1
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 JUNE 30, 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 July 31, 2001 there were 257,327,221 outstanding shares of common stock
of the registrant.
2
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 June 30, 2001 and December 31, 2000 ..... 3
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2001 and 2000 ................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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 .................................................................... 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk ......................... 25
PART II. OTHER INFORMATION
Item 3 Defaults Upon Senior Securities .................................................... 26
Item 5 Other Information .................................................................. 26
Item 6 Exhibits and Reports on Form 8-K ................................................... 28
Signatures ..................................................................................... 29
3
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2001 2000
------------ ------------
(IN MILLIONS, EXCEPT SHARE DATA)
Current Assets
Cash and cash equivalents, including restricted cash ......... E 154.6 E 308.2
Accounts receivable, net ..................................... 95.2 111.8
Net assets of the Golden Telecom business segment ............ -- 175.0
Other current assets ......................................... 132.1 109.2
--------- ---------
Total Current Assets ................................. 381.9 704.2
Property and equipment, net .................................... 1,479.4 1,427.0
Other non-current assets, principally goodwill and intangible
assets, net................................................... 402.1 410.7
--------- ---------
Total Assets ......................................... E 2,263.4 E 2,541.9
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable ............................................. E 188.0 E 226.1
Accrued expenses ............................................. 257.1 157.2
Current portion of debt and capital lease obligations ........ 1,865.3 32.8
Net liabilities of the Business Services business segment .... 720.4 594.2
Deferred revenue ............................................. 51.3 56.7
--------- ---------
Total Current Liabilities ............................ 3,082.1 1,067.0
Long-term debt and capital lease obligations ................. 318.8 2,146.8
Other non-current liabilities, principally deferred revenue .. 190.4 177.3
--------- ---------
Total Liabilities .................................... 3,591.3 3,391.1
Commitments and Contingencies
Redeemable preferred stock, $0.0001 par value (10,000,000 shares
authorized; 98,065 and 100,000 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively) ............. 610.9 542.9
Shareholders' Deficit
Common stock, $0.10 par value (540,000,000 shares authorized;
226,909,674 and 203,869,538 shares issued and outstanding at June
30, 2001 and December 31, 2000, respectively ................... 20.7 18.0
Additional paid-in capital ..................................... 1,398.4 1,376.4
Accumulated other comprehensive (loss) income .................. (57.2) 36.4
Accumulated deficit ............................................ (3,300.7) (2,822.9)
--------- ---------
Total Shareholders' Deficit .......................... (1,938.8) (1,392.1)
--------- ---------
Total Liabilities and Shareholders' Deficit .......... E 2,263.4 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)
4
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- ------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues ....................................... E 117.0 E 116.2 E 238.2 E 226.0
Operating expenses:
Access and network services .................. 66.6 41.3 138.6 82.6
Selling, general and administrative .......... 44.0 40.2 82.8 74.4
Depreciation and amortization ................ 61.5 38.5 115.2 70.5
Business disposition and restructuring related
charges..................................... 113.9 -- 119.6 --
Equity related - non-cash compensation ....... 3.9 0.6 7.8 1.2
------- ------- ------- -------
Total operating expenses ....................... 289.9 120.6 464.0 228.7
------- ------- ------- -------
Loss from operations ........................... (172.9) (4.4) (225.8) (2.7)
Other income (expense):
Interest expense ............................. (57.5) (44.1) (110.5) (88.6)
Interest income .............................. 3.8 25.1 11.6 49.8
Foreign currency losses ...................... (17.2) (23.8) (50.0) (22.8)
Other (expense) income ....................... (0.7) 1.7 1.3 1.7
------- ------- ------- -------
Total other expenses ........................... (71.6) (41.1) (147.6) (59.9)
------- ------- ------- -------
Loss before income taxes ....................... (244.5) (45.5) (373.4) (62.6)
Income taxes ................................... 1.5 4.4 2.2 8.7
------- ------- ------- -------
Net loss from continuing operations ............ (246.0) (49.9) (375.6) (71.3)
Loss from discontinued business operations ..... (73.7) (103.5) (201.1) (228.8)
------- ------- ------- -------
Net loss before extraordinary item ............. (319.7) (153.4) (576.7) (300.1)
Extraordinary item ............................. 98.9 -- 98.9 --
------- ------- ------- -------
Net loss ....................................... (220.8) (153.4) (477.8) (300.1)
Preferred dividends ............................ (10.3) (9.7) (19.3) (18.9)
------- ------- ------- -------
Net loss applicable to common shareholders ..... E(231.1) E(163.1) E(497.1) E(319.0)
======= ======= ======= =======
Basic and diluted loss per common share:
Net loss from continuing operations (includes
preferred dividends) per share ............... E (1.17) E (0.30) E (1.87) E (0.47)
Net loss per share - discontinued operations . (0.34) (0.52) (0.95) (1.18)
Net loss per share - extraordinary item ...... 0.45 -- 0.47 --
------- ------- ------- -------
Basic and diluted net loss per share ......... E (1.06) E (0.82) E (2.35) E (1.65)
======= ======= ======= =======
Weighted average common shares outstanding ..... 218.9 197.9 211.6 193.4
======= ======= ======= =======
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)
5
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
--------- -------
(IN MILLIONS)
Net Cash (Used in) Provided by Operating Activities of Continuing
Operations ....................................................... E (148.2) E 4.2
-------- -------
Cash flow from Investing Activities
Purchases of property and equipment ............................ (167.1) (269.3)
Restricted cash and other investing activities ................. 46.1 36.2
Proceeds from disposition of business .......................... 143.7 --
-------- -------
Net Cash Provided by (Used in) Investing Activities of
Continuing Operations ........................................ 22.7 (233.1)
-------- -------
Cash Flow from Financing Activities
Repayments of debt and capital lease obligations ............... (65.3) (22.3)
Net Proceeds from issuance of securities ....................... -- 4.8
Payment of debt issue costs .................................... (0.8) --
Proceeds from debt ............................................. 100.0 --
-------- -------
Net Cash Provided by (Used in) Financing Activities of
Continuing Operations ......................................... 33.9 (17.5)
-------- -------
Effect of exchange rate changes on cash and cash equivalents ..... 88.2 72.0
Cash Used in discontinued operations ............................. (104.1) (305.9)
-------- -------
Net decrease in cash and cash equivalents ........................ (107.5) (480.3)
Cash and cash equivalents at beginning of period ................. 219.1 907.9
-------- -------
Cash and Cash Equivalents at End of Period ....................... E 111.6 E 427.6
======== =======
Supplemental Disclosure of Cash Flow Information:
Capitalization of leases ....................................... E 52.0 E 161.3
======== =======
Issuance of common shares or notes for interest in business
ventures ...................................................... E -- E 100.0
======== =======
Conversion of debt into common shares .......................... E 118.0 E 79.9
======== =======
Conversion of preferred stock into common shares ............... E 11.3 E --
======== =======
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)
6
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 AND 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 the Restructuring, as well as the restructuring of the
Company's and Global TeleSystems Europe B.V.'s ("GTS Europe BV") obligations
under their public debt securities and of the Company's depositary shares
representing its preferred stock, as described in more detail below under, " --
Defaults, Restructuring of Debt and Preferred Stock," 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.
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
entered into agreements to divest its Business Services unit to the holders of
bonds issued by its Global TeleSystems (Europe) Ltd ("Esprit") subsidiary in
exchange for the bonds. The Company also held certain discussions with third
parties concerning the sale of the Central European business. In June 2001, the
Company terminated the active marketing of its Central European business
Division because of unfavorable market conditions for the sale of
telecommunications businesses. In addition, during the second quarter of 2001,
the Company completed the sale of a majority 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. On July 11, 2001, the Company
announced that the buyers had exercised their right to purchase 2.3 million
shares of Golden Telecom for $25 million. After the conclusion of the sale, the
Company owns 0.6 million shares, or approximately 2.4%, of Golden Telecom.
