evaluates the materiality of foreign exchange exposures in different countries
and the financial instruments available to mitigate these exposures. The Company
has designed and implemented reporting processes to monitor the potential
exposure on an ongoing basis and the Company will use the output of this process
to execute financial hedges to cover foreign exchange exposure when practical
and economically justified.
IMPACT OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union, including Belgium, The Netherlands, Ireland, France, Germany, Italy and
Spain, where the Company has operations, established fixed conversion rates
between their existing sovereign currencies and a new currency called the "Euro"
(E). These countries adopted the Euro as their common legal currency on that
date. The Euro trades on currency exchanges and is available for non-cash
transactions. Hereafter and until January 1, 2002, the existing sovereign
currencies will remain legal tender in these countries. On January 1, 2002, the
Euro is scheduled to replace the sovereign legal currencies of these countries.
The Company has significant operations within the European Union including
many of the countries that have adopted the Euro. The Company continues to
evaluate the impact the Euro will have on its continuing business operations and
no assurances can be given that the Euro will not have material adverse affect
on the Company's business, financial condition and results of operations.
However, the Company does not expect the Euro to have a material effect on the
Company's competitive position as a result of price transparency within the
European Union as the Company has always operated as a pan-European business
with transparent pricing in ECU for the majority of its customers.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The only significant change since December 31, 1999 is the execution in
July 2000 by a subsidiary of the Company of an eight year, $550 million,
multi-currency bank facility. Of the $550 million committed under the bank
facility, $275 million is currently available, of which, as of September 30,
2000, the subsidiary has borrowed E200 million, or $175.9 million. The bank
facility exposes us to changes in interest and foreign exchange rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity -- Corporate."
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.1 Loan Agreement dated 14 July 2000 among Global TeleSystems
Europe Holdings B.V. and Bank of America International
Limited, Deutsche Bank AG London, Dresdner Bank AG London
Branch and the other parties named therein.
27 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------
<S> <C>
August 10, 2000 Announcement of Second Quarter 2000 financial results.
September 19, 2000 Announcement of the resignation of H. Brian Thompson from,
and the election of Robert J. Amman to, the positions of
Chairman and Chief Executive Officer.
US $550 million multi-currency bank facility entered into by
an indirect subsidiary, Global TeleSystems Europe Holdings
B.V.
In connection with the Company's migration of certain
functions to Europe, the Company expects to dispose of its
web-hosting center that is under construction in Northern
Virginia.
</TABLE>
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GLOBAL TELESYSTEMS, INC.
(Registrant)
By: /s/ JEFFREY H. VON DEYLEN
----------------------------------
Jeffrey H. Von Deylen
Senior Vice President, Finance
(Principal Accounting Officer)
Date: November 14, 2000
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.1 Loan Agreement dated 14 July 2000 among Global TeleSystems
Europe Holdings B.V. and Bank of America International
Limited, Deutsche Bank AG London, Dresdner Bank AG London
Branch and the other parties named therein.
27 Financial Data Schedule
</TABLE>
