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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 October 31, 2001 there were 257,327,221 outstanding shares of common
stock of the registrant.
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements of Global TeleSystems, Inc. (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 .... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2001 and 2000 .................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 .............................. 26
PART II. OTHER INFORMATION
Item 3 Defaults Upon Senior Securities ......................................................... 26
Item 5 Other Information ....................................................................... 27
Item 6 Exhibits and Reports on Form 8-K ........................................................ 29
Signatures ........................................................................................ 30
</Table>
2
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
------------- ------------
(IN MILLIONS, EXCEPT SHARE DATA)
Current Assets
Cash and cash equivalents, including restricted cash ............................. E. 83.2 E. 308.2
Accounts receivable, net ......................................................... 83.7 111.8
Net assets of the Golden Telecom business segment ................................ -- 175.0
Other current assets ............................................................. 111.7 109.2
------------ ------------
Total Current Assets ..................................................... 278.6 704.2
Property and equipment, net ........................................................ 1,109.7 1,427.0
Other non-current assets, principally goodwill and intangible assets, net .......... 61.9 410.7
------------ ------------
Total Assets ............................................................. E. 1,450.2 E. 2,541.9
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable ................................................................. E. 184.9 E. 226.1
Accrued expenses ................................................................. 268.5 157.2
Current portion of debt and capital lease obligations ............................ 1,758.4 32.8
Net liabilities of the Business Services business segment ........................ -- 594.2
Deferred revenue ................................................................. 68.0 56.7
------------ ------------
Total Current Liabilities ................................................ 2,279.8 1,067.0
Long-term debt and capital lease obligations ..................................... 311.8 2,146.8
Other non-current liabilities, principally deferred revenue ...................... 168.6 177.3
------------ ------------
Total Liabilities ........................................................ 2,760.2 3,391.1
Commitments and Contingencies
Redeemable preferred stock, $0.0001 par value (10,000,000 shares authorized;
50,876 and 100,000 shares issued and outstanding at September 30, 2001 and
December 31, 2000, respectively) ................................................... 300.7 542.9
Shareholders' Deficit
Common stock, $0.10 par value (540,000,000 shares authorized;
257,327,221 and 203,869,538 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively ............................. 24.2 18.0
Additional paid-in capital ......................................................... 1,685.1 1,376.4
Accumulated other comprehensive income ............................................. 37.9 36.4
Accumulated deficit ................................................................ (3,357.9) (2,822.9)
------------ ------------
Total Shareholders' Deficit .............................................. (1,610.7) (1,392.1)
------------ ------------
Total Liabilities and Shareholders' Deficit .............................. E. 1,450.2 E. 2,541.9
============ ============
</Table>
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)
3
GLOBAL TELESYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues ..................................................... E. 104.4 E. 125.3 E. 342.7 E. 351.3
Operating expenses:
Access and network services ................................ 68.9 54.7 207.5 137.3
Selling, general and administrative ........................ 41.5 37.7 124.3 112.1
Depreciation and amortization .............................. 63.3 43.4 178.5 114.0
Business disposition and restructuring related charges ..... 727.1 15.6 846.8 15.6
Equity related - non-cash compensation ..................... 5.0 0.6 12.8 1.8
------------ ------------ ------------ ------------
Total operating expenses ..................................... 905.8 152.0 1,369.9 380.8
------------ ------------ ------------ ------------
Loss from operations ......................................... (801.4) (26.7) (1,027.2) (29.5)
Other income (expense):
Interest expense ........................................... (35.7) (45.5) (146.1) (134.1)
Interest income ............................................ 4.5 22.1 16.0 72.0
Foreign currency income (losses) ........................... 53.0 (25.4) 2.9 (48.2)
Other income (expense) ..................................... 9.2 2.3 10.6 4.0
------------ ------------ ------------ ------------
Total other expenses ......................................... 31.0 (46.5) (116.6) (106.3)
------------ ------------ ------------ ------------
Loss before income taxes ..................................... (770.4) (73.2) (1,143.8) (135.8)
Income taxes ................................................. 0.3 4.9 2.4 13.6
------------ ------------ ------------ ------------
Net loss from continuing operations .......................... (770.7) (78.1) (1,146.2) (149.4)
Loss from discontinued business operations ................... (13.2) (135.3) (214.4) (364.0)
------------ ------------ ------------ ------------
Net loss before extraordinary item .......................... (783.9) (213.4) (1,360.6) (513.4)
Extraordinary item ........................................... 726.7 -- 825.6 --
------------ ------------ ------------ ------------
Net loss ..................................................... (57.2) (213.4) (535.0) (513.4)
Preferred dividends .......................................... (6.9) (10.0) (26.2) (28.9)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders ................... E. (64.1) E. (223.4) E. (561.2) E. (542.3)
============ ============ ============ ============
Basic and diluted loss per common share:
Net loss from continuing operations (includes preferred