7
Defaults, Restructuring of Debt and Preferred Stock
On June 1, 2001, the Company and GTS Europe BV, a wholly-owned subsidiary of
the Company, announced plans to initiate discussions with the holders of their
debt securities and, in the case of the Company, depositary shares representing
its preferred stock regarding a balance sheet recapitalization to reduce the
principal and interest obligations and dividend requirements of these companies.
In July 2001, the Company announced that representatives of informal committees
representing holders of public debt of the Company and GTS Europe BV and
depositary shares evidencing interests in preferred stock of the Company (the
"Depository Shares") have retained independent advisors, that the advisors have
begun their due diligence investigations and that the Company would make a
formal recapitalization proposal to these representatives in the near future.
The Company and GTS Europe BV continue to pursue such discussions on a proposal
with the representatives of these security holders. Such discussions could
result in, among other things, a consensual agreement between the Company, GTS
Europe BV, and their respective debtholders (and in the case of the Company,
holders of their Depositary Shares) on a plan of restructuring involving the
exchange of non-cash paying securities, including common shares, for the
outstanding debt securities and Depositary Shares. Such a plan of restructuring
could be filed as part of a petition in bankruptcy or equivalent proceedings in
a court or courts with appropriate jurisdiction over the relevant parties and
matters. One possible consequence of such a plan of restructuring and its
approval by such a court or courts could be the ownership and control or partial
ownership of the reorganized entity or entities by such debtholders. If
agreement is reached upon such a plan of restructuring, it is likely that
current Company stockholders would have a significantly reduced interest in such
a reorganized entity and would receive minimal or no consideration for their GTS
stock in connection with such proceedings.
In view of these plans and ongoing discussions, GTS Europe BV did not make
cash interest payments, due on June 1, 2001, of E15.1 million on its E275
million aggregate principal amount of 11% Senior Notes due 2009 and E11.8
million on its E225 million aggregate principal amount of 10.5% Senior Notes due
2006. These non-payments were not cured and matured into events of default under
the indentures related to these notes on July 1, 2001. In addition, on July 2,
2001, GTS did not make a cash interest payment due on that date of $12.4 million
(approximately E13.8 million) on its $362.4 million (approximately E426.6
million) aggregate principal amount then outstanding of its 5.75% Convertible
Senior Subordinated Debentures due 2010. This non-payment was not cured and
accordingly the non-payment matured into an event of default under the indenture
related to these debentures on July 31, 2001. On July 16, 2001, GTS Europe BV
did not make a cash interest payment due on that date of $10.4 million
(approximately E11.6 million) on its $200 million (approximately E235.4 million)
aggregate principal amount of its 10.375% Senior Notes due 2009 and E4.4 million
on its E85 million aggregate principal amount of its 10.375% Senior Notes due
2006. GTS and GTS Europe BV do not expect to cure these payment defaults and, if
they are not cured, such payment defaults will mature into events of default
under the indentures related to these notes on August 15, 2001. Also related to
its recapitalization plans, GTS does not expect to make the $5.2 million
(approximately E5.9 million) cash interest payment due on August 15, 2001 on its
$105 million (approximately E123.6 million) aggregate principal amount of its
9.875% Senior Notes due 2005; and GTS Europe BV does not expect to make the
$15.2 million (approximately E17.3 million) cash interest payment due on August
15, 2001 on its $265 million (approximately E311.9 million) aggregate principal
amount of its 11.5% Senior Notes due 2007. GTS and GTS Europe BV do not expect
to cure these payment defaults and if they are not cured such payment defaults
will mature into events of default under the indentures related to these notes
on September 15, 2001. GTS and GTS Europe BV do not expect to make additional
payments of principal and interest on the above securities during the pendency
of their restructuring efforts.
Deutsche Bank AG London, Dresdner Bank AG London Branch and Bank of America
Securities Limited (the "Bank Group"), which are parties to a credit facility
with Global TeleSystems Europe Holdings B.V., an indirect subsidiary of GTS and
a direct subsidiary of GTS Europe BV, have agreed to waive until August 15, 2001
any defaults under such credit facility caused by the failure to make cash
interest payments on the above-described GTS Europe BV Senior Notes and GTS
Senior Notes and Convertible Debentures. This waiver may expire earlier if the
holders of any such debt securities accelerate such debt, commence legal
proceedings seeking more than $2.5 million in respect of such debt securities or
a bankruptcy or insolvency is commenced by or against GTS or GTS Europe BV in
the U.S. or The Netherlands. The Company is in discussions with the Bank Group
to extend the waiver.
On June 15, 2001, the Company did not make a dividend payment due on its
Depositary Shares, each representing 1/100 of a share of its 7.25% Cumulative
Convertible Preferred Stock. The Company has dividend arrearages of $27.2
million on such Depositary Shares representing non-payment of three consecutive
quarterly dividend payments. The Company does not expect to make future dividend
payments or to pay dividend arrearages on the Depositary Shares during the
pendency of its restructuring efforts. Upon the accumulation of six full unpaid
quarterly dividends (whether or not consecutive) the number of members of GTS's
Board of Directors will be immediately and automatically increased by two and
the holders of a majority of the outstanding Depositary Shares, voting together
as a class, will be entitled to elect two members to the Board of Directors of
GTS.
8
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 E143.7 million. Of the E143.7 million, approximately E68.1 million
of cash was received at closing. The remaining E75.6 million was received by the
end of May. The Company recognized a loss of approximately E20.0 million upon
the completion of the sale. The buyers also received a right to purchase from
the Company, during the 60 day period following May 14th, up to an additional
E28.4 million of Golden Telecom shares at a price of E12.51 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 E12.51 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 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 July 11, 2001, the Company announced that the buyers had exercised their
right to purchase 2.3 million shares of Golden Telecom for $25 million. After
the conclusion of the sale, the Company owns approximately 0.6 million shares,
or approximately 2.4%, 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 E572.8 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
E35 million in secured financing for working capital and on or after April 1,
2001 up to E20 million in secured debt financing (subject to increase in certain
circumstances) 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 July 13, 2001, the
Company announced that the noteholders have approved the Scheme to restructure
the terms of their notes. One-hundred percent of noteholder votes cast were in
favor of the Scheme. Final approval of the scheme by the High Court (the
"Court") of England and Wales occurred on July 27, 2001. As discussed in further
detail in Note 3 "Basis of Presentation - Discontinued Operations Presentation",
upon the completion of the Esprit debt restructuring, the Company will record a
gain of between E600 and E800 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 E300 million in available
funds, through March 2002, at which time the Amended Bank Facility converts into
a one-year term loan. As of June 30, 2001, the subsidiary had drawn down E150
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 E180 million to E300 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. Pursuant to the agreement between GTS
and the Bank Group to waive any defaults through August 15 under the Amended
Bank Facility resulting from the nonpayment of interest on GTS Europe BV's debt
securities described above, the Bank Group's consent will be required for future
funding requests. The Company and the Bank Group continue their discussions
aimed at replacing the current Amended Bank Facility with a longer-term
financing facility.
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 underlying conversion shares
issued upon the conversion of the Converted Bonds with the balance being issued
as additional consideration for the exchange. The Company recognized an
extraordinary gain within its second quarter 2001 consolidated statements of
operations of approximately E49.2 million (this amount is net of unamortized
debt issuance costs of approximately E1.7 million).
9
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 were underlying conversion shares issued upon the
conversion of the Converted Bonds, with the balance being issued as additional
consideration for the exchange. The Company recognized an additional
extraordinary gain within its second quarter 2001 consolidated statements of
operations of approximately E49.7 million (this amount is net of unamortized
debt issuance costs of approximately E1.5 million). As of June 30, 2001, E426.7
million of the Converted Bonds were outstanding.
