1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
(COMMISSION FILE NUMBER: 0-23717)
GLOBAL TELESYSTEMS, INC.
(Exact name of registrant as specified in its charter)
---------------------
DELAWARE 94-3068423
(State of incorporation) (I.R.S. Employer Identification No.)
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 July 31, 2000 there were 201,961,532 outstanding shares of common stock
of the registrant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements of Global TeleSystems, Inc. (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 3
and December 31, 1999.......................................
Condensed Consolidated Statements of Operations for the
Three and Six Months
Ended June 30, 2000 and 1999................................ 4
Condensed Consolidated Statements of Cash Flows for the Six 5
Months Ended June 30, 2000 and 1999.........................
Notes to Condensed Consolidated Financial Statements........ 6
Item 2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations...................................
Item 3 Quantitative and Qualitative Disclosures About Market 15
Risk........................................................
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders......... 15
Item 6 Exhibits and Reports on Form 8-K............................ 15
Signatures................................................................ 16
2
3
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(IN MILLIONS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including current restricted
cash................................................... $ 901.4 $1,341.4
Accounts receivable, net.................................. 262.0 239.0
Other current assets...................................... 137.6 106.5
--------- --------
TOTAL CURRENT ASSETS.............................. 1,301.0 1,686.9
Property and equipment, net................................. 1,345.2 1,004.5
Goodwill and intangible assets, net......................... 1,220.4 1,172.9
Other non-current assets.................................... 106.5 137.5
--------- --------
TOTAL ASSETS...................................... $ 3,973.1 $4,001.8
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 269.5 $ 198.6
Accrued expenses.......................................... 253.4 295.3
Current portion of debt and capital lease obligations..... 43.7 122.2
Deferred revenue and other current liabilities............ 91.8 86.6
--------- --------
TOTAL CURRENT LIABILITIES......................... 658.4 702.7
Long-term debt and capital lease obligations................ 2,485.6 2,430.0
Deferred revenue and other non-current liabilities.......... 160.4 123.9
--------- --------
TOTAL LIABILITIES................................. 3,304.4 3,256.6
COMMITMENTS AND CONTINGENCIES
Minority interest........................................... 109.4 114.6
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; 198,803,089 and 184,472,884 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively)............................................. 19.9 18.4
Additional paid-in capital.................................. 1,496.5 1,280.8
Notes receivable due from shareholder....................... (10.7) (10.4)
Accumulated deficit......................................... (1,448.7) (1,160.5)
--------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 57.0 128.3
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 3,973.1 $4,001.8
========= ========
The accompanying notes are an integral part of these financial statements.
3
4
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues............................................... $ 259.3 $ 200.3 $ 511.0 $ 371.2
Operating expenses:
Access and network services.......................... 160.8 113.3 315.4 215.8
Selling, general and administrative.................. 114.8 90.8 231.3 169.4
Depreciation and amortization........................ 68.3 48.4 137.8 87.7
Merger and restructuring costs....................... -- -- -- 63.7
------- ------- ------- -------
Total operating expenses..................... 343.9 252.5 684.5 536.6
Loss from operations................................... (84.6) (52.2) (173.5) (165.4)
Other income (expense):
Interest expense..................................... (57.8) (49.3) (118.7) (96.9)
Interest income...................................... 22.3 15.9 45.8 31.0
Foreign currency losses.............................. (19.3) (6.0) (34.5) (14.1)
Other income/(expense)............................... 0.2 (6.4) 1.1 (11.0)
------- ------- ------- -------
Total other expenses......................... (54.6) (45.8) (106.3) (91.0)
------- ------- ------- -------
Loss before income taxes............................... (139.2) (98.0) (279.8) (256.4)
Income taxes........................................... 4.2 4.2 8.4 8.0
------- ------- ------- -------
Net Loss............................................... (143.4) (102.2) (288.2) (264.4)
------- ------- ------- -------
Preferred dividends.................................... (9.0) (7.6) (18.1) (7.6)
------- ------- ------- -------
Net loss applicable to common shareholders............. $(152.4) $(109.8) $(306.3) $(272.0)
