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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
(COMMISSION FILE NUMBER: 0-23717)
GLOBAL TELESYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3168423
(State of incorporation) (I.R.S. Employer Identification No.)
4121 WILSON BOULEVARD
7TH FLOOR
ARLINGTON, VIRGINIA 22203
(Address of principal executive office)
(703) 258-3401
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At April 30, 2001 there were 214,485,538 outstanding shares of common stock
of the registrant.
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TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements of Global TeleSystems, Inc. (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
2000..................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2001 and 2000............................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000............................................ 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.................... 19
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ............................................. 19
Signatures ............................................................................... 21
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PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 2001 2000
---------- ------------
(IN MILLIONS, EXCEPT SHARE DATA)
Current Assets
Cash and cash equivalents, including restricted cash ............ E. 183.8 E. 308.2
Accounts receivable, net ........................................ 94.1 111.8
Net assets of the Golden Telecom business segment ............... 193.3 175.0
Other current assets ............................................ 100.1 109.2
---------- ----------
Total Current Assets .................................... 571.3 704.2
Property and equipment, net ....................................... 1,529.3 1,427.0
Other non-current assets, principally goodwill and intangible
assets, net ..................................................... 414.6 410.7
Total Assets ............................................ E. 2,515.2 E. 2,541.9
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable ................................................ E. 173.1 E. 226.1
Accrued expenses ................................................ 160.3 157.2
Current portion of debt and capital lease obligations ........... 42.3 32.8
Net liabilities of the Business Services business segment ....... 675.0 594.2
Estimated loss on the divestiture of Golden Telecom ............. 27.5 --
Deferred revenue ................................................ 52.4 56.7
---------- ----------
Total Current Liabilities ............................... 1,130.6 1,067.0
Long-term debt and capital lease obligations .................... 2,317.0 2,146.8
Other non-current liabilities, principally deferred revenue ..... 200.6 177.3
---------- ----------
Total Liabilities ....................................... 3,648.2 3,391.1
Commitments and Contingencies
Redeemable preferred stock, $0.0001 par value (10,000,000 shares
authorized; 100,000 shares issued and outstanding) .............. 591.0 542.9
Shareholders' Deficit
Common stock, $0.10 par value (540,000,000 shares authorized;
203,869,538 shares issued and outstanding at March 31, 2001
and December 31, 2000 ........................................... 18.0 18.0
Additional paid-in capital ........................................ 1,371.3 1,376.4
Accumulated other comprehensive (loss) income ..................... (33.4) 36.4
Accumulated deficit ............................................... (3,079.9) (2,822.9)
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Total Shareholders' Deficit ............................. (1,724.0) (1,392.1)
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Total Liabilities and Shareholders' Deficit ............. E. 2,515.2 E. 2,541.9
========== ==========
The accompanying notes are an integral part of these financial statements.
Prior period amounts have been restated from U.S. Dollar to Euro (see Note 3)
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GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
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(IN MILLIONS, EXCEPT
PER SHARE DATA)
Revenues ...................................................... E. 121.3 E. 109.8
Operating expenses:
Access and network services ................................. 72.0 41.3
Selling, general and administrative ......................... 38.8 34.2
Depreciation and amortization ............................... 53.7 32.0
Business disposition and restructuring related charges ...... 5.9 --
Equity related -- non-cash compensation ..................... 3.9 0.6
--------- --------
Total operating expenses ...................................... 174.3 108.1
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(Loss) income from operations ................................. (53.0) 1.7
Other income (expense):
Interest expense ............................................ (53.0) (44.5)
Interest income ............................................. 7.7 24.7
Foreign currency gains (losses) ............................. (32.7) 1.0
Other income ................................................ 2.0 --
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Total other expenses .......................................... (76.0) (18.8)
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Loss before income taxes ...................................... (129.0) (17.1)
Income taxes .................................................. 0.7 4.3
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Net loss from continuing operations ........................... (129.7) (21.4)
Loss from discontinued business operations .................... (127.3) (125.3)
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Net loss ...................................................... (257.0) (146.7)
Preferred dividends ........................................... (8.9) (9.2)
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Net loss applicable to common shareholders .................... E. (265.9) E. (155.9)
========= =========
Loss per common share:
Net loss from continuing operations (includes preferred
dividends) per share ..................................... E. (0.68) E. (0.16)
Net loss per share -- discontinued operations ............... (0.62) (0.67)
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Net loss per share .......................................... E. (1.30) E. (0.83)
========= =========
Weighted average common shares outstanding .................... 204.0 188.7
========= =========
The accompanying notes are an integral part of these financial statements.
Prior period amounts have been restated from U.S. Dollar to Euro (see Note 3)
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GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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2001 2000
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(IN MILLIONS)
Net Cash Used in Operating Activities of Continuing Operations ............ E. (108.4) E. (64.5)
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Cash flow from Investing Activities
Purchases of property and equipment ..................................... (105.5) (107.0)
Restricted cash and other investing activities .......................... 22.7 0.7
Investments in and advances to ventures, net of repayments .............. (0.5) --
--------- ---------
Net Cash Used in Investing Activities of Continuing Operations ........ (83.3) (106.3)
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Cash Flow from Financing Activities
Proceeds from debt, net of debt issue costs ............................. 99.6 --
Repayments of debt and capital lease obligations ........................ (5.2) (5.1)
Net proceeds from stock options.......................................... -- 3.3
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Net Cash Provided by Financing Activities of Continuing
Operations .......................................................... 94.4 (1.8)
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Effect of exchange rate changes on cash and cash equivalents .............. 41.8 28.4
Cash used in discontinued operations ...................................... (37.3) (72.7)
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Net decrease in cash and cash equivalents ................................. (92.8) (216.9)
Cash and cash equivalents at beginning of period .......................... 219.1 907.9
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Cash and Cash Equivalents at End of Period ................................ E. 126.3 E. 691.0
========= =========
Supplemental Disclosure of Cash Flow Information:
Capitalization of leases ................................................ E. 37.3 E. 78.9
========= =========
Issuance of common shares or notes for interest in business
ventures .............................................................. -- 91.3
========= =========
Conversion of debt into common shares ................................... -- 81.7
========= =========
The accompanying notes are an integral part of these financial statements.