dividends) per share ....................................... E. (3.07) E. (0.44) E. (5.21) E. (0.91)
Net loss per share - discontinued operations ............... 0.05 (0.67) (0.95) (1.85)
Net income per share - extraordinary item .................. 2.87 -- 3.67 --
------------ ------------ ------------ ------------
Basic and diluted net loss per share ....................... E. (0.25) E. (1.11) E. (2.49) E. (2.76)
============ ============ ============ ============
Weighted average common shares outstanding ................... 253.1 201.9 225.1 196.2
============ ============ ============ ============
</Table>
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 CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2000
------------ ------------
(IN MILLIONS)
Net Cash (Used in) Provided by Operating Activities of Continuing Operations ........ E. (166.2) E. 32.5
------------ ------------
Cash Flow from Investing Activities
Purchases of property and equipment ............................................... (205.8) (434.6)
Proceeds from disposition of business ............................................. 172.7 --
Restricted cash and other investing activities .................................... 39.9 34.4
------------ ------------
Net Cash Provided by (Used in) Investing Activities of Continuing Operations .... 6.8 (400.2)
------------ ------------
Cash Flow from Financing Activities
Proceeds from the issuance of debt ................................................ 100.0 200.0
Repayments of debt and capital lease obligations .................................. (68.1) (28.7)
Net Proceeds from issuance of securities .......................................... -- 7.5
Payment of debt issue costs ....................................................... (2.5) (7.6)
Funding to Business Services business segment ..................................... (35.0) --
------------ ------------
Net Cash (Used in) Provided by Financing Activities of Continuing Operations ..... (5.6) 171.2
------------ ------------
Effect of exchange rate changes on cash and cash equivalents ........................ 71.3 73.5
Cash used in discontinued operations ................................................ (91.4) (340.3)
------------ ------------
Net decrease in cash and cash equivalents ........................................... (185.1) (463.3)
Cash and cash equivalents at beginning of period .................................... 219.1 907.9
------------ ------------
Cash and Cash Equivalents at End of Period .......................................... E. 34.0 E. 444.6
============ ============
Supplemental Disclosure of Cash Flow Information:
Capitalization of leases .......................................................... E. 52.0 E. 175.3
============ ============
Issuance of common shares or notes for interest in business ventures .............. E. -- E. 141.0
============ ============
Conversion of debt into common shares ............................................. E. 159.3 E. 79.9
============ ============
Conversion of preferred stock into common shares .................................. E. 285.1 E. --
============ ============
</Table>
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.
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).
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 alternative telecommunications providers, like the Company, has become
unavailable or has become available only with extremely 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 in an effort 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 BV'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 " --KPNQwest
Acquisition."
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 proposed 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") had retained independent advisors, that the advisors
had begun their due diligence investigations and that the Company would make a
formal recapitalization proposal to these representatives in the near future.
In view of these plans and ongoing discussions with security holders of the
Company and GTS Europe BV, GTS Europe BV did not make cash interest payments,
due on June 1, 2001, of E.15.1 million on its E.275 million aggregate principal
amount of 11% Senior Notes due 2009 and E.11.8 million on its E.225 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 E.13.8
million) on its $362.4 million (approximately E.426.6 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 E.11.6
million) on its $200 million (approximately E.235.4 million) aggregate principal
amount of its 10.375% Senior Notes due 2009 and E.4.4 million on its E.85
million aggregate principal amount of its 10.375% Senior Notes due 2006. These
payment defaults matured into events of default under the indentures related to
these notes on August 15, 2001. Also related to its recapitalization plans, GTS
did not make the $5.2 million (approximately E.5.9 million) cash interest
payment due on August 15, 2001 on its $105 million (approximately E.123.6
million) aggregate principal amount of its 9.875% Senior Notes due 2005; and GTS
Europe BV did not make the $15.2 million (approximately E.17.3 million) cash
interest payment due on August 15, 2001 on its $265 million (approximately
E.311.9 million) aggregate principal amount of its 11.5% Senior Notes due 2007.
These payment defaults matured into events of default
6
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, as
described below under " -- KPNQwest Acquisition."
Banc of America Securities Limited, Bank of America International Limited,
Deutsche Bank AG London, Dresdner Bank AG London Branch, E.N. Investment
Company, Centaurus Alpha Master Fund Limited, Lehman Commercial Paper Inc.,
Morgan Stanley & Co. International Limited, certain investment funds and
accounts managed by Oaktree Capital Management, LLC, and certain other funds
described as the "Mackay Funds" (collectively, the "Bank Group"), which are
parties to a E.250.0 million revolving credit facility with the Company and
certain of its subsidiaries (including Global TeleSystems Europe Holdings B.V.,
an indirect subsidiary of the Company and a direct subsidiary of GTS Europe BV)
have waived 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. The Bank Group also waived
certain other defaults under such credit facility. These waivers may expire 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 the Company or GTS
Europe BV in the U.S. or The Netherlands other than a bankruptcy pursuant to the
proposed voluntary restructuring of the Company and its subsidiaries described
herein.