======= ======= ======= =======
Net loss per common share.............................. $ (0.77) $ (0.66) $ (1.58) $ (1.65)
======= ======= ======= =======
Weighted average common shares outstanding............. 197.9 167.6 193.4 164.8
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
4
5
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
(IN MILLIONS)
NET CASH USED IN OPERATING ACTIVITIES....................... $ (101.9) $ (212.4)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment....................... (366.9) (76.7)
Restricted cash........................................... 59.5 14.0
Acquisitions, net of cash acquired........................ -- (346.1)
Other investing activities................................ (7.0) (14.9)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES.................. (314.4) (423.7)
-------- --------
FINANCING ACTIVITIES
Repayments of debt and capital lease obligations.......... (76.3) (43.5)
Net proceeds from issuance of securities.................. 4.6 504.6
Proceeds from debt, net of debt issue costs............... -- 292.3
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.... (71.7) 753.4
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 56.3 30.2
-------- --------
Net (decrease) increase in cash and cash equivalents........ (431.7) 147.5
Cash and cash equivalents at beginning of period............ 1,082.9 998.5
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 651.2 $1,146.0
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalization of leases.................................. $ 171.2 $ 96.3
======== ========
Issuance of common shares or notes for interest in
business ventures...................................... $ 99.7 $ 244.1
======== ========
Conversion of debt into common shares..................... $ 79.0 $ --
======== ========
The accompanying notes are an integral part of these financial statements.
6
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 six months ended June 30, 2000 may not
be indicative of the operating results for the full year.
On May 16, 2000, the GTS stockholders approved an amendment to the
Company's Certificate of Incorporation to change the Company's name from Global
TeleSystems Group, Inc. to "Global TeleSystems, Inc." Additionally, the GTS
stockholders approved an increase in the Company's authorized common stock from
270 million to 540 million shares.
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.
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
6
7
the Company for the periods presented. The components of basic and diluted
earnings per share were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
Net loss (A)................................ $(143.4) $(102.2) $(288.2) $(264.4)
Preferred stock dividends................... (7.6) (18.1) (7.6)
------- ------- ------- -------
Net loss available for common
shareholders (B)..................... $(152.4) $(109.8) $(306.3) $(272.0)
======= ======= ======= =======
Weighted average outstanding of:
Common stock shares (C)................... 197.9 167.6 193.4 164.8
Dilutive effect of:
Common shares issuable upon debt
conversion............................. 17.0 28.7 17.0 28.7
Preferred stock........................... 14.5 14.5 14.5 14.5
Warrants.................................. 5.9 7.6 6.7 7.5
Employee stock options.................... 1.2 14.8 7.6 14.0
Restricted shares, unvested............... 0.1 0.2 0.1
------- ------- ------- -------
Common stock and common stock
equivalents (D)...................... 236.6 233.4 239.3 229.7
Interest on convertible stock, net of taxes
(E)....................................... $ 6.5 $ 8.9 $ 13.0 $ 17.8
------- ------- ------- -------
Earnings per share:
Basic (B/C)............................... $ (0.77) $ (0.66) $ (1.58) $ (1.65)
======= ======= ======= =======
Diluted ((A+E)/D)......................... $ (0.58) $ (0.40) $ (1.15) $ (1.07)
======= ======= ======= =======
4. COMPREHENSIVE INCOME (LOSS)
The following table reflects the calculation of comprehensive income (loss)
for GTS for the three and six months ended June 30, 2000 and 1999:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN MILLIONS)
Net loss.................................... $(143.4) $(102.2) $(288.2) $(264.4)
Other comprehensive income (loss) Preferred
Dividends................................. (9.0) (7.6) (18.1) (7.6)
Foreign currency translation
adjustments............................ (5.5) 1.6 28.3 (5.4)
------- ------- ------- -------
Comprehensive loss.......................... $(157.9) $(108.2) $(278.0) $(277.4)
======= ======= ======= =======
5. MERGER AND RESTRUCTURING COSTS
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 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, $1.0 million remains as an accrual, at June 30, 2000, for
additional transactional costs to be paid.
The $19.8 million third quarter 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
8
8
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. Of the $19.8 million, $6.5 million remains as an accrual,
at June 30, 2000, for cash payments that the Company expects to incur as part of
the plan of abandonment.