Prior period amounts have been restated from U.S. Dollar to Euro (see Note 3)
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GLOBAL TELESYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS OPERATIONS
Global TeleSystems, Inc. ("GTS" or "the Company"), is a provider of data,
internet 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 also operates a cross-border fiber-optic network and a
Tier-1 IP backbone (Ebone). In addition, until May 14, 2001, GTS was the
majority owner of Golden Telecom, Inc. ("Golden Telecom"), which offers a
variety of fixed-line and mobile telecommunications services in Russia, Ukraine
and other former Soviet nations.
2. SIGNIFICANT 2001 BUSINESS ACTIVITIES (SUBSEQUENT EVENTS)
November 2000 Restructuring
In November 2000, the Company announced a restructuring of its operations
(the "Restructuring") to focus on those areas of its business that management
believes have stronger prospects for long-term success and profitability, and to
divest, liquidate or otherwise address those operations that management believes
are non-strategic or which are unsustainable as currently constituted and are a
drain on the Company's limited financial and other resources. The decision to
undertake the Restructuring was prompted in large measure by the significant
downturn in the financial and stock markets, which commenced in March 2000. As a
consequence of that downturn, the availability of equity and debt financing,
which is essential and was previously plentiful for below-investment grade
emerging and more-established alternative telecommunications providers, like the
Company, has substantially decreased or has become available only with onerous
terms and conditions. At the same time, the pace of competition in the Company's
markets has intensified. The Company cannot predict when these conditions will
improve. Consequently, the Company determined that a substantial restructuring
was required to achieve self-sufficiency with regard to its financial resources
and to implement its business plan. Although the Company believes it has made
significant progress to complete the Restructuring and to enhance its liquidity
position, the future viability of the Company will depend upon the Company's
ability to complete those aspects of the Restructuring, which will fund its
operations through the first quarter of 2002, and to access additional capital
to fund its operations after the first quarter of 2002.
In connection with the Restructuring, the Company will focus on its core
competency of providing broadband services to traditional carriers, Internet
service providers, application service providers, other Web-centric entities and
data intensive pan-European corporations. The objective of the Restructuring is
to position the Company as a data and Internet services-only provider, which the
Company expects will have positive operating results, although there can be no
assurance in this regard. As part of the Restructuring, the Company reorganized
into four "stand alone" business units -- GTS Broadband Services; GTS Business
Services; GTS Central Europe; and Golden Telecom. Among other things, the
objective of separating itself into these four business units was to enable the
Company to sell its investment interest in its Business Services and Central
Europe. In addition, during the first quarter of 2001, the Company entered into
negotiations to sell all or part of its 62% interest in Golden Telecom, a
subsidiary with operations in Russia and other countries in the former Soviet
Union, which was split-off from the Company in an initial public offering, which
occurred in October 1999.
As disclosed in greater detail below, during the first and second quarters
of 2001, the Company made significant progress in achieving steps necessary to
complete the Restructuring and to enhance its liquidity position. The Company
has held certain discussions with third parties concerning the sale of the
Central European businesses. These discussions have not resulted in any
definitive agreements for the purchase of any Central European assets and there
can be no assurance that the Company will conclude any such agreements.
Golden Telecom Divestiture
On May 14, 2001, the Company announced that it had closed the sale to a
group of buyers of 12.2 million shares of the common stock of Golden Telecom for
approximately E.142.2 million. Of the E.142.2 million, approximately E.79.6
million of cash and a promissory note for approximately E.62.6 million were
received at closing. The promissory note is due to be paid at the end of May
2001. The buyers also have a right to purchase from the Company, during the 60
day period following May 14th, up to an additional E.28.4 million of Golden
Telecom shares at a price of E.12.51 per share, and, if certain conditions are
met, the right to purchase the Company's remaining interest in Golden Telecom
during the twelve-month period following May 14th for the greater of E.12.51 per
share or a 20% premium to the average closing share price for the 60-day period
preceding the purchase date. After
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the closing discussed above, the Company owned approximately 2.9 million common
shares of Golden Telecom, or approximately 11.6% of the outstanding Golden
Telecom common shares. In addition, in connection with such closing, three of
the four Company representatives on the Golden Telecom Board of Directors
resigned and the Company's representation no longer constituted a majority of
the membership on that Board. As discussed in further detail in Note 3 "Basis of
Presentation -- Discontinued Operations", the Company anticipates that it will
recognize a loss of approximately E.27.5 million, upon the completion of the
divestiture of Golden Telecom.
Business Services Divestiture
On March 28, 2001, the Company announced a consensual agreement with an
unofficial committee of the senior noteholders of Global TeleSystems (Europe)
Limited, formerly known as Esprit Telecom Group plc, ("Esprit") under which,
among other things, the obligation to repay approximately E.572.8 million of
senior debt owed to the noteholders will be exchanged for a 90% ownership
interest in a new legal entity comprised of Esprit and other GTS subsidiaries
that comprise GTS's "Business Services" business unit, subject to approval of a
scheme of arrangement (the "Scheme") by the noteholders and the U.K. courts. GTS
will either directly or indirectly own the remaining 10% of this new company and
has agreed, upon certain conditions, to provide on or after May 1, 2001 up to
E.35 million in secured financing for working capital and on or after April 1,
2001 up to E.20 million in secured debt financing (which will be repaid with
preferred stock in the new company upon consummation of the restructuring of
Esprit) to be used by this new company to purchase backbone transmission
services from the Company. On March 28, 2001, Esprit commenced a consent
solicitation to obtain approvals from its noteholders to allow the Company's
secured financing to proceed. Esprit obtained the required consents on April 10,
2001, and on that date it entered into supplemental indentures related to the
Esprit notes, which will allow such secured financing to proceed.