On September 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
$19.2 million on such Depositary Shares representing non-payment of four
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.
KPNQwest Acquisition
On October 19, 2001, the Company announced that it had signed a definitive
share purchase agreement with KPNQwest. The agreement provides that KPNQwest
will acquire on the terms and conditions set forth in such agreement (i) GTS
Europe BV and (ii) the Company's Central European businesses. KPNQwest will
acquire these companies through the issuance of approximately E.210 million of
new senior convertible notes and the assumption of bank debt and capital lease
obligations upon closing. The transaction is expected to close during the first
quarter of 2002.
The Company also reached agreements with the informal committees
representing the holders of the Company's and GTS Europe BV's debt securities
with respect to existing events of default under such debt securities, the terms
of the transaction with KPNQwest and the allocation of the KPNQwest senior
convertible notes. Holders of approximately 67% of the approximately E.1.1
billion outstanding principal amount of the publicly traded GTS Europe BV Senior
Notes, approximately 78% of the approximately E.116 million outstanding
principal amount of the GTS Senior Notes and approximately 35% of the
approximately E.362 million outstanding principal amount of GTS Convertible
Debentures signed forbearance agreements committing them to support the proposed
transaction subject to certain terms and conditions, and to forbear from
exercising and from supporting any exercise by other holders of such debt
securities of remedies against the Company or GTS Europe BV arising under such
debt securities.
To ensure the binding nature of the sale arrangement on all of the holders
of their debt securities, the Company and GTS Europe BV expect that the
transaction will be effectuated through "pre-arranged" court proceedings by the
Company and GTS Europe BV under United States bankruptcy laws and a
corresponding application by GTS Europe BV for "surseance" and "deposition for
composition" in The Netherlands.
On November 14, 2001, the Company and GTS Europe BV filed petitions for
relief under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. Pursuant to the Bankruptcy
Code, the Company and GTS Europe BV will continue in the management and
possession of their properties as debtors in possession. Also on November 14,
2001, GTS Europe BV commenced a proceeding in the District Court of Amsterdam
under the Netherlands Bankruptcy Act relating to a moratorium of payments to
creditors and a binding composition. The plan of reorganization filed in the
U.S. and Dutch court proceedings provide for the E.210 million KPNQwest senior
convertible notes and the Company's investment in Ventelo BV, the Company's
reorganized Business Services business unit that was divested by the Company
earlier this year, to be distributed to the debt security holders of the Company
and GTS Europe BV as agreed between the Company and the informal committees
representing the debt security holders. No distribution is anticipated to be
made to holders of the Company's common or preferred equity securities.
In addition, the Company caused certain of its affiliates to enter into a
Share and Asset Purchase Agreement, dated as of October 18, 2001 (the "Share and
Asset Purchase Agreement"), with KPNQwest and certain of its affiliates, calling
for the sale of
7
all of the outstanding shares of GTS Transatlantic Carrier Services, Ltd. ("GTS
Transatlantic"), the owner of the Company's rights in a transatlantic cable
system known as FLAG-Atlantic-1 (the "System"), together with the equipment used
by certain affiliates of the Company to operate and maintain the System. The
aggregate purchase price for these purchases was E.50 million, payable in
installments of E.5 million, E.10 million, E.15 million and E.20 million on
October 19, 2001, November 15, 2001, December 15, 2001 and February 28, 2002,
respectively. Additionally, pursuant to the Share and Asset Purchase Agreement,
GTS Network (Ireland) Limited, an affiliate of the Company, will provide, at
cost, network management services for KPNQwest and its affiliates in respect of
the equipment purchased under the Share and Asset Purchase Agreement.
Golden Telecom Divestiture
On May 14, 2001, the Company announced that it had closed the sale to a
group of buyers of 12.2 million shares of the common stock of Golden Telecom for
approximately E.143.7 million. The Company recognized a loss of approximately
E.20.0 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 E.28.4 million of Golden Telecom shares at a price of E.12.51 per
share, and, if certain conditions are met, the right to purchase the Company's
remaining interest in Golden Telecom during the twelve-month period following
May 14th for the greater of E.12.51 per share or a 20% premium to the average
closing share price for the 60-day period preceding the purchase date.
After 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 10, 2001, the buyers notified the Company of the exercise of their
right to cause the Company to sell certain shares of Golden Telecom held by the
Company. The buyers designated Golden Telecom as the purchaser of such shares.
On July 24, 2001, the Company completed the sale of 2.3 million shares of Golden
Telecom to Golden Telecom (as designee of each of the buyers) for $25.0 million.