On July 11, 2001, the Company entered into an agreement with a third party
to exchange the third party's holding of $35.5 million aggregate principal
amount of the Company's 5.75% Senior Subordinated Convertible Debentures due
2010 (the "Converted Debentures") for 8,165,000 shares of GTS common stock. The
terms of the exchange agreement resulted in the early extinguishments of the
Converted Debentures, which were discharged and cancelled as a result of the
transaction. Of the 8,165,000 common shares issued, 1,289,736 shares of common
stock were underlying conversion shares issued upon the conversion of the
Converted Debentures, with the balance being issued as additional consideration
for the exchange. The Company will recognize an extraordinary gain of
approximately E38.8 million (this amount is net of unamortized debt issuance
costs of approximately E0.9 million) within its third quarter 2001 consolidated
statements of operations in connection with this transaction.
After giving effect to all the above-described transactions, as of July 31,
2001, GTS had approximately E373.7 million of such debentures outstanding.
During the second quarter, holders of 193,500 Depositary Shares, each
representing 1/100th of a share of the Company's 7.25% Cumulative Convertible
Preferred Stock ("the Converted Depositary Shares"), exchanged their Depositary
Shares for 280,418 shares of GTS common stock.
In addition, on July 11, 2001, the Company entered into another agreement
with the same third party that exchanged the Converted Debentures on July 11,
2001 to exchange the third party's holding of 4,340,950 Depositary Shares for
21,704,750 shares of GTS common stock. The terms of this exchange agreement
resulted in the cancellation of this third party's Converted Depositary Shares
as a result of the transaction. Of the 21,704,750 common shares issued,
6,290,904 shares of common stock were underlying conversion shares issued upon
the conversion of the Converted Depositary Shares, with the balance being issued
as additional consideration for this exchange. Following completion of this
transaction, the Company had outstanding approximately 5.5 million Depositary
Shares.
To the extent the shares of GTS common stock issued in connection with the
above-described transactions relating to the Company's convertible debentures
and Depositary Shares are sold, such sales are expected to have a depressive
effect on the market price of the Company's common stock.
NYSE Suspension of Trading and Delisting
On June 4, 2001, The New York Stock Exchange ("NYSE") informed the Company that
it had suspended trading in GTS common stock on the NYSE due to indications of
an "abnormally low selling price." The NYSE also informed the Company that it
intended to seek to de-list the Company's common stock. The Company does not
believe that the NYSE's decision is well founded in the NYSE's rules and on July
18, 2001 the Company filed with the NYSE its request for reversal of the June 4,
2001 decision by the NYSE to suspend trading and seek de-listing of the
Company's common stock. The NYSE held a hearing on such matters on August 1,
2001, and upheld its decision to suspend the trading of GTS shares and seek the
de-listing of GTS shares on the NYSE. The Company does not currently intend to
take any further action with respect to this matter. The delisting will become
effective upon the filing by the NYSE with the Securities and Exchange
Commission of an application to strike the listing and registration of GTS
shares and the expiration of the time period set forth in such application,
which is expected to be 10 days. The Company's shares currently trade on the
Over the Counter Bulletin Board market under the symbol "GTLS.OB".
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 six months ended June 30, 2001 may not be indicative of the
operating results for the full year.
10
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 the 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 and
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 statements are
filed subsequent to the measurement date. Accordingly, the Company has restated
its results of operations for all prior periods.
11
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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------------
2001 2000 2001 2000
----------- ------------ --------------- -------------
(IN MILLIONS)
Revenues from the discontinued business operations:
Golden Telecom (through May 14, 2001)............. E 12.7 E 28.6 E 48.1 E 53.1
Business Services................................. 104.6 104.8 230.3 238.2
------------ ------------ ------------ ------------
Total Revenues from discontinued business operations E 117.3 E 133.4 E 278.4 E 291.3
============ ============ ============ ============
Losses from the discontinued operations of the Golden
Telecom business segment, net of income taxes of
E0.1 and E0.3 and E0.1 and E0.1 for the three and
six months ended June 30, 2001 and 2000 respectively
(through May 14, 2001)............................. E (1.1) E (3.3) E (5.5) E (5.8)
Estimated gain/(loss) on the divestiture of Golden
Telecom............................................ 1.3 - (26.2) -
Loss from the discontinued operations of the Business
Services business segment.......................... (73.9) (100.2) (169.4) (223.0)
------------ ------------- ------------ ------------
Loss from discontinued business operations.......... E (73.7) E (103.5) E (201.1) E (228.8)
============ ============= ============= =============
Operating losses in respect of the Business Services segment that will be
incurred during the third 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 December 31, 2000
consolidated balance sheet consist of:
DECEMBER 31,
2000
--------------
(in millions)
Current assets............................................. E 151.4
Total assets............................................... 371.3
Current liabilities........................................ 38.8
Total liabilities and minority interests................... 196.3
------------
Net assets reflected in the Company's consolidated balance
sheets..................................................... E 175.0
============
The net liabilities of Business Services business operations included within
the consolidated balance sheet consist of:
JUNE 30, DECEMBER 31,
2001 2000
---------------- ---------------
(IN MILLIONS)
Current assets............................................ E 894.1 E 758.9
Total assets.............................................. 1,987.0 1,716.2
Current liabilities....................................... 1,610.4 1,406.3
Total liabilities......................................... 2,707.4 2,310.4
---------------- ---------------
Net liabilities reflected in the Company's consolidated
balance sheets............................................. E (720.4) E (594.2)
================= ================
Financial Instruments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) 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. As previously discussed in Note 2. "Significant 2001 Business Activities
and Subsequent Events," the buyers of part of Golden Telecom received a right to
purchase the remaining shares of Golden Telecom from the Company (the "Right").
The Right has been accounted for in accordance with SFAS 133 and recorded at its
fair value. As of June 30, 2001, the Right was valued at E11.2 million and
reflected as a current liability within our consolidated balance sheet.
12
4. BUSINESS DISPOSITION AND RESTRUCTURING RELATED CHARGES
2001 Business Initiatives
In the first and second quarters of 2001, the Company recorded a charge that
aggregates approximately E119.6 million which is attributable to the previously
discussed November 2000 Restructuring. The charge is comprised of accrued
professional advisory fees of E12.4 million; write-off of impaired tangible
assets of E61.4 million; E29.2 million for contract terminations for excess
backbone capacity and facility closure related costs; and personnel related
costs of E16.6 million. The professional advisory fees represent costs incurred
for lawyers, bankers and accountants and includes amounts that the Company is
obligated to remit to the financial and legal advisors to the informal
committees representing the holders of public debt securities of Esprit, the
Company and GTS Europe BV and the Company's Depositary Shares. The write-off of
tangible property includes provisions associated with excess transatlantic
capacity and facilities. The personnel related costs relate to current services
performed in relation to retention agreements with certain key personnel for
continuing their employment with the Company, and to a lesser extent for
severance payments for terminated personnel who were not notified until 2001.
The Company anticipates that the professional advisory fees and personnel
retention amounts will be remitted to the respective parties during the third
and fourth quarter of 2001. The Company anticipates that it will continue to
incur additional 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
additional professional advisory fees.
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 E1,127.3
million (E1,076.2 million non-cash charge and E51.1 million cash charge). The
non-cash charge of E1,076.2 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 E51.1 million was
principally associated with severance for personnel, transaction related costs
(professional advisors) and facility closure related costs.
At June 30, 2001, E64.3 million remains as an accrual for additional cash
payments that the Company expects to pay in 2001 and 2002 for its business
disposition and restructuring related initiatives.