As of May 18, 2001, holders representing approximately 70% of the
outstanding aggregate principal amount of the Esprit notes had signed a Lock-Up
Agreement dated as of March 27, 2001, pursuant to which, among other things,
such holders have agreed, subject to certain conditions, to support and act in
good faith to ensure approval of and the implementation of the Scheme. Further,
on May 18, 2001, Esprit filed an application in the High Court for an order
summoning a meeting of noteholders pursuant to Section 425 of the Companies Act
to consider the Scheme under that statute. A preliminary hearing has been set
for May 24, 2001 to review our application. The application requests that the
meeting take place by June 30, 2001. Noteholders approval will be conditional on
the High Court sanctioning the Scheme and the occurrence of other administrative
events. As discussed in further detail in Note 3 "Basis of Presentation -
Discontinued Operations", upon the completion of the debt restructuring, the
Company will record a gain of at least E.600.0 million, principally attributable
to the early extinguishment of the Esprit note obligations.
Amended Bank Facility
On April 5, 2001, the Company announced that a subsidiary had reached an
agreement to amend its Bank Facility (the "Amended Bank Facility") while a
longer-term credit facility is negotiated. Assuming the satisfaction of certain
conditions, the Amended Bank Facility provides up to E.300 million in available
funds, through March 2002, at which time the Amended Bank Facility converts into
a one-year term loan. As of March 31, 2001, the subsidiary had drawn down E.200
million of these funds. The subsidiary will have access to available funding
under the Amended Bank Facility limited to the lesser of (i) a range of funding,
based on the subsidiary's business plan, from E.180 million to E.300 million
from April 2001 through March until the termination of the Amended Bank
Facility), and (ii) an amount determined by a monthly calculated rolling
three-month annualized cash flow multiple.
Conversion of Debt to Equity
On April 18, 2001, the Company entered into an agreement with a third party
to exchange the third party's holding of $53,080,000 aggregate principal amount
of the Company's 5.75% senior subordinated convertible debentures due 2010 (the
"Converted Bonds") for shares of the Company's common stock. The terms of the
exchange agreement resulted in GTS issuing 10,616,000 of its common shares for
the early extinguishment of the Converted Bonds, which were discharged and
cancelled as a result of the transaction. Of the 10,616,000 common shares
issued, 1,928,396 shares of common stock were issued upon the conversion of the
Converted Bonds. The Company will recognize an extraordinary gain within its
second quarter 2001 consolidated statements of operations of approximately
E.49.4 million (this amount is net of unamortized debt issuance costs of
approximately E.1.7 million). As of April 30, 2001, aggregate principal amount
of E.465.0 million of the 5.75% senior subordinated convertible debentures
remained outstanding.
On May 18, 2001, the Company entered into agreements with three other third
party holders of an additional $51,415,000 aggregate principal amount of such
convertible debentures to exchange such debentures for 11,876,865 shares of the
Company's common stock. Of the 11,876,865 common shares to be issued, 1,867,907
shares of common stock will be issued pursuant to the conversion of such bonds.
Although there can be no assurance, such exchange is expected to be completed by
May 25, 2001 and, if completed, the Company will recognize an additional
extraordinary gain within its second quarter 2001 consolidated statements
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of operations of approximately E.48.2 million (this amount is net of unamortized
debt issuance costs of approximately E.1.4 million).
3. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally accepted in the United States 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 2000 audited
consolidated financial statements and the notes related thereto. The results of
operations for the three months ended March 31, 2001 may not be indicative of
the operating results for the full year.
Reclassifications have been made to the 2000 condensed consolidated
financial statements in order to conform to the 2001 presentation.
Change in the Reporting Currency
The Company changed its reporting currency from U.S. Dollars to Euros
("Euro") effective with this first quarter 2001 Form 10-Q report. This change
was made because management believes that it results in a more meaningful
presentation of the financial position and results of operations of the Company
since the majority of its operations are conducted in the Euro or in currencies
that are linked to the Euro. All prior period amounts have been translated to
the Euro using the U.S. Dollar to Euro exchange rate in effect for those periods
and as such they depict the same trends as the previously issued financial
statements in US Dollars.
Functional Currency
The functional currency for the Company's legal entities is the currency
that most transactions are conducted in for a specific legal entity. The assets
and liabilities for the Company's legal entities are translated into the Euro
currency using current exchange rates at the balance sheet dates. Statement of
operations items are translated at average exchange rates prevailing during the
period. The resulting translation adjustments are recorded in the foreign
currency translation adjustment account within the stockholders' deficit section
of the consolidated balance sheets. Foreign currency transaction gains or losses
are included in the calculation of net loss.
Discontinued Operations Presentation
As previously discussed in Note 2. "Significant 2001 Business Activities
(Subsequent Events)", the Company initiated a Restructuring in November 2000,
and as a result of the Restructuring, the Company has entered into agreements
during the first and second quarters of 2001 related to its planned divestiture
of Golden Telecom and the Company's Business Services business operations. The
Company has accounted for the disposal of these segments under Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" ("APB 30"). APB 30 requires
that the results of continuing operations be reported separately from those of
discontinued operations for all periods presented and that any gain or loss from
disposal of a segment of a business be reported in conjunction with the related
results of discontinued operations. Further, Emerging Issues Task Force No.
95-18 "Accounting and Reporting for a Discontinued Business Segment When the
Measurement Date Occurs after the Balance Sheet Date but Before the Issuance of
Financial Statements", provides that the estimated loss from disposal and
segment operating results should be presented as discontinued operations in the
yet to be issued financial statements, if those statement are filed subsequent
to the measurement date. Accordingly, the Company has restated its results of
operations for all prior periods.
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Accordingly, the operations of the Golden Telecom and Business Services
business segments have been presented within these financial statements on a
discontinued basis and comprise:
MARCH 31, MARCH 31,
2001 2000
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(IN MILLIONS)
Revenues from the discontinued business operations:
Golden Telecom ........................................ E. 35.4 E. 24.5
Business Services ..................................... 125.8 133.4
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Total Revenues from discontinued business operations..... E. 161.2 E. 157.9
========= =========
Losses from the discontinued operations of the Golden
Telecom business segment, net of income taxes of
E.0.2 for the quarter ended March 31, 2001............. E. (4.4) E. (2.5)
Estimated loss on the divestiture of Golden Telecom...... (27.5) --
Loss from the discontinued operations of the Business
Services business segment.............................. (95.4) (122.8)
--------- ---------
Loss from discontinued business operations............... E. (127.3) E. (125.3)
========= =========
Operating losses in respect of the Business Services segment that will be
incurred during the second quarter of 2001 will be deferred until the gain on
the disposal is realized. No income taxes arise on either the estimated loss on
the divestiture of Golden Telecom or on the losses from the discontinued
operations of the Business Services business segment.