After the conclusion of this sale, the Company owned approximately 0.6 million
shares, or approximately 2.4%, of Golden Telecom. On October 30, 2001, one of
the buyers in the May 14, 2001 sale purchased from the Company the remaining
shares of Golden Telecom held by the Company for approximately $6.0 million.
Business Services Divestiture
On March 28, 2001, the Company announced a consensual agreement with an
unofficial committee of the senior noteholders of Global TeleSystems (Europe)
Limited, formerly known as Esprit Telecom Group plc, ("Esprit") under which,
among other things, the obligation to repay approximately E.572.8 million of
senior debt owed to the noteholders will be exchanged for a 90% ownership
interest in a new legal entity comprised of Esprit and other GTS subsidiaries
that comprise GTS's "Business Services" business unit, subject to approval of a
scheme of arrangement (the "Scheme") by the noteholders and the U.K. courts. GTS
will either directly or indirectly own the remaining 10% of this new company and
has agreed, upon certain conditions, to provide on or after May 1, 2001 up to
E.35.0 million in secured financing for working capital and on or after April 1,
2001 up to E.20.0 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 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 and the Company
fulfilled all material conditions to effectiveness of the Scheme on or about
August 23, 2001. As discussed in further detail in Note 3 "Basis of Presentation
- - Discontinued Operations", upon the completion of the Esprit debt
restructuring, the Company recorded an extraordinary gain of E.687.3 million,
principally attributable to the early extinguishment of the Esprit note
obligations.
Amended Bank Facility
On October 18, 2001 the Company and certain of its subsidiaries (including
Global TeleSystems Europe Holdings B.V.) entered into a Second Supplemental
Agreement dated October 18, 2001 with the Bank Group, which amended and restated
the existing loan agreement providing for a revolving credit facility available
to Global TeleSystems Europe Holdings B.V (such facility, as it was amended
pursuant to the Second Supplemental Agreement, the "Amended Bank Facility"). The
Amended Bank Facility provides for a revolving credit facility of up to E.250.0
million that terminates upon consummation of the bankruptcy restructuring of the
Company and its subsidiaries. As of November 14, 2001, E.170.0 million is
outstanding under the Amended Bank Facility. The Amended Bank Facility comprises
two tranches, "Tranche A" of up to E.150.0 million and "Tranche B" of up to
E.100.0 million. No utilizations may be made under Tranche B if the Company's
gross cash balances are more than E.10.0 million. In addition, utilizations
under Tranche B must be consistent with the Company's agreed upon monthly budget
and must not exceed a cumulative weekly limit of E.10.0 million.
8
Conversion of Debt to Equity
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 recognized an extraordinary gain of approximately
E.39.4 million (this amount is net of unamortized debt issuance costs of
approximately E.0.9 million) within its third quarter 2001 consolidated
statements of operations in connection with this transaction.
The above transaction is in addition to deleveraging transactions effected
by GTS during April and May 2001 to extinguish $104.5 million aggregate
principal amount of GTS's 5.75% Senior Subordinated Convertible Debentures due
2010. In connection with such previously reported transactions, GTS recognized
an extraordinary gain within its second quarter consolidated statements of
operations of approximately E.98.9 million (this amount is net of unamortized
debt issuance costs of approximately E.3.1 million). After giving effect to all
the above-described transactions, as of September 30, 2001, GTS had
approximately E.359.3 million of such debentures outstanding.
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.
During the third quarter, holders of 378,000 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 547,793 shares of GTS common stock. Following the completion of these
transactions, the Company had approximately 5.1 million Depository Shares
outstanding. In addition, these transactions resulted in a reduction of unpaid
dividends of approximately E.18.1 million.
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 did 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. 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. Following the August 1, 2001 hearing, the Company
decided not to take any further action with respect to this matter and the NYSE
filed an application with the Securities and Exchange Commission to strike the
listing and registration of GTS shares. The Securities and Exchange Commission
issued an order granting the application of the NYSE to strike the listing and
registration of the GTS shares, effective at the opening of business on August
31, 2001. The Company's shares currently trade on the Over the Counter Bulletin
Board market under the symbol "GTLS.OB."
Involuntary Chapter 7 Bankruptcy Petition
On October 11, 2001, three holders of GTS Convertible Debentures filed an
involuntary petition against the Company under chapter 7 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The filing of the petition itself does not mean that the Company is a
debtor in a chapter 7 bankruptcy case or is otherwise inhibited from undertaking
business or operating in the normal course. Under the Bankruptcy Code, the
Company must file an answer within twenty days after it has been served with the
petition. On November 1, 2001, the Company was served with the involuntary
petition. On November 14, 2001, the Company consented to the relief sought in
the petition and voluntarily converted its case from chapter 7 to chapter 11 of
the Bankruptcy Code.