The $59.0 million fourth quarter 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 principally a result of the acquisitions and organizational
consolidations that the Company effected in 1999. Of the $59.0 million, $24.1
million remains as an accrual, at June 30, 2000, for additional cash payments
that the Company expects to incur as part of its plan of restructuring.
6. SEGMENT INFORMATION
Based on the Company's organizational structure, the Company operates 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.
Information about the Company's segments is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
Revenue:
Europe........................................... $ 232.4 $ 177.1 $ 459.8 $ 323.8
Golden Telecom................................... 26.9 23.2 51.2 47.4
-------- -------- -------- --------
Total Revenue............................ 259.3 200.3 511.0 371.2
Income (loss) from operations:
Europe........................................... (81.2) (48.4) (166.6) (161.1)
Golden Telecom................................... (3.4) (3.8) (6.9) (4.3)
-------- -------- -------- --------
Total loss from operations............... (84.6) (52.2) (173.5) (165.4)
Unallocated other income / (expense):
Interest, net.................................... (35.5) (33.4) (72.9) (65.9)
Other expenses, net.............................. (19.1) (12.4) (33.4) (25.1)
-------- -------- -------- --------
Loss before income taxes...................... $ (139.2) $ (98.0) $ (279.8) $ (256.4)
Assets:
Europe........................................... $3,615.6 $3,261.9
Golden Telecom................................... 357.5 222.4
-------- --------
Total assets............................. $3,973.1 $3,484.3
======== ========
7. SUPPLEMENTAL INFORMATION
Due to the significance of the Company's activities that are transacted in
the Euro (?) foreign currency, the Company believes that it is appropriate to
provide supplemental Euro reporting currency financial results. Further, the
Company continues to believe that the US Dollar is the appropriate reporting
currency for its SEC reported consolidated financial statements and disclosures.
8
9
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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
Revenues........................................... 277.3 189.5 532.3 343.3
Operating expenses:
Access and network services...................... 172.0 107.2 328.6 199.5
Selling, general and administrative.............. 122.8 85.9 240.8 156.6
Depreciation and amortization.................... 73.0 45.8 143.4 81.2
Merger and restructuring costs................... -- -- -- 57.3
-------- -------- -------- --------
Total operating expenses................. 367.8 238.9 712.8 494.6
Loss from operations............................... (90.5) (49.4) (180.5) (151.3)
======== ======== ======== ========
8. SUBSEQUENT EVENTS
Line of Credit Facility
On July 17, 2000, the Company announced that one of its subsidiaries had
executed an eight (8) year, US $550 million, multi-currency, line of credit
facility. The line of credit 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.
Under the terms of the agreement, US $275 million will become available
upon satisfaction of certain customary conditions, such as the execution of
various security agreements, with the remainder of the US $550 million becoming
available once certain additional conditions have been satisfied.
Purchase of Minority Interest in GTS Europe B.V.
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., including grantees of GTS Europe B.V.'s stock
options. Upon the completion of this exchange, the Company, as of July 26, 2000,
owns 100% of the outstanding common shares of GTS Europe B.V.; however, the
remaining 318 options of GTS Europe B.V. will become exercisable into GTS Europe
B.V. common shares in September 2000. Further, pursuant to the October 15, 1999
exchange agreement, the Company is obligated to exchange its common shares for
the GTS Europe B.V. shares that will be issued upon the exercise of the 318
options.
This 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 will result
in excess purchase price over the fair value of assets acquired of approximately
$37.2 million, which will be recorded in the third quarter of 2000.
Third Quarter 2000 Restructuring Initiative
On August 1, 2000, the Board of Directors of the Company formally approved
management's plan of restructuring its business operations. This plan of
restructuring is focused on separating the Company's non-core business from its
core strategic businesses and streamlining operations, including headcount
reductions/redeployment, reductions of its corporate headquarters location, the
centralization of finance and billing operations and sales office consolidation.
These actions are expected to result in the reduction by the end of 2000 of
approximately 400 positions from the Company's staffing levels. The Company
expects that it will record a one-time charge of between $15 million to $20
million for employee severance and lease termination costs in the third quarter
of 2000.