The net assets of Golden Telecom included within the consolidated balance
sheet consist of:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(IN MILLIONS)
Current assets.................................................... E. 137.0 E. 151.4
Total assets...................................................... 385.6 371.3
Current liabilities............................................... 37.8 38.8
Total liabilities and minority interests.......................... 192.3 196.3
-------- --------
Net assets reflected in the Company's consolidated balance sheet.. E. 193.3 E. 175.0
======== ========
Estimated loss on the divestiture of Golden Telecom................. E. 27.5 E. --
======== ========
The net liabilities of Business Services business operations included within
the consolidated balance sheet consist of:
MARCH 31, DECEMBER 31,
2001 2000
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(IN MILLIONS)
Current assets............................................................ E. 796.5 E. 758.9
Total assets.............................................................. 1,833.0 1,716.2
Current liabilities....................................................... 1,499.6 1,406.3
Total liabilities......................................................... 2,508.0 2,310.4
---------- ----------
Net liabilities reflected in the Company's consolidated balance sheets.... E. (675.0) E. (594.2)
========== ==========
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended in June 2000. The Company
adopted the new statement effective January 1, 2001. The statement requires the
Company to recognize all derivatives on the balance sheet at fair value. Due to
our minimal use of derivatives, the adoption of the new statement did not have a
significant effect on our results of operations or financial position.
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4. BUSINESS DISPOSITION AND RESTRUCTURING RELATED CHARGES
2001 Business Initiatives
In the first quarter 2001, the Company has recorded a charge of
approximately E.5.9 million which is attributable to the previously discussed
November 2000 Restructuring. The charge is principally related to accrued
retention payments to be made to certain key personnel for continuing their
employment with the Company during the Restructuring and will be paid upon the
attainment of certain milestones, and to a lesser extent for severance payments
for terminated personnel who were not notified until 2001. The Company
anticipates that it will continue to incur business disposition and
restructuring related charges throughout 2001 as it continues to implement its
Restructuring and refine its estimates. The nature of the charges will be
attributable to additional key personnel retention payment accruals, additional
severance for personnel and costs associated with improving the business
operations. At March 31, 2001, E.3.3 million of the E.5.9 million remains as an
accrual for additional cash payments that the Company expects to pay during the
remainder of 2001.
2000 Business Initiatives
During 2000, the Company underwent several business initiatives to improve
the operating performance of its business, and as a result, the Company had
recognized a substantial charge within its Statement of Operations of E.1,127.3
million (E.1,076.2 million non-cash charge and E.51.1 million cash charge). The
non-cash charge of E.1,076.2 million was principally associated with the
write-off of impaired goodwill and intangible assets, write-off of fixed assets
and other non-current assets. While the cash charge of E.51.1 million was
principally associated with severance for personnel, transaction related costs
(professional advisors) and facility closure related costs.
At March 31, 2001, E.28.6 million remains as an accrual for additional cash
payments that the Company expects to pay in 2001.
5. EQUITY RELATED -- NON-CASH COMPENSATION:
The Company has recognized non-cash compensation costs associated with
equity securities, restricted shares and stock options, of E.3.9 million and
E.0.6 million in the three months ended March 31, 2001 and 2000, respectively.
The Company anticipates that it will have recognized non-cash compensation
charges in the range of E.17.0 million and E.23.0 million, by the end of 2001.
6. EARNINGS PER SHARE (SUPPLEMENTAL INFORMATION)
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share, if applicable,
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 reflects the dilutive effect of all outstanding common
share equivalent securities of the Company for the periods presented, applying
the treasury stock method, and is being presented for informational purposes
only:
THREE MONTHS ENDED
MARCH 31,
---------------------------
(IN MILLIONS) 2001 2000
------- ------
Weighted average outstanding of:
Common stock shares........................................... 203.9 188.7
Contingently issuable shares -- Restricted stock (vested)..... 0.1 0.7
------- ------
204.0 189.4
Dilutive effect of:
Common shares issuable upon debt conversion................... 17.0 17.0
Preferred stock............................................... 14.5 14.5
Restricted shares, unvested................................... 4.0 0.2
Employee stock options........................................ 0.3 5.7
Warrants...................................................... -- 7.2
------- ------
Common stock and common stock equivalents .................. 239.8 234.0
------- ------
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7. COMPREHENSIVE LOSS
The following table reflects the calculation of comprehensive loss for GTS
for the three months ended March 31, 2001 and 2000:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
--------- ---------
(IN MILLIONS)
Net loss......................................... E. (257.0) E. (146.7)
Other comprehensive loss.........................
Preferred Dividends............................ (8.9) (9.2)
Foreign currency translation adjustments....... (69.8) 23.3
--------- ---------
Comprehensive loss............................... E. (335.7) E. (132.6)
========= =========
8. RELATED PARTY TRANSACTIONS
Included in revenues for the quarter ended March 31, 2001 and 2000, were
E.18.2 million and E.12.3 million of revenues, respectively, from the Company's
discontinued Business Services business segment. Included in revenues for the
quarter ended March 31, 2001 and 2000, were E.0.4 million and E.0.1 million of
revenues, respectively, from the Company's discontinued Golden Telecom business
segment.
Included in access and network services costs for the quarter ended March
31, 2001 and 2000, were E.0.6 million and E.0.1 million of access and network
services costs, respectively, from the Company's discontinued Business Services
business segment. Included in access and network services costs for the quarter
ended March 31, 2001 was E.1.0 million of access and network services costs from
the Company's discontinued Golden Telecom business segment. There was no access
and network services costs for the quarter ended March 31, 2000 from the
Company's discontinued Golden Telecom business segment.