5. EQUITY RELATED - NON-CASH COMPENSATION:
The Company has recognized non-cash compensation costs associated with
equity securities, restricted shares and stock options, of E7.8 million and E1.2
million in the six months ended June 30, 2001 and 2000, respectively. The
Company anticipates that it will have recognized non-cash compensation charges
in the range of E17.0 million and E23.0 million, by the end of 2001.
13
6. COMPREHENSIVE LOSS
The following table reflects the calculation of comprehensive loss for GTS
for the three and six months ended June 30, 2001 and 2000:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
2001 2000 2001 2000
------------- ----------- ------------- --------
(IN MILLIONS)
Net loss......................................... E (220.8) E (153.4) E (477.8) E (300.1)
Other comprehensive (losses) gains:
Preferred Dividends............................ (10.3) (9.7) (19.3) (18.9)
Unrealized holding gains on available for sale
securities................................... 8.9 - 8.9 -
Foreign currency translation adjustments....... (32.6) (15.8) (102.4) 7.5
--------- --------- --------- ---------
Comprehensive loss............................... E (254.8) E (178.9) E (590.6) E (311.5)
========== ========= ========= =========
7. RELATED PARTY TRANSACTIONS
Included in revenues for the six months ended June 30, 2001 and 2000, were
E23.3 million and E26.7 million of revenues, respectively, from the Company's
discontinued Business Services business segment. Included in revenues for the
period ended May 14, 2001 and for the six months ended June 30, 2000, were E0.5
million and E0.6 million of revenues, respectively, from the Company's
discontinued Golden Telecom business segment.
Included in access and network services costs for the six months ended June
30, 2001 and 2000, were E0.7 million and E0.3 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 period
ended May 14, 2001 was E1.5 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 six months ended June 30, 2000 from the
Company's discontinued Golden Telecom business segment.
As of June 30, 2001 and December 31, 2000, the Company had net receivables
of E297.3 million and E324.8 million, respectively, that were due from the
Company's discontinued Business Services business segment. Pursuant to the
Business Services Divestiture, certain of these receivables were realized by the
Company in the second quarter 2001, as the Company acquired the Ebone related
business assets that were owned by the Business Services business operations,
prior to their divestiture. These Ebone assets were 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 December 31, 2000, the Company had net
receivables of E13.4 million, that were due from the Company's discontinued
Golden Telecom business segment.
8. SEGMENT INFORMATION
Based on the Company's current organizational structure, the Company
operates in two reportable business segments: Ebone and Central Europe. The
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 divestiture and pending divestiture,
respectively, 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.
14
Information about the Company's segments is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
(IN MILLIONS) 2001 2000 2001 2000
--------------- -------------- -------------- --------------
Revenues:
Ebone........................................... E 93.2 E 104.1 E 193.4 E 202.9
Central Europe.................................. 28.0 13.1 53.1 23.8
Corporate/Eliminations.......................... (4.2) (1.0) (8.3) (0.7)
--------------- --------------- --------------- ---------------
Total Revenue...................................... 117.0 116.2 238.2 226.0
Income (loss) from operations:
Ebone........................................... (107.5) 20.8 (134.2) 46.1
Central Europe.................................. (1.3) (0.2) (1.8) (0.4)
Corporate....................................... (64.1) (25.0) (89.8) (48.4)
--------------- --------------- --------------- ---------------
Total (loss) income from operations................ (172.9) (4.4) (225.8) (2.7)
Unallocated other income (expense):
Interest, net................................... (53.7) (19.0) (98.9) (38.8)
Other expenses, net............................. (17.9) (22.1) (48.7) (21.1)
-------------- --------------- -------------- ---------------
Loss from continuing operations before income
taxes......................................... E (244.5) E (45.5) E (373.4) E (62.6)
Assets:
Ebone........................................... 1,953.2 1,895.3
Central Europe.................................. 174.3 87.7
Corporate/Eliminations.......................... 135.9 438.9
-------------- --------------
Total assets from continuing business operations... E 2,263.4 E 2,421.9
Capital expenditures:
Ebone........................................... 20.8 119.7 97.5 196.1
Central Europe.................................. 12.0 9.7 18.1 18.9
Corporate....................................... 28.8 33.0 51.5 54.3
-------------- -------------- -------------- --------------
Total capital expenditures......................... E 61.6 E 162.4 E 167.1 E 269.3
9. NET LOSS PER SHARE (SUPPLEMENTAL INFORMATION)
Basic and diluted loss per share is computed on the basis of the weighted
average number of common shares outstanding. The dilutive effect of the
following items are calculated and presented for informational purposes only as
they are anti-dilutive to the loss per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN MILLIONS) 2001 2000 2001 2000
----------- ----------- --------- ---------
Weighted average outstanding of:
Common stock shares ........................... 218.4 197.8 211.1 193.3
Contingently issuable shares - Restricted stock
(vested) .................................... 0.5 0.1 0.5 0.1
----- ----- ----- -----
218.9 197.9 211.6 193.4
Dilutive effect of:
Common shares issuable upon debt conversion ... 13.2 17.0 13.2 17.0
Preferred stock ............................... 14.2 14.5 14.2 14.5
Restricted shares, unvested ................... 2.6 0.1 2.9 0.1
Employee stock options ........................ -- 1.2 -- 7.6
Warrants ...................................... -- 5.9 -- 6.7
----- ----- ----- -----
Common stock and common stock equivalents ....... 248.9 236.6 241.9 239.3
----- ----- ----- -----
15
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,
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 the
Restructuring, as well as the restructuring of the Company's and GTS Europe BV's
obligations under their public debt securities and of the Company's Depositary
Shares described in more detail below under " -- Liquidity and Capital
Resources", and to access additional capital to fund its operations after the
first quarter of 2002. There can be no assurance that these objectives will be
met or such efforts successfully consummated.
16
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 completed the
sale of a majority 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. On July 11, 2001, the Company announced that the buyers of Golden
Telecom had exercised their right to purchase 2.3 million shares of Golden
Telecom for $25 million. After the conclusion of the sale, the Company owns 0.6
million shares or approximately 2.4% of Golden Telecom.
As disclosed in greater detail below under "--Liquidity and Capital
Resources,", 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. In
June 2001, the Company terminated the active marketing of its Central European
businesses because of unfavorable market conditions for the sale of
telecommunications businesses. In addition, as further described in more detail
below under "--Liquidity and Capital Resources," the Company has undertaken
discussions with representatives of informal committees representing holders of
public debt securities of the Company and GTS Europe BV and the Company's
Depositary Shares with a view to achieving a consensual plan of restructuring
with respect to the obligations under those securities.
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:
- Our pan-European broadband fiber optic network, which extends more
than 25,000 kilometers, reaches virtually all major European cities,
and is the largest such operational network in Europe;
- Our pan-European Tier 1 Internet Protocol backbone, which carries
large volumes of Internet data traffic and is the first European IP
network to operate at 10 gigabits per second; and
- 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:
- Focus our activities on our core expertise in optical and IP
networking;
- Build on our leadership position in the carriers' carrier market to
penetrate a broader bandwidth intensive enterprise customer base;
- Exploit the reach and capacity of our fiber optic network; and
- Capitalize on the "Ebone" brand name, which we adopted in January 2001
as the brand for our broadband unit.