9
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 nine months ended September 30, 2001 may not be indicative of
the operating results for the full year.
Reclassifications have been made to the 2000 condensed consolidated
financial statements in order to conform to the 2001 presentation.
Going Concern
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates continuity of operations,
realization of assets and satisfaction of liabilities in the normal course of
business. The Company's continued existence is dependent on its ability to
complete the restructuring of the obligations of the Company and GTS Europe BV
under their public debt securities and of the Company's depositary shares
representing its preferred stock and to consummate the KPNQwest acquisition as
previously discussed in Note 2. "Significant Business Activities and Subsequent
Events," under "--Defaults, Restructuring of Debt and Preferred Stock," and "
- --KPNQwest Acquisition." The financial statements do not include any adjustments
to reflect the possible effects on recoverability and classification of assets
or classification of liabilities that may result from the inability of the
Company to continue as a going concern.
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 shareholders' deficit section
of the consolidated balance sheets. Foreign currency transaction gains or losses
are included in the calculation of net loss.
Recent Accounting Pronouncements
In June, 2001, the FASB issued Statements of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets". Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning January 1, 2002. We are currently assessing the financial impact SFAS
No. 141 and No. 142 will have on our consolidated financial statements.
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 the 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
10
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.
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:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(IN MILLIONS)
Revenues from the discontinued business operations:
Golden Telecom (through May 14, 2001) .......................... E. -- E. 32.3 E. 48.1 E. 85.4
Business Services (through August 23, 2001) .................... 58.3 188.3 288.6 426.5
---------- ---------- ---------- ----------
Total Revenues from discontinued business operations ............. E. 58.3 E. 220.6 E. 336.7 E. 511.9
========== ========== ========== ==========
Income (losses) from the discontinued operations of the Golden
Telecom business segment, net of income taxes of E.0.1 and E.0.3
and E.0.1 and E.0.1 for the three and nine months ended September
30, 2001 and 2000 respectively (through May 14, 2001) ........... E. -- E. 0.4 E. (5.5) E. (5.4)
Estimated gain/(loss) on the divestiture of Golden Telecom ....... 8.4 -- (17.8) --
Loss from the discontinued operations of the Business Services
business segment (through August 23, 2001) ....................... (21.6) (135.7) (191.1) (358.6)
---------- ---------- ---------- ----------
Loss from discontinued business operations ....................... E. (13.2) E. (135.3) E. (214.4) E. (364.0)
========== ========== ========== ==========
Extraordinary gain on the early extinguishment of debt of the
Business Services business segment ............................... E. 687.3 E. -- E. 687.3 E. --
========== ========== ========== ==========
</Table>
Upon the completion of the divestiture of the Business Services business
segment, the Company recorded an extraordinary gain of E.687.3 million,
principally attributable to the early extinguishment of the Esprit note
obligations.
No income taxes arise on the estimated loss on the divestiture of Golden
Telecom, the losses from the discontinued operations of the Business Services
business segment, or the extraordinary gain on the divesture of the Business
Services business segment.
The net assets of Golden Telecom included within the December 31, 2000
consolidated balance sheet consist of:
<Table>
<Caption>
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
============
</Table>
The net liabilities of Business Services business operations included within
the December 31, 2000 consolidated balance sheet consist of:
<Table>
<Caption>
DECEMBER 31,
2000
------------
(in millions)
Current assets ........................................................... E. 758.9
Total assets ............................................................. 1,716.2
Current liabilities ...................................................... 1,406.3
Total liabilities ........................................................ 2,310.4
------------
Net liabilities reflected in the Company's consolidated balance sheets ... E. (594.2)
============
</Table>
11
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 September 30, 2001, the remaining Right was valued at E.0.8
million and reflected as a current liability within our consolidated balance
sheet.
4. BUSINESS DISPOSITION AND RESTRUCTURING RELATED CHARGES
2001 Business Initiatives
In the first, second and third quarters of 2001, the Company recorded a
charge that aggregates approximately E.846.8 million which is attributable to
the previously discussed November 2000 Restructuring. The charge is comprised of
professional advisory fees of E.19.5 million; write-off of impaired tangible
assets of E.434.4 million; write-off of impaired intangible assets of E.332.2
million; E.29.2 million for contract terminations for excess backbone capacity
and facility closure related costs; and personnel related costs of E.31.5
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. In determining the write-down
amounts for the tangible and intangible assets, the Company utilized the
estimated total consideration of the KPNQwest Acquisition, including the
issuance of approximately E.210 million of new senior convertible notes and the
assumption of bank debt and capital lease obligations upon closing. 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 fourth quarter of 2001. The Company
anticipates that it will continue to incur additional business disposition and
restructuring related charges throughout the final quarter of 2001 and the first
quarter of 2002 as it continues to implement its Restructuring and refine its
estimates. The nature of the charges will be attributable to 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 E.1,127.3
million (E.1,076.2 million non-cash charge and E.51.1 million cash charge). The
non-cash charge of E.1,076.2 million was principally associated with the
write-off of impaired goodwill and intangible assets, write-off of fixed assets
and other non-current assets. While the cash charge of E.51.1 million was
principally associated with severance for personnel, transaction related costs
(professional advisors) and facility closure related costs.