As of March 31, 2001 and December 31, 2000, the Company had net receivables
of E.350.0 million and E.324.8 million, respectively, that were due from the
Company's discontinued Business Services business segment. Pursuant to the
Business Services Divestiture, certain of these receivables will be realized by
the Company in the second quarter 2001, as the Company will be acquiring the
Ebone related business assets that are currently owned by the Business Services
business operations, prior to their divestiture. These Ebone assets will be sold
to the Company based on a fair market value appraisal. As reflected in the
agreement with the Esprit noteholders, the remaining amount of net receivables
will be contributed as either equity or will be forgiven. As of March 31, 2001
and December 31, 2000, the Company had net receivables of E.13.2 million and
E.13.4 million, respectively, that were due from the Company's discontinued
Golden Telecom business segment.
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9. SEGMENT INFORMATION
Based on the Company's current organizational structure, the Company
operates in two reportable business segments: Ebone and Central Europe. A
Corporate segment will be absorbed into Ebone upon the completion of the
Company's restructuring and sale of businesses activities. Prior to the first
quarter of 2001, the Company had two other reportable segments: Golden Telecom
and Businesses Services, but due to their pending divestiture and the Company's
decision to follow discontinued operations accounting for those businesses, the
Company is no longer disclosing those businesses as reportable business segments
(see Note 3. "Basis of Presentation - Discontinued Operations Presentation").
The Company's reportable segments represent business units that offer
telecommunication products and service offerings, that include, the provision of
broadband, internet, data and voice services to its customers, which are
currently being managed separately due to the geographic dispersion of their
operations.
Information about the Company's segments is as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
--------- ---------
(IN MILLIONS)
Revenues:
Ebone.................................................... E. 100.3 E. 98.8
Central Europe........................................... 25.1 10.7
Corporate/Eliminations................................... (4.1) 0.3
---------- ----------
Total Revenue............................................... 121.3 109.8
Income (loss) from operations:
Ebone.................................................... (26.7) 25.2
Central Europe........................................... (0.5) (0.2)
Corporate................................................ (25.8) (23.3)
---------- ----------
Total (loss) income from operations......................... (53.0) 1.7
Unallocated other income/(expense):
Interest, net............................................ (45.3) (19.8)
Other income (expenses), net............................. (30.7) 1.0
---------- ----------
Loss from continuing operations before income taxes.... E. (129.0) E. (17.1)
Assets:
Ebone.................................................... 2,091.2 1,844.9
Central Europe........................................... 152.0 141.2
Corporate................................................ 78.7 493.7
---------- ----------
Total assets from continuing business operations............ E. 2,321.9 E. 2,479.8
Capital expenditures:
Ebone.................................................... 76.7 76.4
Central Europe........................................... 6.1 9.2
Corporate................................................ 22.7 21.3
---------- ----------
Total capital expenditures.................................. E. 105.5 E. 107.0
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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 months ended March 31, 2001
and 2000 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.
NOVEMBER 2000 RESTRUCTURING
In November 2000, the Company announced a restructuring of its operations
(the "Restructuring") to focus on those areas of its business that management
believes have stronger prospects for long-term success and profitability, and to
divest, liquidate or otherwise address those operations that management believes
are non-strategic or which are unsustainable as currently constituted and are a
drain on the Company's limited financial and other resources. The decision to
undertake the Restructuring was prompted in large measure by the significant
downturn in the financial and stock markets, which commenced in March 2000. As a
consequence of that downturn, the availability of equity and debt financing,
which was essential and was previously plentiful for below-investment grade
emerging and more-established alternative telecommunications providers, like the
Company, has substantially decreased or has become available only with onerous
terms and conditions. At the same time, the pace of competition in the Company's
markets has intensified. The Company cannot predict when these conditions will
improve. Consequently, the Company determined that a substantial restructuring
was required to achieve self-sufficiency with regard to its financial resources
and to implement its business plan. Although the Company believes it has made
significant progress during the first and second quarters of 2001 to complete
the Restructuring and to enhance its liquidity position, the future viability of
the Company will depend upon the Company's ability to complete those aspects of
the Restructuring, which will fund its operations through the first quarter of
2002, and to access additional capital to fund its operations after the first
quarter of 2002.
In connection with the Restructuring, the Company will focus on its core
competency of providing broadband services to traditional carriers, Internet
service providers, application service providers, other Web-centric entities and
data intensive pan-European corporations. The objective of the Restructuring is
to position the Company as a data and Internet services-only provider, which the
Company expects will have positive operating results, although there can be no
assurance in this regard. As part of the Restructuring, the Company reorganized
into four "stand alone" business units -- GTS Broadband Services; GTS Business
Services; GTS Central Europe; and Golden Telecom. Among other things, the
objective of separating itself into these four business units was to enable the
Company to sell its investment interest in its Business Services and Central
Europe. In addition, during the first quarter of 2001, the Company entered into
negotiations to sell all or part of its 62% interest in Golden
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Telecom, a subsidiary with operations in Russia and other countries in the
former Soviet Union, which was split-off from the Company in an initial public
offering, which occurred in October 1999.
As disclosed in greater detail below, during the first and second quarters
of 2001, the Company made significant progress in achieving steps necessary to
complete the Restructuring and to enhance its liquidity position. The Company
has held certain discussions with third parties concerning the sale of the
Central European businesses. These discussions have not resulted in any
definitive agreements for the purchase of any Central European assets and there
can be no assurance that the Company will conclude any such agreements.
BUSINESS STRATEGY
As a result of the Restructuring, the Company will focus on enhancing and
building on its position as the premier provider of broadband network solutions
and services in Europe. The unit will expand its services to address the data
and Internet needs of 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-capacity direct Internet access as well as a host of new
high-end data applications, such as streaming media services.
The Company's goal is to maintain and enhance our position as a leading
pan-European provider of broadband, Internet, and data to communications
carriers, Internet service providers and other high-usage enterprise customers.
In order to achieve this goal, we will build on the strengths of:
o Our pan-European broadband fiber optic network, which extends
approximately 21,000 kilometers, connects 56 cities in 20 countries, and
is the largest such operational network in Europe;
o Our pan-European Tier 1 Internet Protocol backbone, which carries
approximately 5% of the total Internet traffic, 25% of all European
Internet traffic and is the first European IP network to operate at 10
gigabits per second; and
o Our large base of carrier, Internet service provider and other
bandwidth- and Internet-intensive customers.