17
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------
2001 2000 2001 2000
--------- -------- --------- -------
Revenues 100.0% 100.0% 100.0% 100.0%
Access and network services..................... 56.9 35.5 58.2 36.5
Selling, general and administrative............. 37.6 34.6 34.8 32.9
Depreciation and amortization................... 52.6 33.1 48.4 31.2
Business disposition, merger and restructuring
related charges................................. 97.4 - 50.1 -
Equity related - non-cash compensation.......... 3.3 0.5 3.3 0.5
-------- -------- -------- --------
Loss from operations............................ (147.8) (3.8) (94.8) (1.2)
Interest expense................................ (49.1) (38.0) (46.4) (39.2)
Interest income................................. 3.2 21.6 4.9 22.0
Foreign currency losses......................... (14.7) (20.5) (21.0) (10.1)
Other income/(expense).......................... (0.6) 1.5 0.5 0.8
-------- -------- -------- --------
Loss before income taxes........................ (209.0) (39.1) (156.8) (27.7)
Income taxes.................................... 1.3 3.8 0.9 3.8
-------- -------- -------- --------
Net loss from continuing operations............. (210.3) 42.9 (157.7) (31.5)
Loss from discontinued business operations...... (63.0) (89.1) (84.4) (101.2)
-------- -------- --------- --------
Net loss before extraordinary item.............. (273.3)% (132.0)% (242.1)% (132.7)%
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Revenues. Consolidated revenues increased to E117.0 million, or 0.7%, for
the three months ended June 30, 2001 as compared to E116.2 million for the three
months ended June 30, 2000. Components of revenue for the three months ended
June 30, 2001 were Ebone (E93.2 million), Central Europe (E28.0 million) and
Corporate/Eliminations (E(4.2) million). Components of revenues for the three
months ended June 30, 2000 were comprised of Ebone (E104.1 million), Central
Europe (E13.1 million) and Corporate/Eliminations (E(1.0) 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 June 30, 2001 increased to E66.6 million or 56.9% of revenues as
compared to E41.3 million or 35.5% of revenues for the three months ended June
30, 2000. The increase in access and network services costs as a percentage of
revenues in the second 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 June 30, 2001 increased to E44.0 million or
37.6% of revenues as compared to E40.2 million or 34.6% of revenues for the
three months ended June 30, 2000. Components of selling, general and
administrative expenses for the three months ended June 30, 2001 were Ebone
(E27.2 million, or 29.2% of Ebone revenues), Central Europe (E6.4 million, or
22.9% of Central Europe revenues) and Corporate (E10.4 million). Components of
selling, general and administrative expenses for the three months ended June 30,
2000 were Ebone (E18.3 million, or 17.6% of Ebone revenues), Central Europe
(E3.5 million, or 26.8% of Central Europe revenues) and Corporate (E18.4
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.
18
Depreciation and Amortization. Depreciation and amortization increased to
E61.5 million or 52.6% of revenues for the three months ended June 30, 2001 as
compared to E38.5 million or 33.1% of revenues for the three months ended June
30, 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.
Business Disposition and Restructuring Related Costs. In the first and
second quarters of 2001, the Company recorded a charge that aggregates
approximately E119.6 million which is attributable to the previously discussed
November 2000 Restructuring. The charge is comprised of accrued professional
advisory fees of E12.4 million; write-off of impaired tangible assets of E61.4
million; E29.2 million for contract terminations for excess backbone capacity
and facility closure related costs; and personnel related costs of E16.6
million. The professional advisory fees represent costs incurred for lawyers,
bankers and accountants and includes amounts that the Company is obligated to
remit to the financial and legal advisors to the informal committees
representing the holders of public debt securities of Esprit, the Company and
GTS Europe BV and the Company's Depositary Shares. The write-off of impaired
tangible assets includes provisions associated with excess transatlantic
capacity and facilities. The personnel related costs relate to current services
performed in relation to retention agreements with certain key personnel for
continuing their employment with the Company, and to a lesser extent for
severance payments for terminated personnel who were not notified until 2001.
The Company anticipates that the professional advisory fees and personnel
retention amounts will be remitted to the respective parties during the third
and fourth quarter of 2001. The Company anticipates that it will continue to
incur additional 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
additional professional advisory fees.
Equity Related - Non-Cash Compensation. The Company recognized non-cash
compensation costs associated with equity securities, restricted shares and
stock options, of E3.9 million and E0.6 million in the three months ended June
30, 2001 and 2000, respectively. The Company anticipates that it will have
recognized non-cash compensation charges in the range of E17.0 million and E23.0
million, by the end of 2001.
Interest Expense. Interest expense increased to approximately E57.5 million
for the three months ended June 30, 2001 as compared to E44.1 million for the
three months ended June 30, 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 E3.8 million for
the three months ended June 30, 2001 as compared to E25.1 million for the three
months ended June 30, 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
E17.2 million in the three months ended June 30, 2001 as compared to losses of
E23.8 million in the three months ended June 30, 2000. The changes in foreign
currency losses is primarily due to the impact of foreign currency fluctuations
on the Company's unhedged US dollar denominated debt obligations.
19
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 E73.7 million and E103.5 million
in the three months ended June 30, 2001 and 2000, respectively.
Extraordinary item. In the second quarter of 2001, the Company recorded a
E98.9 million extraordinary charge to earnings resulting from the early
extinguishment of debt obligations.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Revenues. Consolidated revenues increased to E238.2 million, or 5.4%, for
the six months ended June 30, 2001 as compared to E226.0 million for the six
months ended June 30, 2000. Components of revenue for the six months ended June
30, 2001 were Ebone (E193.4 million), Central Europe (E53.1 million) and
Corporate/Eliminations ((E8.3) million). Components of revenues for the six
months ended June 30, 2000 were comprised of Ebone (E202.9 million), Central
Europe (E23.8 million) and Corporate/Eliminations (E(0.7) 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 six
months ended June 30, 2001 increased to E138.6 million or 58.2% of revenues as
compared to E82.6 million or 36.5% of revenues for the six months ended June 30,
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 six months ended June 30, 2001 increased to E82.8 million or
34.8% of revenues as compared to E74.4 million or 32.9% of revenues for the six
months ended June 30, 2000. Components of selling, general and administrative
expenses for the six months ended June 30, 2001 were Ebone (E47.7 million, or
24.7% of Ebone revenues), Central Europe (E12.1 million, or 22.8% of Central
Europe revenues) and Corporate (E23.0 million). Components of selling, general
and administrative expenses for the six months ended June 30, 2000 were Ebone
(E32.3 million, or 16.0% of Ebone revenues), Central Europe (E6.1 million, or
25.6% of Central Europe revenues) and Corporate (E36.0 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
E115.2 million or 48.4% of revenues for the six months ended June 30, 2001 as
compared to E70.5 million or 31.2% of revenues for the six months ended June 30,
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.
20
Business Disposition and Restructuring Related Costs. In the first and
second quarters of 2001, the Company recorded a charge that aggregates
approximately E119.6 million which is attributable to the previously discussed
November 2000 Restructuring. The charge is comprised of accrued professional
advisory fees of E12.4 million; write-off of impaired tangible property of E61.4
million; E29.2 million for contract terminations for excess backbone capacity
and facility closure related costs; and personnel related costs of E16.6
million. The professional advisory fees represent costs incurred for lawyers,
bankers and accountants and includes amounts that the Company is obligated to
remit to the financial and legal advisors to the informal committees
representing the holders of public debt securities of Esprit, the Company and
GTS Europe BV and the Company's Depositary Shares. The write-off of impaired
tangible assets includes provisions associated with excess transatlantic
capacity and facilities. The personnel related costs relate to current services
performed in relation to retention agreements with certain key personnel for
continuing their employment with the Company, and to a lesser extent for
severance payments for terminated personnel who were not notified until 2001.
The Company anticipates that the professional advisory fee's and personnel
retention amounts will be remitted to the respective parties during the third
and fourth quarter of 2001. The Company anticipates that it will continue to
incur additional 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
additional professional advisory fees.
Equity Related - Non-Cash Compensation. The Company recognized non-cash
compensation costs associated with equity securities, restricted shares and
stock options, of E7.8 million and E1.2 million in the six months ended June 30,
2001 and 2000, respectively. The Company anticipates that it will have
recognized non-cash compensation charges in the range of E17.0 million and E23.0
million, by the end of 2001.