At September 30, 2001, E.47.9 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 E.12.8 million and
E.1.8 million in the nine months ended September 30, 2001 and 2000,
respectively. The Company anticipates that it will have recognized non-cash
compensation charges in the range of E.16.0 million and E.19.0 million, by the
end of 2001.
12
6. COMPREHENSIVE INCOME (LOSS)
The following table reflects the calculation of comprehensive income (loss)
for GTS for the three and nine months ended September 30, 2001 and 2000:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(IN MILLIONS)
Net loss ......................................................... E. (57.2) E. (213.4) E. (535.0) E. (513.4)
Other comprehensive (losses) gains:
Preferred Dividends ............................................ (6.9) (10.0) (26.2) (28.9)
Unrealized holding losses on available for sale securities ..... (10.9) -- (2.0) --
Foreign currency translation adjustments ....................... 105.9 (107.1) 3.5 (99.5)
---------- ---------- ---------- ----------
Comprehensive income (loss) ...................................... E. 30.9 E. (330.5) E. (559.7) E. (641.8)
========== ========== ========== ==========
</Table>
7. RELATED PARTY TRANSACTIONS
Included in revenues for period ended August 23, 2001 and for the nine
months ended September 30, 2000, were E.26.1 million and E.43.9 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 nine months ended September 30, 2000, were E.0.5 million and E.0.2 million
of revenues, respectively, from the Company's discontinued Golden Telecom
business segment.
Included in access and network services costs for the period ended August
23, 2001 and for the nine months ended September 30 2000, were E.0.8 million and
E.2.0 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 E.1.5 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
nine months ended September 30, 2000 from the Company's discontinued Golden
Telecom business segment.
As of December 31, 2000, the Company had net receivables of E.324.8 million,
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 were contributed as either equity or forgiven and included as a
reduction in the extraordinary gain on the divestiture of the Business Services
business segment. As of December 31, 2000, the Company had net receivables of
E.13.4 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 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.
13
Information about the Company's segments is as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(IN MILLIONS) 2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Ebone ................................................... E. 80.1 E. 108.9 E. 273.6 E. 311.8
Central Europe .......................................... 28.9 19.0 82.0 42.9
Corporate/Eliminations .................................. (4.6) (2.6) (12.9) (3.4)
---------- ---------- ---------- ----------
Total Revenue .............................................. 104.4 125.3 342.7 351.3
Income (loss) from operations:
Ebone ................................................... (745.2) 11.3 (877.4) 57.4
Central Europe .......................................... (31.2) (0.3) (32.9) (0.7)
Corporate ............................................... (25.0) (37.7) (116.9) (86.2)
---------- ---------- ---------- ----------
Total (loss) income from operations ........................ (801.4) (26.7) (1,027.2) (29.5)
Unallocated other income / (expense):
Interest, net ........................................... (31.2) (23.4) (130.1) (62.1)
Other expenses, net ..................................... 62.2 (23.1) 13.5 (44.2)
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes ... E. (770.4) E. (73.2) E.(1,143.8) E. (135.8)
Assets:
Ebone ................................................... 1,265.4 2,245.4
Central Europe .......................................... 147.2 122.4
Corporate/Eliminations .................................. 37.6 319.2
---------- ----------
Total assets from continuing business operations ........... E. 1,450.2 E. 2,687.0
Capital expenditures:
Ebone ................................................... 35.2 135.1 132.7 331.2
Central Europe .......................................... 3.5 9.9 21.6 28.8
Corporate ............................................... -- 20.3 51.5 74.6
---------- ---------- ---------- ----------
Total capital expenditures ................................. E. 38.7 E. 165.3 E. 205.8 E. 434.6
</Table>
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three and nine months ended
September 30, 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 alternative telecommunications providers, like the Company, has
become unavailable or has become available only with extremely 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, second and third 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 complete the restructuring of the obligations of the
Company and Global TeleSystems Europe B.V. ("GTS Europe BV) under their public
debt securities and of the Company's Depositary Shares, as described in more
detail below under "--KPNQwest Acquisition" and "--Liquidity and Capital
Resources." There can be no assurance that these objectives will be met or such
efforts successfully consummated.
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.
15
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 10, 2001, the buyers notified the Company of the exercise of their right to
cause the Company to sell certain shares of Golden Telecom held by the Company.