The key elements of our strategy for achieving this goal are as follows:
o Focus our activities on our core expertise in optical and IP networking;
o Build on our leadership position in the carriers' carrier market to
penetrate a broader bandwidth intensive customer base;
o Exploit the reach and capacity of our fiber optic network; and
o Capitalize on the "Ebone" brand name, which we adopted in January 2001
as the brand for our broadband unit.
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RESULTS OF OPERATIONS
Organizational structure change
THE FINANCIAL RESULTS THAT ARE REFLECTED BELOW ARE NOT INDICATIVE OF THE
FUTURE FINANCIAL RESULTS OF THE COMPANY AS A RESULT OF THE RESTRUCTURING.
The following table sets forth the statement of operations as a percentage
of revenues:
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
------ ------
Revenues ................................................... 100.0% 100.0%
Access and network services ................................ 59.4 37.6
Selling, general and administrative ........................ 32.0 31.1
Depreciation and amortization .............................. 44.3 29.1
Business disposition, merger and restructuring related
charges .................................................. 4.9 0.0
Equity related -- non-cash compensation .................... 3.2 0.5
------ ------
(Loss) income from operations ............................. (43.7) 1.5
Interest expense ........................................... (43.7) (40.5)
Interest income ............................................ 6.3 22.5
Foreign currency gains/(losses) ............................ (27.0) 0.9
Other income/(expense) ..................................... 1.6 0.0
------ ------
Loss before income taxes ................................... (106.3) (15.6)
Income taxes ............................................... 0.6 3.9
------ ------
Net loss from continuing operations ........................ (106.9) (19.5)
Loss from discontinued business operations ................. (104.9) (114.1)
------ ------
Net loss ................................................... (211.9) (133.6)
------ ------
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2000
Revenues. Consolidated revenues increased to E.121.3 million, or 10.5%, for
the three months ended March 31, 2001 as compared to E.109.8 million for the
three months ended March 31, 2000. Components of revenue for the three months
ended March 31, 2001 were Ebone (E.100.3 million), Central Europe (E.25.1
million) and Corporate/Eliminations (E.(4.1) million). Components of revenues
for the three months ended March 31, 2000 were comprised of Ebone (E.98.8
million), Central Europe (E.10.7 million) and Corporate/Eliminations (E.0.3
million). The growth in revenue 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.
Access and Network Services. Access and network services costs for the three
months ended March 31, 2001 increased to E.72.0 million or 59.4% of revenues as
compared to E.41.3 million or 37.6% of revenues for the three months ended March
31, 2000. The increase in access and network services costs as a percentage of
revenues in the first quarter of 2001 is attributable to increased direct
network operating and maintenance costs and increases in local access costs as
required for customer connectivity.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 2001 increased to E.38.8 million
or 32.0% of revenues as compared to E.34.2 million or 31.1% of revenues for the
three months ended March 31, 2000. Components of selling, general and
administrative expenses for the three months ended March 31, 2001 were Ebone
(E.20.4 million, or 20.3% of Ebone revenues), Central Europe (E.5.7 million, or
22.7% of Central Europe revenues) and Corporate (E.12.7 million). Components of
selling, general and administrative expenses for the three months ended March
31, 2000 were Ebone (E.14.0 million, or 14.1% of Ebone revenues), Central Europe
(E.2.6 million, or 24.3% of Central Europe revenues) and Corporate (E.17.6
million). The increase in selling, general and administrative expenses as a
percentage of revenues for Ebone, is reflective of increased sales and marketing
efforts, development of the Company's new brand identity and increased
administrative costs required for the Company's increased customer base.
Depreciation and Amortization. Depreciation and amortization increased to
E.53.7 million or 44.3% of revenues for the three months ended March 31, 2001 as
compared to E.32.0 million or 29.1% of revenues for the three months ended March
31, 2000. 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.
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Business Disposition and Restructuring Related Costs. In the first quarter
2001, the Company has recorded a charge of approximately E.5.9 million which is
attributable to the previously discussed November 2000 Restructuring. The charge
is principally related to accrued retention payments to be made to certain key
personnel for continuing their employment with the Company during the
Restructuring; and will be paid upon the attainment of certain milestones, and
to a lesser extent for severance payments for terminated personnel who were not
notified until 2001. The Company anticipates that it will continue to incur
business disposition and restructuring related charges throughout 2001 as it
continues to implement its Restructuring and refine its estimates. The nature of
the charges will be attributable to additional key personnel retention payment
accruals, additional severance for personnel and costs associated with improving
the business operations.
Equity Related -- Non-Cash Compensation. The Company has recognized non-cash
compensation costs associated with equity securities, restricted shares and
stock options, of E.3.9 million and E.0.6 million in the three months ended
March 31, 2001 and 2000, respectively. The Company anticipates that it will have
recognized non-cash compensation charges in the range of E.17.0 million and
E.23.0 million, by the end of 2001.
Interest Expense. Interest expense increased to approximately E.53.0 million
for the three months ended March 31, 2001 as compared to E.44.5 million for the
three months ended March 31, 2000. This increase in interest expense is
primarily attributable to the interest associated with the July 2000 bank credit
facility.
Interest Income. Interest income decreased to approximately E.7.7 million
for the three months ended March 31, 2001 as compared to E.24.7 million for the
three months ended March 31, 2000. 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.
Foreign Currency Loss. The Company recognized foreign currency losses of
E.32.7 million in the three months ended March 31, 2001 as compared to gains of
E.1.0 million in the three months ended March 31, 2000. This increase is
primarily due to the impact of foreign currency fluctuations on the Company's
unhedged US dollar denominated debt obligations.
Loss From Discontinued Business Operations. As a result of the
Restructuring, the Company has entered into agreements during the first and
second quarters of 2001 related to its planned divestiture of Golden Telecom and
the Company's Business Services business operations. The Company has accounted
for the disposal of these segments under Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), and accordingly, the Company recognized a
loss from discontinued business operations of E.127.3 million and E.125.3
million in the first quarters ended March 31, 2001 and 2000, respectively.