Interest Expense. Interest expense increased to approximately E110.5 million
for the six months ended June 30, 2001 as compared to E88.6 million for the six
months ended June 30, 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 E11.6 million
for the six months ended June 30, 2001 as compared to E49.8 million for the six
months ended June 30, 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
E50.0 million in the six months ended June 30, 2001 as compared to losses of
E22.8 million in the six months ended June 30, 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 E201.1 million and E228.8 million
in the six months ended June 30, 2001 and 2000, respectively.
Extraordinary item. In the second quarter of 2001, the Company recorded a
E98.9 million extraordinary charge to earnings resulting from the early
extinguishment of debt obligations.
21
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 E175 million to E250
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
have substantially divested or 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 E65
million to its Business Services business operations during 2001, the E65
million includes funding since the beginning of the year.
On June 1, 2001, the Company and Global TeleSystems Europe B.V. ("GTS Europe
BV"), a wholly-owned subsidiary of the Company, announced plans to initiate
discussions with the holders of their debt securities and, in the case of the
Company, depositary shares representing its preferred stock regarding a balance
sheet recapitalization to reduce the principal and interest obligations and
dividend requirements of these companies. In July 2001, the Company announced
that representatives of informal committees representing holders of public debt
of the Company and GTS Europe BV and Depositary Shares evidencing interests in
preferred stock of the Company have retained independent advisors; that the
advisors have begun their due diligence investigations; and that the Company
would make a formal recapitalization proposal to these representatives in the
near future. The Company and GTS Europe BV continue to pursue discussions on a
proposal with the representatives of these security holders. Such discussions
could result in, among other things, a consensual agreement between the company
and GTS Europe BV and their respective debtholders (and in the case of the
Company, holders of their Depositary Shares) on a plan of restructuring
involving the exchange of non-cash paying securities, including common stock,
for the outstanding debt securities and Depositary Shares. Such a plan of
restructuring could be filed as part of a petition in bankruptcy or equivalent
proceedings in a court or courts with appropriate jurisdiction over the relevant
parties and matters. One possible consequence of such a plan of restructuring
and its approval by such a court or courts could be the ownership or partial
ownership and control of the reorganized entity or entities by such debtholders.
If agreement is reached upon such a plan of restructuring, it is likely that
current Company stockholders would have a significantly reduced interest in such
a reorganized entity and would receive minimal or no consideration for their GTS
stock in connection with such proceedings.
In view of these plans and ongoing discussions, GTS Europe BV did not make
cash interest payments, due on June 1, 2001, of E15.1 million on its E275
million aggregate principal amount of 11% Senior Notes due 2009 and E11.8
million on its E225 million aggregate principal amount of 10.5% Senior Notes due
2006. These non-payments were not cured and matured into events of default under
the indentures related to these notes on July 1, 2001. In addition, on July 2,
2001, GTS did not make a cash interest payment due on that date of $12.4 million
(approximately E13.8 million) on its $362.4 million (approximately E426.6
million) aggregate principal amount then outstanding of its 5.75% Convertible
Senior Subordinated Debentures due 2010. This non-payment was not cured and
accordingly the non-payment matured into an event of default under the indenture
related to these debentures on July 31, 2001. On July 16, 2001, GTS Europe BV
did not make a cash interest payment due on that date of $10.4 million
(approximately E11.6 million) on its $200 million (approximately E235.4 million)
aggregate principal amount of its 10.375% Senior Notes due 2009 and E4.4 million
on its E85 million aggregate principal amount of its 10.375% Senior Notes due
2006. GTS and GTS Europe BV do not expect to cure these payment defaults and, if
they are not cured, such payment defaults will mature into events of default
under the indentures related to these notes on August 15, 2001. Also related to
its recapitalization plans, GTS does not expect to make the $5.2 million
(approximately E5.9 million) cash interest payment due on August 15, 2001 on its
$105 million (approximately E123.6 million) aggregate principal amount of its
9.875% Senior Notes due 2005; and GTS Europe BV does not expect to make the
$15.2 million (approximately E17.3 million) cash interest payment due on August
15, 2001 on its $265 million (approximately E311.9 million) aggregate principal
amount of its 11.5% Senior Notes due 2007. GTS and GTS Europe BV do not expect
to cure these payment defaults and if they are not cured such payment defaults
will mature into events of default under the indentures related to these notes
on September 15, 2001. GTS and GTS Europe BV do not expect to make additional
payments of principal and interest on the above securities during the pendency
of their restructuring efforts.
22
Deutsche Bank AG London, Dresdner Bank AG London Branch and Bank of America
Securities Limited (the "Bank Group"), which are parties to a credit facility
with Global TeleSystems Europe Holdings B.V., an indirect subsidiary of GTS and
a direct subsidiary of GTS Europe BV, have agreed to waive until August 15, 2001
any defaults under such credit facility caused by the failure to make cash
interest payments on the above-described GTS Europe BV Senior Notes and GTS
Senior Notes and Convertible Debentures. This waiver may expire earlier if the
holders of any such debt securities accelerate such debt, commence legal
proceedings seeking more than $2.5 million in respect of such debt securities or
a bankruptcy or insolvency is commenced by or against GTS or GTS Europe BV in
the U.S. or The Netherlands. The Company is in discussions with the Bank Group
to extend the waiver.
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 E143.7 million. Of the E143.7 million, approximately E68.1 million
of cash was received at closing with the remaining E75.6 million being received
by the end of May. The buyers also have a right to purchase from the Company,
during the 60 day period following May 14th, up to an additional E28.4 million
of Golden Telecom shares at a price of E12.51 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 E12.51 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 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 July 11, 2001, the Company announced the buyers had exercised
their right to purchase 2.3 million shares of Golden Telecom for $25 million.
After the conclusion of the sale, the Company will own approximately 2.4% of
Golden Telecom.
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 E300 million in available funds through March 2002, at
which time the Amended Bank Facility converts into a one-year term loan. As of
June 30, 2001, the subsidiary had drawn down E150 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 E180 million to E300 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. Pursuant to the agreement between GTS and the Bank Group to waive any
defaults under the Amended Bank Facility resulting from the nonpayment of
interest on GTS Europe BV's debt securities described above, the Bank Group's
consent will be required for future funding requests. The Company and the Bank
Group continue their discussions aimed at replacing the current Amended Bank
Facility with a longer-term financing facility.
In addition, in connection with the Esprit Restructuring, 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 under a scheme of arrangement that received final
approval by the UK court on July 27, 2001. 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 underlying conversion shares
issued upon conversion of the Converted Bonds, with the balance being issued as
additional consideration for the exchange. The Company recognized an
extraordinary gain within its second quarter 2001 consolidated statements of
operations of approximately E49.2 million (this amount is net of unamortized
debt issuance costs of approximately E1.7 million). As a result of the
conversion, the Company estimates that it will save E3.4 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 were underlying conversion shares issued upon conversion
of such bonds, with the balance being issued as additional consideration for the
exchanges. The Company recognized an additional extraordinary gain within its
second quarter 2001 consolidated statements of operations of approximately E49.2
million (this amount is net of unamortized debt issuance costs of approximately
E1.4 million). As a result of the conversion, the Company estimates that it will
save E3.4 million in annual interest cash payments.
23
On July 11, 2001, the Company entered into an agreement with a third party
to exchange the third party's holding of $35.5 million aggregate principal
amount of the Company's 5.75% Senior Subordinated Convertible Debentures due
2010 (the "Converted Debentures") for 8,165,000 shares of GTS common stock. The
terms of the exchange agreement resulted in the early extinguishments of the
Converted Debentures, which were discharged and cancelled as a result of the
transaction. Of the 8,165,000 common shares issued, 1,289,736 shares of common
stock were underlying conversion shares issued upon the conversion of the
Converted Debentures, with the balance being issued as additional consideration
for the exchange. The Company will recognize an extraordinary gain of
approximately E38.8 million (this amount is net of unamortized debt issuance
costs of approximately E0.9 million) within its third quarter 2001 consolidated
statements of operations in connection with this transaction.