9
10
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 six months ended June
30, 2000 and 1999 and of certain factors that management believes are likely to
affect the Company's prospective financial condition. This information should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and the notes related thereto appearing elsewhere in this document.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
those concerning (i) projected traffic volume, (ii) future revenues and costs
and (iii) changes in the Company's competitive environment contain
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this report. Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Report.
The factors described in this report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements 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
The Company's goal is to become Europe's premier independent e*business
services provider and to maintain and enhance its position as a leading
pan-European provider of broadband, Internet, data and voice services to
communications carriers, Internet service providers and other high-usage
customers. In order to achieve this goal, the Company will build on the
strengths of its pan-European broadband fiber optic network, its pan-European IP
backbone and its position as a leading supplier of communications services to
businesses. The key elements of its strategy for achieving these goals are as
follows:
- Expand its services portfolio to support the communications and
e-business activities of its customers;
- Leverage its distribution network to further penetrate its existing
customer base and reach new customers;
- Build on its leadership position to penetrate a broadband, data and IP
intensive customer base;
10
11
- Continue to invest in the reach and capacity of its fiber optic network;
- Build infrastructure and extend its network closer to customers by;
- Expanding and enhancing the transatlantic capacity of the network and
- Build or deploy data and web-hosting centers to support Web-based
services.
- Build local city networks (CEN) to connect broadband users in major
metropolitan cities.
- Enhance brand name recognition
As part of the Company's business strategy, the Company expects to continue
to expand through additional significant acquisitions and by entering into
additional joint ventures and other cooperative business relationships. The
Company believes that such opportunities currently exist in Europe and in the
United States and the Company is continually evaluating these opportunities.
Certain of these transactions, if consummated, may be material to the Company's
operations and financial condition.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations as a percentage
of revenues:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
Revenues............................................ 100.0% 100.0% 100.0% 100.0%
Access and network services......................... 62.0 56.6 61.7 58.2
Selling, general and administrative................. 44.3 45.3 45.3 45.6
Depreciation and amortization....................... 26.3 24.2 27.0 23.6
Merger and restructuring costs...................... -- -- -- 17.2
----- ----- ----- -----
Loss from operations................................ (32.6) (26.1) (34.0) (44.6)
Interest expense.................................... (22.3) (24.6) (23.2) (26.1)
Interest income..................................... 8.6 7.9 9.0 8.4
Foreign currency losses............................. (7.5) (3.0) (6.8) (3.8)
Other income/(expense).............................. 0.1 (3.1) 0.2 (3.0)
----- ----- ----- -----
Loss before income taxes............................ (53.7) (48.9) (54.8) (69.1)
Income taxes........................................ 1.6 2.1 1.6 2.2
----- ----- ----- -----
Net loss............................................ (55.3)% (51.0)% (56.4)% (71.3)%
===== ===== ===== =====
Preferred dividends................................. (3.5) (3.8) (3.5) (2.0)
----- ----- ----- -----
Net loss applicable to common shareholders.......... (58.8)% (54.8)% (59.9)% (73.3)%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Revenue. Consolidated revenue increased to $259.3 million, or 29.5%, for
the three months ended June 30, 2000 as compared to $200.3 million for the three
months ended June 30, 1999. Components of revenue for the three months ended
June 30, 2000 were Europe ($232.4 million) and Golden Telecom ($26.9 million).
Revenue for the three months ended June 30, 1999 was comprised of Europe ($177.1
million) and Golden Telecom ($23.2 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, the expansion of the
network and the acquisitions that were completed in 1999.
Access and Network Services. Access and network services costs for the
three months ended June 30, 2000 increased to $160.8 million or 62.0% of
revenues as compared to $113.3 million or 56.6% of revenues for the three months
ended June 30, 1999. The increase in access and network services costs as a
percentage of revenues in the second quarter of 2000 is attributable to
increased settlement and interconnect costs paid to
11
12
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
expects that these investments should 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.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended June 30, 2000 increased to $114.8 million or
44.3% of revenues as compared to $90.8 million or 45.3% of revenues for the
three months ended June 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; 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 the third quarter of 2000.