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 business
strategy and meet the funding requirements of its operations, including losses
from operations, as well as to provide capital for its business development
initiatives. We anticipate that we will incur between E.175 million to E.250
million in cash capital expenditures in 2001 to implement our business plan, and
these amounts include the requirements for our Central European business segment
and the transatlantic capacity participation discussed below. The cash capital
expenditure amounts disclosed above excludes the cash capital expenditure
requirements for our Golden Telecom and Business Services businesses that we are
in the process of divesting. Further, pursuant to the arrangement that the
Company has negotiated with the Esprit bondholders, the Company contemplates
that it will be responsible to fund E.65 million to its Business Services
business operations during 2001, the E.65 million includes funding since the
beginning of the year.
On May 14, 2001, the Company announced that it had closed the sale to a
group of buyers of 12.2 million shares of the common stock of Golden Telecom for
approximately E.142.2 million. Of the E.142.2 million, approximately E.79.6
million of cash and a promissory note for approximately E.62.6 million were
received at closing. The promissory note is due to be paid at the end of May
2001. The buyers also have a right to purchase from the Company, during the 60
day period following May 14th, up to an additional E.28.4 million of Golden
Telecom shares at a price of E.12.51 per share, and, if certain conditions are
met, the right to purchase the Company's remaining interest in Golden Telecom
during the twelve-month period following May 14th for the greater of E.12.51
price per share or a 20% premium to the average closing share price for the
60-day period preceding the purchase date. After the closing discussed above,
the Company owned approximately 2.9 million common shares of Golden Telecom, or
approximately 11.6% of the outstanding Golden Telecom common shares. In
addition, in connection with such closing, three of
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the four Company representatives on the Golden Telecom Board of Directors
resigned and the Company's representation no longer constituted a majority of
the membership on that Board.
On April 5, 2001, the Company announced that a subsidiary had reached an
agreement to amend the bank facility (the "Amended Bank Facility") entered into
July 2000 while a longer-term credit facility is negotiated. The Amended Bank
Facility provides up to E.300 million in available funds through March 2002, at
which time the Amended Bank Facility converts into a one-year term loan.
Effectiveness of the Amended Bank Facility is subject to the satisfaction of
certain conditions precedent which the subsidiary is in the process of
completing. As of March 31, 2001, the subsidiary had drawn down E.200 million of
these funds. The subsidiary will have access to available funding under the
Amended Bank Facility limited to the lesser of (i) a range of funding, based on
the borrower's business plan, from E.180 million to E.300 million from April
2001 through March 2002 (until the termination of the Amended Bank Facility),
and (ii) an amount determined by a monthly calculated rolling three-month
annualized cash flow multiple.
In addition, in connection with the Esprit Restructuring, the Company
expects that the Esprit Notes will be exchanged for a ninety percent ownership
interest in a new business unit comprised of Esprit and other GTS subsidiaries
that comprise GTS's "Business Services" business unit, subject to approval of a
scheme of arrangement by the U.K. courts. The Company's obligation to fund
Esprit and this new business unit will be limited to borrowings under two
secured loan facilities.
On April 18, 2001, the Company entered into an agreement with a third party
to exchange the third party's holding of $53,080,000 aggregate principal amount
of the Company's 5.75% senior subordinated convertible debentures due 2010 (the
"Converted Bonds") for shares of the Company's common stock. The terms of the
exchange agreement resulted in GTS issuing 10,616,000 of its common shares for
the early extinguishment of the Converted Bonds, which were discharged and
cancelled as a result of the transaction. Of the 10,616,000 common shares
issued, 1,928,396 shares of common stock were issued upon conversion of the
Converted Bonds. The Company will recognize an extraordinary gain within its
second quarter 2001 consolidated statements of operations of approximately
E.49.4 million (this amount is net of unamortized debt issuance costs of
approximately E.1.7 million). As of April 30, 2001, aggregate principal amount
of E.465.0 million of the 5.75% senior subordinated convertible debentures
remained outstanding. As a result of the conversion, the Company estimates that
it will save E.3.4 million in annual interest cash payments.
On May 18, 2001, the Company entered into agreements with three other third
party holders of an additional $51,415,000 aggregate principal amount of such
convertible debentures to exchange such debentures for 11,876,865 shares of the
Company's common stock. Of the 11,876,865 common shares to be issued, 1,867,907
shares of common stock will be issued pursuant to the conversion of such bonds.
Although there can be no assurance, such exchange is expected to be completed by
May 25, 2001 and if completed, the Company will recognize an additional
extraordinary gain within its second quarter 2001 consolidated statements of
operations of approximately E.48.2 million (this amount is net of unamortized
debt issuance costs of approximately E.1.4 million). If the conversion occurs,
the Company estimates that it will save E.3.4 million in annual interest cash
payments. In addition, to the extent the shares of common stock issued in
connection with the above-described transactions are sold, such sales are
expected to have a depressive effect on the market price of the Company's common
stock.
The Company may undertake additional actions in order to reduce the amount
of indebtedness on its balance sheet. Among the measures that the Company may
undertake are additional purchases, in private negotiated transactions, of its
outstanding convertible securities, including its 5 3/4% Convertible
Subordinated Debentures due 2010 and the Depositary Shares representing shares
of its 7 1/4% Cumulative Convertible Preferred Stock. Such purchases may take
the form of additional exchanges of newly issued shares of common stock of the
Company for convertible securities surrendered by the holder. Any such
transactions will be made in compliance with applicable securities laws, the
provisions of the instruments governing such convertible securities, the
indenture governing the Company's 9 7/8% Senior Notes due 2005, and the Amended
Bank Facility.