After giving effect to all the above-described transactions, as of July 31,
2001, GTS had approximately E373.7 million of such debentures outstanding.
During the second quarter, holders of 193,500 Depositary Shares, each
representing 1/100th of a share of the Company's 7.25% Cumulative Convertible
Preferred Stock ("the Converted Depositary Shares"), exchanged their Depositary
Shares for 280,418 shares of GTS common stock.
In addition, on July 11, 2001, the Company entered into another agreement
with the same third party that exchanged the Converted Debentures on July 11,
2001 to exchange the third party's holding of 4,340,950 Depositary Shares for
21,704,750 shares of GTS common stock. The terms of this exchange agreement
resulted in the cancellation of the Converted Depositary Shares of this third
party as a result of the transaction. Of the 21,704,750 common shares issued,
6,290,904 shares of common stock were underlying conversion shares issued upon
the conversion of the Converted Depositary Shares, with the balance being issued
as additional consideration for the exchange. Following completion of this
transaction, the Company had outstanding approximately 5.5 million Depositary
Shares.
To the extent the shares of GTS common stock issued in connection with the
above-described transactions relating to the Company's convertible debentures
and Depositary Shares are sold, such shares are expected to have a depressive
effect on the market price of the Company's common stock.
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 and funds from certain
prospective sales of assets; the Company's recent agreement under the Esprit
Restructuring to divest its voice focused Business Services business, which
received court approval on July 27, 2001; and cash made available as a result of
the Company's decision not to pay interest on its and GTS Europe BV's public
debt securities in connection with the commencement of restructuring discussions
with the holders of such debt securities, and assuming the Bank Group consents
to funding requests under the E300 million 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 seeking
to refinance its indebtedness under the Amended Bank Facility (through a
long-term facility or otherwise); pursuing discussions with informal committees
representing the holders of its and GTS Europe BV's outstanding debt obligations
to achieve a consensual restructuring of such obligations; and seeking
additional funding, including through the issuance of new equity or debt
securities. There can be no assurance that the prospective sale of assets will
occur; that the Bank Group will consent to funding requests made under the
Amended Bank Facility; that the Company's objectives will be met with regard to
the Company's efforts to address its longer-term funding needs; or that such
restructuring discussions will be successfully consummated.
24
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 Restructuring and the
restructuring of the Company's and GTS Europe BV's debt obligations and GTS'
depositary shares described above, (2) meet the financial covenants and other
conditions to borrowing under the Amended Bank Facility and obtain the Bank
Group's consent to such borrowings, (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, and (7)
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. If the Company cannot raise additional capital through these steps or
otherwise, however, the Company may be compelled to examine and pursue other
alternatives, including instituting cash conservation measures, which may
include a further curtailment of capital and other expenditures, a sale of
assets (in addition to those assets the Company has sold or otherwise disposed
of as part of the Restructuring), a sale of the Company, halting certain
operations of the Company, or seeking the protection of applicable bankruptcy
laws for units of the Company or the Company as a whole.
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of E111.6 million and E219.1
million as of June 30, 2001 and December 31, 2000, respectively. The Company had
restricted cash of E43.0 million and E89.1 million as of June 30, 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 E148.2 million and provided cash of E4.2 million
for its operating activities for the six months ended June 30, 2001 and 2000,
respectively. In addition, at June 30, 2001, the Company had E64.3 million of
accrued expenses associated with unpaid liabilities that have resulted from our
Restructuring. The Company also provided cash of E22.7 million and used cash of
E233.1 million for its investing activities in the six months ended June 30,
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 or loans linked to the Euro. 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.
25
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 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.
26
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
DEFAULTS
On June 1, 2001, the Company and Global TeleSystems Europe B.V. ("GTS Europe
BV"), a wholly-owned subsidiary of the Company, announced plans to initiate
discussions with the holders of their debt securities and, in the case of the
Company, depositary shares representing its preferred stock regarding a balance
sheet recapitalization to reduce the principal and interest obligations and
dividend requirements of these companies.
In view of these plans and ongoing discussions, GTS Europe BV did not make
cash interest payments, due on June 1, 2001, of E15.1 million on its E275
million aggregate principal amount of 11% Senior Notes due 2009 and E11.8
million on its E225 million aggregate principal amount of 10.5% Senior Notes due
2006. These non-payments were not cured and matured into events of default under
the indentures related to these notes on July 1, 2001. In addition, on July 2,
2001, GTS did not make a cash interest payment due on that date of $12.4 million
(approximately E13.8 million) on its $362.4 million (approximately E426.6
million) aggregate principal amount then outstanding of its 5.75% Convertible
Senior Subordinated Debentures due 2010. This non-payment was not cured and
accordingly the non-payment matured into an event of default under the indenture
related to these debentures on July 31, 2001. On July 16, 2001, GTS Europe BV
did not make a cash interest payment due on that date of $10.4 million
(approximately E11.6 million) on its $200 million (approximately E235.4 million)
aggregate principal amount of its 10.375% Senior Notes due 2009 and E4.4 million
on its E85 million aggregate principal amount of its 10.375% Senior Notes due
2006. GTS and GTS Europe BV do not expect to cure these payment defaults and, if
they are not cured, such payment defaults will mature into events of default
under the indentures related to these notes on August 15, 2001. Also related to
its recapitalization plans, GTS does not expect to make the $5.2 million
(approximately E5.9 million) cash interest payment due on August 15, 2001 on its
$105 million (approximately E123.6 million) aggregate principal amount of its
9.875% Senior Notes due 2005; and GTS Europe BV does not expect to make the
$15.2 million (approximately E17.3 million) cash interest payment due on August
15, 2001 on its $265 million (approximately E311.9 million) aggregate principal
amount of its 11.5% Senior Notes due 2007. GTS and GTS Europe BV do not expect
to cure these payment defaults and if they are not cured such payment defaults
will mature into events of default under the indentures related to these notes
on September 15, 2001. GTS and GTS Europe BV do not expect to make additional
payments of principal and interest on the above securities during the pendency
of their restructuring efforts.
Deutsche Bank AG London, Dresdner Bank AG London Branch and Bank of America
Securities Limited (the "Bank Group"), which are parties to a credit facility
with Global TeleSystems Europe Holdings B.V., an indirect subsidiary of GTS and
a direct subsidiary of GTS Europe BV, have agreed to waive until August 15, 2001
any defaults under such credit facility caused by the failure to make cash
interest payments on the above-described GTS Europe BV Senior Notes and GTS
Senior Notes and Convertible Debentures. This waiver may expire earlier if the
holders of any such debt securities accelerate such debt, commence legal
proceedings seeking more than $2.5 million in respect of such debt securities or
a bankruptcy or insolvency is commenced by or against GTS or GTS Europe BV in
the U.S. or The Netherlands. The Company is in discussions with the Bank Group
to extend the waiver.
ITEM 5. OTHER INFORMATION
DELEVERAGING TRANSACTIONS
On June 15, 2001, GTS did not make a dividend payment due on its Depositary
Shares, each representing 1/100 of a share of its 7.25% Cumulative Convertible
Preferred Stock. GTS has dividend arrearages of $27.2 million on such Depositary
Shares representing non-payment of three consecutive quarterly dividend
payments. GTS does not expect to make future dividend payments or to pay
dividend arrearages on the Depositary Shares during the pendency of their
restructuring efforts. Upon the accumulation of six full unpaid quarterly
dividends (whether or not consecutive) the number of members of GTS's Board of
Directors will be immediately and automatically increased by two and the holders
of a majority of the outstanding Depositary Shares, voting together as a class,
will be entitled to elect two members to the Board of Directors of GTS.