The buyers designated Golden Telecom as the purchaser of such shares. On July
24, 2001, the Company completed the sale of 2.3 million shares of Golden Telecom
to Golden Telecom (as designee of each of the buyers) for $25 million. After the
conclusion of this sale, the Company owned approximately 0.6 million shares, or
approximately 2.4% of Golden Telecom. On October 30, 2001, one of the buyers in
the May 14, 2001 sale purchased from the Company the remaining shares of Golden
Telecom held by the Company for approximately $6 million.
During the second quarter of 2001, GTS and GTS Europe BV 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 explored 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 retained
Houlihan Lokey Howard & Zukin as its investment banker to assist in developing a
financial restructuring plan and undertaking discussions with security holders
of the Company and GTS Europe BV.
As disclosed in greater detail below under "--KPNQwest Acquisition" and
"--Liquidity and Capital Resources," during the first, second and third quarters
of 2001, the Company made significant progress in achieving steps necessary to
complete the Restructuring and to enhance its liquidity position. In addition,
as further described in more detail below under "--KPNQwest Acquisition" and
"--Liquidity and Capital Resources," the Company has reached an agreement with
representatives of informal committees representing holders of public debt
securities of the Company and GTS Europe BV with respect to a consensual plan in
regard to the obligations under those securities.
KPNQWEST ACQUISITION
On October 19, 2001, the Company announced that it had signed a
definitive share purchase agreement with KPNQwest. The agreement provides that
KPNQwest will acquire, under the terms and conditions therein (i) GTS Europe BV
and (ii) the Company's Central European businesses (the "KPNQwest Acquisition").
KPNQwest will acquire these companies through the issuance of approximately
E.210 million of new senior convertible notes and the assumption of bank debt
and capital lease obligations upon closing. The transaction is expected to close
during the first quarter of 2002.
The Company also reached agreements with the informal committees
representing the holders of the Company's and GTS Europe BV's debt securities
with respect to existing events of default under such debt securities, the terms
of the transaction with KPNQwest and the allocation of the KPNQwest senior
convertible notes. To ensure the binding nature of the sale arrangement on all
of the holders of their debt securities, the Company and GTS Europe BV expect
that the transaction will be effectuated through "pre-arranged" court
proceedings by the Company and GTS Europe BV under United States bankruptcy laws
and a corresponding application by GTS Europe BV for "surseance" and "deposition
for composition" in The Netherlands.
On November 14, 2001, the Company and GTS Europe BV filed petitions for
relief under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. Pursuant to the Bankruptcy
Code, the Company and GTS Europe BV will continue in the management and
possession of their properties as debtors in possession. Also on November 14,
2001, GTS Europe BV commenced a proceeding in the District Court of Amsterdam
under the Netherlands Bankruptcy Act relating to a moratorium of payments to
creditors and a binding composition. Approval of the a plan of reorganization in
the U.S. would be subject to, among other things, acceptance by more than
one-half in number and two-thirds in dollar amount of voting holders of debt
securities in the requisite classes. Approval of the plan in The Netherlands
would be subject to, among other things, approval by two-thirds in number and
three-quarters in value of the GTS Europe BV debt security holders participating
in the proceedings. The transaction also may require approval by the European
Commission competition authorities.
In addition, the Company caused certain of its affiliates to enter into a
Share and Asset Purchase Agreement, dated as of October 18, 2001 (the "Share and
Asset Purchase Agreement"), with KPNQwest and certain of its affiliates, calling
for the sale of all of the outstanding shares of GTS Transatlantic Carrier
Services, Ltd. ("GTS Transatlantic"), the owner of the Company's rights in a
transatlantic cable system known as FLAG-Atlantic-1 (the "System"), together
with the equipment used by certain affiliates of the Company to operate and
maintain the System. The aggregate purchase price for these purchases was E.50
million (the "Purchase Price"), payable in installments of E.5 million, E.10
million, E.15 million and E.20 million on October 19, 2001,
16
November 15, 2001, December 15, 2001 and February 28, 2002, respectively.
Additionally, pursuant to the Share and Asset Purchase Agreement, GTS Network
(Ireland) Limited, an affiliate of the Company, will provide at cost network
management services for KPNQwest and its affiliates in respect of the equipment
purchased under the Share and Asset Purchase Agreement.
BUSINESS STRATEGY
As a result of the Restructuring, the Company will focus on enhancing and
building on its position as the premier provider of broadband network solutions
and services in Europe. The unit will expand its services to address the data
and Internet needs of the pan-European corporate market, and will continue to
provide carriers, ISPs, ASPs and Web-centric customers with managed bandwidth
and data products. Expanded services include IP virtual private networks,
dedicated hosting, high-capacity direct Internet access as well as a host of new
high-end data applications, such as streaming media services.
The Company's goal is to maintain and enhance our position as a leading
pan-European provider of broadband, Internet, and data to communications
carriers, Internet service providers and other high-usage enterprise customers.