Based on the Company's current existing cash balances (including net
proceeds from, and expected from, the sale of the 12.2 million common shares in
Golden Telecom), projected internally generated funds, the Company's recent
agreement under the Esprit Restructuring to divest its voice focused Business
Services business and available borrowings under the Amended Bank Facility, the
Company believes that it will be able to address its funding requirements into
first quarter 2002. To address its longer term funding needs, the Company is in
the process of potentially divesting of its Central European business operations
and is seeking to refinance its indebtedness under the Amended Bank Facility
(through a long term facility or otherwise), exploring opportunities to reduce
its outstanding debt obligations and seeking additional funding, including
through the issuance of new equity or debt securities. There can be no assurance
that these objectives will be met. 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) consummate the Restructuring, including the Esprit
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Restructuring, (2) meet the financial covenants and other conditions to
borrowing under the Amended Bank Facility, (3) effectively and efficiently
manage the expansion of the Ebone network and operations and the completion of
its City Enterprise Network infrastructure in the targeted metropolitan markets,
(4) implement its strategy to become a leading provider of data and IP to
corporate businesses, (5) limit, to the extent possible, price erosion for
broadband services, (6) access markets, attract sufficient numbers of customers
and provide and develop services for which customers will subscribe, (7)
effectively and efficiently manage the planned sale of our Central Europe
business and (8) negotiate favorable contracts with suppliers, including large
volume discounts on purchases of capital equipment. 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, its funding needs will increase, possibly to a significant
degree, and the Company will expend its capital resources sooner than currently
expected. 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 requirements, expansion plans and market conditions for acquiring
certain assets.
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of E.126.3 million and E.219.1
million as of March 31, 2001 and December 31, 2000, respectively. The Company
had restricted cash of E.57.5 million and E.89.1 million as of March 31, 2001
and December 31, 2000, 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 E.118.4 million and E.64.5 million for its
operating activities for the three months ended March 31, 2001 and 2000,
respectively. In addition, at March 31, 2001, the Company had E.28.6 million of
accrued expenses associated with unpaid liabilities that have resulted from our
Restructuring. The Company also used cash of E74.5 million and E106.3 million
for its investing activities in the three months ended March 31, 2001 and 2000,
respectively. The Company has consistently spent a significant amount of its
investing cash flows on building its telecommunications network. 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 continuing operations transact their business in the following
significant currencies: Euro, British Pound Sterling, and the US Dollar.
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 Euro. 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. 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, 2000, 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
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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, 2000.
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) On December 15, 2000, Global TeleSystems (Europe) Limited, formerly
Esprit Telecom Group plc (Esprit"), announced that it had elected not to pay
scheduled cash interest payments totaling approximately $12.0 million due on
December 15, 2000 on the $150,000,000 principal amount 10E.% Senior Notes due
2008 ("Esprit US Notes due 2008") and DM 150,000,000 principal amount 11% Senior
Notes due 2008 ("Esprit DM Notes due 2008"). Upon the expiration of the
applicable grace period, this payment default matured into an event of default
under the related indentures for the Esprit US Notes due 2008 and the Esprit DM
Notes due 2008. If the indebtedness represented by the Esprit US Notes due 2008
and Esprit DM Notes due 2008 were accelerated, this could, in turn, trigger an
event of default under the $230,000,000 principal amount 11 1/2% Senior Notes
due 2007 ("Esprit US Notes due 2007") and DM 125,000,000 principal amount 11
1/2% Senior Notes due 2007 ("Esprit DM Notes due 2007," together with the Esprit
US Notes due 2007, the Esprit DM Notes due 2008 and the Esprit US Notes due
2008, the "Esprit Notes").
In order to ensure that certain actions relating to Esprit, including
defaults on certain Esprit debt obligations, including the Esprit Notes, or
certain judgment defaults or bankruptcy or insolvency events thereunder did not
trigger a default or event of default under the Company's 9.875% Senior Notes
due 2005 ("GTS 9.875% Notes"), the Company sought consents from the holders of
the GTS 9.875% Notes to amend the indenture for the GTS 9.875% Notes to provide
that an event of default under the Esprit Notes or other Esprit debt obligations
would not trigger a default or event of default under the GTS 9.875% Notes. In
November 2000, the Company paid an aggregate consent fee in the amount of $10.5
million, obtained the requisite consents and such amendments to the indenture
for the GTS 9.875% Notes were effected.
As discussed in greater detail in footnote 2 to the Unaudited Condensed
Consolidated Financial Statements of the Company included in Item 1 of this
report, Esprit has entered into the Lock-up Agreement with certain holders of
the Esprit Notes and expects that the Esprit Notes will be exchanged for a
ninety percent ownership interest in a new business unit comprised of Esprit and
other GTS subsidiaries that comprise GTS's "Business Services" business unit,
subject to approval of a scheme of arrangement by the U.K. courts. The Company's
obligation to fund Esprit and this new business unit will be limited to
borrowings under two secured loan facilities.
(b) In April 1999, the Company issued, for gross proceeds of $500 million in
a private placement, ten million Depositary Shares, each representing 1/100th of
a share of 7.25% cumulative convertible preferred stock (the "Preferred Stock").
Net proceeds of this offering were $485 million, excluding certain transaction
costs. Holders of the Depositary Shares are entitled to a quarterly cash payment
of $0.90625 per Depositary Share (or 7.25% per year per depositary share)
payable on March 15, June 15, September 15 and December 15 of each year
commencing on June 15, 1999. Each Depositary Share has a liquidation preference
of $50 per share and is convertible into GTS common stock at $34.50 per GTS
common share. The Preferred Stock is convertible at any time into 1.45 shares of
common stock. GTS may redeem the shares of the Preferred Stock, in whole or in
part, at its option on or after March 15, 2002.
The Company has not paid dividends on the Preferred Stock payable on
December 15, 2000 and March 15, 2001. As of March 31, 2000, the cumulative
unpaid dividends on the Preferred Stock were $18.1 million. 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 holders of the Preferred Stock have no voting
rights, except that upon the accumulation of six full unpaid quarterly dividends
(whether or not consecutive) the number of members of the Company's Board of
Directors will be immediately and automatically increased by two and the holders
of a majority of the outstanding shares of Preferred Stock, voting together as a
class, will be entitled to elect two members to the Board of Directors of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
DESIGNATION DESCRIPTION
None
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B. Reports on Form 8-K
DATE OF REPORT SUBJECT OF REPORT
January 18, 2001 Announcement of the appointment of Duncan Lewis
as the Company's President and Chief Operating Officer and
the renaming of the Company's Broadband Services division
to "Ebone."
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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
---------------------------------------
Name: Jeffrey H. Von Deylen
Title: Senior Vice President, Finance
(Principal Accounting Officer)
Date: May 21, 2001
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