27
On July 11, 2001, GTS entered into an agreement with a third party to
exchange the third party's holding of $35.5 million aggregate principal amount
of GTS's 5.75% Senior Subordinated Convertible Debentures due 2010 (the
"Converted Debentures") for 8,165,000 shares of GTS common stock. The terms of
the exchange agreement resulted in the early extinguishments of the Converted
Debentures, which were discharged and cancelled as a result of the transaction.
Of the 8,165,000 common shares issued, 1,289,736 shares of common stock were
underlying conversion shares issued upon the conversion of the Converted
Debentures, with the balance being issued as additional consideration for the
exchange. GTS will recognize an extraordinary gain of approximately E38.8
million (this amount is net of unamortized debt issuance costs of approximately
E0.9 million) within its third quarter 2001 consolidated statements of
operations in connection with this transaction.
During the second quarter, holders of 193,500 Depositary Shares, each
representing 1/100th of a share of the Company's 7.25% Cumulative Convertible
Preferred Stock ("the Converted Depositary Shares"), exchanged their Depositary
Shares for 280,418 shares of GTS common stock.
In addition, on July 11, 2001, GTS entered into another agreement with the
same third party that exchanged the Converted Debentures on July 11, 2001 to
exchange the third party's holding of 4,340,950 Depositary Shares, each
representing 1/100 of a share of Converted Depositary Shares for an additional
21,704,750 shares of GTS common stock. The terms of this exchange agreement
resulted in the cancellation of the Converted Depositary Shares as a result of
the transaction. Of the 21,704,750 common shares issued, 6,290,904 shares of
common stock were underlying conversion shares issued upon the conversion of the
Converted Depositary Shares, with the balance being issued as additional
consideration for the exchange. Following completion of this transaction, GTS
had outstanding approximately 5.5 million Depositary Shares.
The above transactions are in addition to deleveraging transactions effected
by GTS during April and May 2001 to extinguish $104,495,000 aggregate principal
amount of GTS's 5.75% Senior Subordinated Convertible Debentures due 2010. After
giving effect to all the above-described transactions, as of July 31, 2001, GTS
had approximately E373.7 million of such debentures outstanding. In connection
with such previously reported transactions, GTS recognized an extraordinary gain
within its second quarter consolidated statements of operations of approximately
E98.9 million (this amount is net of unamortized debt issuance costs of
approximately E3.1 million).
These deleveraging transactions are a part of the process to recapitalize
GTS's balance sheet to eliminate or reduce the Company's debt obligations and
preferred stock, as discussed below. To the extent the shares of GTS 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.
DISCUSSIONS WITH GTS AND GTS EUROPE BV BONDHOLDERS
During the second quarter of 2001, GTS and GTS Europe commenced discussions
with holders of their senior notes and, in the case of GTS, its convertible
debentures and depositary shares representing its preferred stock. In their
discussions, GTS and GTS Europe BV will explore various options for reducing
such debt obligations and depositary shares and related cash interest
obligations and dividend requirements. In July 2001, the Company announced that
representatives of informal committees representing holders of public debt of
the Company and GTS Europe BV and the depositary shares have retained
independent advisors, that the advisors have begun their due diligence
investigations and that the Company would make a formal recapitalization
proposal to these representatives in the near future. The Company and GTS Europe
BV continue to pursue discussions on a proposal with the representatives of
these securityholders. Such discussions could result in, among other things, a
consensual agreement between the company and GTS Europe BV and their respective
debtholders (and in the case of the Company, holders of their Depositary Shares)
on a plan of restructuring involving the exchange of non-cash paying securities,
including common shares, for the outstanding debt securities and Depositary
Shares. Such a plan of restructuring could be filed as part of a petition in
bankruptcy or equivalent proceedings in a court or courts with appropriate
jurisdiction over the relevant parties and matters. One possible consequence of
such a plan of restructuring and its approval by such a court or courts could be
the ownership or partial ownership and control of the reorganized entity or
entities by such debtholders. If agreement is reached upon such a plan of
restructuring, it is likely that current Company stockholders would have a
significantly reduced interest in such a reorganized entity and would receive
minimal or no consideration for their GTS stock in connection with such
proceedings.
During the pendency of such discussions, GTS and GTS Europe BV intend that
they will continue to operate in the normal course, including satisfying all
obligations to customers, suppliers, partners and staff, consistent with their
normal business practices.
GTS has retained Houlihan Lokey Howard & Zukin as its investment banker to
assist in developing a financial restructuring plan and undertaking discussions
with GTS and GTS Europe BV bondholders and preferred stockholders.
28
ESPRIT TELECOM RESTRUCTURING
On July 13, 2001, GTS announced that the holders of approximately $500
million aggregate principal amount of publicly-traded senior notes issued by its
Global TeleSystems (Europe) Ltd. subsidiary, formerly known as Esprit Telecom
Group plc ("Esprit Telecom"), have approved Esprit Telecom's Scheme of
Arrangement under Part XIII of the UK Companies Act of 1985 (the "Scheme") to
restructure the terms of their notes. One-hundred percent of bondholder votes
cast were in favor of the Scheme. Final approval of the scheme by the High Court
(the "Court") of England and Wales occurred on July 27, 2001.
Pursuant to the Scheme, as previously announced, Esprit Telecom's senior
notes will be exchanged for stock representing a 90% ownership interest in a new
company that will own Esprit Telecom as well as the other GTS subsidiaries
providing principally voice services to businesses in Western Europe. GTS will
own through a subsidiary the remaining 10% of the equity in the new company, and
will hold warrants to acquire an additional 10% of the new company. The Scheme
is consistent with GTS's overall program to recapitalize its balance sheet by
eliminating or reducing its debt obligations and preferred stock.
NYSE SUSPENSION OF TRADING AND DELISTING
On June 4, 2001, The New York Stock Exchange ("NYSE") informed GTS that it
had suspended trading in GTS common stock on the NYSE due to indications of an
"abnormally low selling price." The NYSE also informed GTS that it intended to
seek to delist GTS's common stock. GTS does not believe that the NYSE's decision
is well founded in the NYSE's rules and on July 18, 2001 GTS filed with the NYSE
its request for reversal of the June 4, 2001 decision by the NYSE to suspend
trading and seek delisting of GTS's common stock. The NYSE held a hearing on
such matters on August 1, 2001, and upheld its decision to suspend the trading
of GTS shares and seek the de-listing of GTS shares on the NYSE. The Company
does not currently intend to take any further action with respect to this
matter. The delisting will become effective upon the filing by the NYSE with the
Securities and Exchange Commission of an application to strike the listing and
registration of GTS shares and the expiration of the time period set forth in
such application, which is expected to be 10 days. The Company's shares
currently trade on the Over the Counter Bulletin Board market under the symbol
"GTLS.OB".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
DESIGNATION DESCRIPTION
----------- -----------
None
B. Reports on Form 8-K
DATE OF REPORT SUBJECT OF REPORT
- -------------- -----------------
April 2, 2001 Announcement of the sale of Golden Telecom shares
for $125 million.
April 5, 2001 Announcement of the Agreement with the Esprit
Telecom Senior Bondholders.
April 6, 2001 Announcement of the Fourth Quarter and Annual
2000 Financial Results.
May 14, 2001 Announcement of the closing of the sale of the
Golden Telecom shares for $125 million.
June 1, 2001 Announcement of the Company's intention to
recapitalize its Balance Sheet and its
election not to pay interest on certain
outstanding bonds.
June 5, 2001 Announcement of the New York Stock Exchanges
decision to suspend trading of the Company's
shares.
June 8, 2001 Announcement of initial discussions with Senior
Bondholders.
29
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/ ROBERT A. SCHRIESHEIM
---------------------------------
Name: Robert A. Schriesheim
Title: Executive Vice President,
& Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 14, 2001