Depreciation and Amortization. Depreciation and amortization increased to
$68.3 million or 26.3% of revenues for the three months ended June 30, 2000 as
compared to $48.4 million or 24.2% of revenues for the three months ended June
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. The
Company expects that depreciation expense will continue to increase in
subsequent periods as the Company's network expansion efforts continue.
Interest Expense. Interest expense increased to approximately $57.8 million
for the three months ended June 30, 2000 as compared to $49.3 million for the
three months ended June 30, 1999. This increase in interest expense is
attributable to the interest associates with the issuance in November 1999 of
?500.9 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 $22.3 million
for the three months ended June 30, 2000 as compared to $15.9 million for the
three months ended June 30, 1999. This increase was due to the interest earned
from the Company's short-term investment of the proceeds received from financing
activities.
Foreign Currency Loss. The Company recognized foreign currency losses of
$19.3 million in the three months ended June 30, 2000 as compared to losses of
$6.0 million in the three months ended June 30, 1999. This increase is primarily
due to the impact of foreign currency fluctuations on the Company's unhedged
debt obligations.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Revenue. Consolidated revenue increased to $511.0 million, or 37.7%, for
the six months ended June 30, 2000 as compared to $371.2 million for the six
months ended June 30, 1999. Components of revenue for the six months ended June
30, 2000 were Europe ($459.8 million) and Golden Telecom ($51.2 million).
Revenue for the six months ended June 30, 1999 was comprised of Europe ($323.8
million) and Golden Telecom ($47.4 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.
Access and Network Services. Access and network services costs for the six
months ended June 30, 2000 increased to $315.4 million or 61.7% of revenues as
compared to $215.8 million or 58.2% of revenues for the
12
13
six months ended June 30, 1999. The increase in access and network services
costs as a percentage of revenues in the second quarter of 2000 is attributable
to increased settlement and interconnect costs paid to third parties and direct
network operating and maintenance costs. The Company's 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 expects that these
investments should 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.
Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended June 30, 2000 increased to $231.3 million or
45.3% of revenues as compared to $169.4 million or 45.6% of revenues for the six
months ended June 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 the third quarter of 2000.
Depreciation and Amortization. Depreciation and amortization increased to
$137.8 million or 27.0% of revenues for the six months ended June 30, 2000 as
compared to $87.7 million or 23.6% of revenues for the six months ended June 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. The
Company expects that depreciation expense will continue to increase in
subsequent periods as the Company's network expansion efforts continue.
Merger and Restructuring Costs. In connection with the business combination
of GTS (Europe) Ltd. in the first quarter of 1999, the Company recognized a
$63.7 million charge to earnings for transaction and integration costs.
Interest Expense. Interest expense increased to approximately $118.7
million for the six months ended June 30, 2000 as compared to $96.9 million for
the six months ended June 30, 1999. This increase in interest expense is
attributable to the interest associates with the issuance in November 1999 of
?500.9 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 $45.8 million
for the six months ended June 30, 2000 as compared to $31.0 million for the six
months ended June 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
$34.5 million in the six months ended June 30, 2000 as compared to losses of
$14.1 million in the six months ended June 30, 1999. This increase is primarily
due to the impact of foreign currency fluctuations on the Company's unhedged
debt obligations.
THIRD QUARTER RESTRUCTURING INITIATIVE
On August 1, 2000, the Board of Directors of the Company formally approved
management's plan of restructuring its business operations. This plan of
restructuring is focused on separating the Company's non-core business from its
core strategic businesses and streamlining operations, including headcount
reductions/redeployment, the centralization of finance and billing operations
and sales office consolidation. The
13
14
Company expects that it will record a one-time charge of between $15 million to
$20 million for employee severance and lease termination costs in the third
quarter of 2000.
Further, the Company anticipates that this restructuring plan should yield
pro forma cost savings in the range of $25 million to $30 million.
LIQUIDITY AND CAPITAL RESOURCES
CORPORATE
The telecommunications industry is capital intensive. In order for the
Company to successfully compete, the Company will require substantial capital to
continue to develop its telecommunications networks, implement its e*Business
strategy and meet the funding requirements of the Company's operations,
including losses from operations, as well as to provide capital for the
Company's acquisition and business development initiatives. The Company
currently expects that it will incur additional capital expenditures, including
capital leases, of between $500 million and $700 million through June 30, 2001,
to implement its current strategic capital expenditure plan, including the
transatlantic capacity participation discussed below.
The Company is participating in the construction and operation of the FLAG
Atlantic-1 transoceanic cable through its 50% interest in the FLAG Atlantic
Limited joint venture. The Company has agreed pursuant to the terms of the joint
venture to (1) invest $100 million for its interest in the venture, which is to
be paid in October 2000 and (2) purchase capacity on the fiber cable for $200
million.
On July 17, 2000, the Company announced that one of its subsidiaries had
executed an eight (8) year, US $550 million, multi-currency, line of credit
facility ("the New Credit Facility"). The New Credit 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.
The Company believes that its existing cash balances and projected
internally generated funds, should be sufficient to fund its currently
identified capital expenditures, at least through December 31, 2000, including
capital expenditures and payments on the long-term fiber lease arrangements
associated with the network. However, it is possible that the Company will seek
additional financing in the future. Additionally, 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) effectively and
efficiently manage the build-out of the FLAG Atlantic-1 transatlantic cable
through its participation in the FLAG Atlantic Limited joint venture, (4) 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, other European
cities and the U.S., (5) negotiate favorable contracts with suppliers, including
large volume discounts on purchases of capital equipment and (6) 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 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. In addition, if the Company expands its operations at an
accelerated rate or consummate acquisitions, the Company's funding needs will
increase, possibly to a significant degree, and the Company will expend its
capital resources sooner than currently expected. As a
15
15
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. The Company continues to evaluate its capital program in light
of business needs, expansion plans and market conditions for acquiring certain
assets. The Company has flexibility in the timing of its capital program as it
relates to between $100 million and $150 million for the remainder of the year.
This relates to certain activities that have no impact on revenue for
approximately the next twenty-four months.
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of $651.2 million and $1.1
billion as of June 30, 2000 and December 31, 1999, respectively. The Company had
restricted cash of $250.2 million and $312.1 million as of June 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.
The Company used cash of $101.9 million and $212.4 million for its
operating activities for the six months ended June 30, 2000 and 1999,
respectively. The Company also used cash of $314.4 million and $423.7 million
for its investing activities in the six months ended June 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.
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'
(?). 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
16
16
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes since December 31, 1999.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2000, the Company held its annual meeting of shareholders. In
connection with the meeting, the Company solicited proxies pursuant to
Regulation 14 under the Securities Exchange Act of 1934 from holders of record
of its common stock as of March 31, 2000. Each of the Company's four nominees
for election to its Board of Directors was elected to a term ending at the
Company's annual meeting of shareholders to be held in 2003. Four additional
proposals were submitted to shareholder for approval and were approved. The
votes cast on each such proposal were as follows:
(1) Approval of the increase in the Company's authorized common stock from
270 million to 540 million shares -- FOR 142,185,035 shares; AGAINST 2,251,047;
ABSTAIN 118,805 shares
(2) Approval of the change in the Company's name -- FOR 144,361,271 shares;
AGAINST 89,380; ABSTAIN 104,236 shares
(3) Approval of the Company's Employee Stock Purchase Plans -- FOR
144,732,540 shares; AGAINST 2,671,329; ABSTAIN 151,018 shares
(4) Ratification of selection of Ernst & Young, LLP as the Company's
independent auditors for 2000 -- FOR 144,400,824 shares; AGAINST 58,779 shares;
ABSTAIN 95,284 shares
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
DESIGNATION DESCRIPTION
----------- -----------------------
27 Financial Data Schedule
B. Reports on Form 8-K
DATE OF REPORT SUBJECT OF REPORT
-------------- -----------------------
None
16
17
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 GROUP, INC.
(Registrant)
By:
--------------------------------------
/s/ JEFFREY H. VON DEYLEN
Name: Jeffrey H. Von Deylen
Title: Senior Vice President,
Finance (Principal
Accounting Officer)
Date: August 11, 2000
17
18
EXHIBIT INDEX
DESIGNATION DESCRIPTION
----------- -----------
27 Financial Data Schedule