In order to achieve this goal, we will build on the strengths of:
o Our pan-European broadband fiber optic network, which extends more than
25,000 kilometers, reaches virtually all major European cities, and is
the largest such operational network in Europe;
o 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
o Our large base of carrier, Internet service provider and other
bandwidth- and Internet-intensive customers.
The key elements of our strategy for achieving this goal are as follows:
o Focus our activities on our core expertise in optical and IP networking;
o Build on our leadership position in the carriers' carrier market to
penetrate a broader bandwidth intensive enterprise customer base;
o Exploit the reach and capacity of our fiber optic network; and
o Capitalize on the "Ebone" brand name, which we adopted in January 2001
as the brand for our broadband unit.
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:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues ......................................................... 100.0% 100.0% 100.0% 100.0%
Access and network services ...................................... 66.0 43.7 60.5 39.1
Selling, general and administrative .............................. 39.8 30.1 36.3 31.9
Depreciation and amortization .................................... 60.6 34.6 52.1 32.5
Business disposition, merger and restructuring related charges ... 696.5 12.5 247.1 4.4
Equity related - non-cash compensation ........................... 4.7 0.5 3.8 0.6
---------- ---------- ---------- ----------
Loss from operations ............................................. (767.6) (21.4) (299.8) (8.5)
Interest expense ................................................. (34.2) (36.3) (42.5) (38.2)
Interest income .................................................. 4.3 17.6 4.7 20.5
Foreign currency losses .......................................... 50.8 (20.3) 0.8 (13.7)
Other income/(expense) ........................................... 8.8 1.8 (3.1) 1.1
---------- ---------- ---------- ----------
Loss before income taxes ......................................... (737.9) (58.6) (333.7) (38.8)
Income taxes ..................................................... 0.3 3.9 0.7 3.9
---------- ---------- ---------- ----------
Net loss from continuing operations .............................. (738.2) 62.5 (334.4) (42.7)
Income (loss) from discontinued business operations .............. (12.6) (108.0) (62.7) (103.6)
---------- ---------- ---------- ----------
Net loss before extraordinary item ............................... (750.8)% (170.5)% (397.1)% (146.3)%
---------- ---------- ---------- ----------
</Table>
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenues. Consolidated revenues decreased to E.104.4 million, or (16.7)%,
for the three months ended September 30, 2001 as compared to E.125.3 million for
the three months ended September 30, 2000. Components of revenue for the three
months ended September 30, 2001 were Ebone (E.80.1 million), Central Europe
(E.28.9 million) and Corporate/Eliminations (E.(4.6) million). Components of
revenues for the three months ended September 30, 2000 were comprised of Ebone
(E.108.9 million), Central Europe (E.19.0 million) and Corporate/Eliminations
(E.(2.6) million). The decrease in Ebone revenue was due to pricing pressures in
the carrier's carrier market resulting in price declines on existing and new
contracts and cancellations of certain contracts as competitors completed
network buildout.
Access and Network Services. Access and network services costs for the three
months ended September 30, 2001 increased to E.68.9 million or 66.0% of revenues
as compared to E.54.7 million or 43.7% of revenues for the three months ended
September 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 September 30, 2001 increased to E.41.5
million or 39.8% of revenues as compared to E.37.7 million or 30.1% of revenues
for the three months ended September 30, 2000. Components of selling, general
and administrative expenses for the three months ended September 30, 2001 were
Ebone (E.26.5 million, or 33.1% of Ebone revenues), Central Europe (E.6.2
million, or 21.5% of Central Europe revenues) and Corporate (E.8.8 million).
Components of selling, general and administrative expenses for the three months
ended September 30, 2000 were Ebone (E.16.6 million, or 15.3% of Ebone
revenues), Central Europe (E.4.2 million, or 21.9% of Central Europe revenues)
and Corporate (E.16.9 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
E.63.3 million or 60.6% of revenues for the three months ended September 30,
2001 as compared to E.43.4 million or 34.6% of revenues for the three months
ended September 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.
Business Disposition and Restructuring Related Costs. In the third quarter
of 2001, the Company recorded a charge that aggregates approximately E.727.1
million which is attributable to the previously discussed November 2000
Restructuring. The charge is comprised of professional advisory fees of E.7.2
million; write-off of impaired tangible assets of E.372.8 million; write-off of
impaired intangible assets of E.332.2 and personnel related costs of E.14.9
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. In determining the write-down
amounts for the tangible and intangible assets, the Company utilized the
estimated total consideration of the KPNQwest Acquisition, including the
issuance of approximately E.210 million of new senior convertible notes and the
assumption of bank debt and capital lease obligations upon closing. 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 fourth quarter of 2001. The Company
anticipates that it will continue to incur additional business disposition and
restructuring related charges throughout the final quarter of 2001 and the first
quarter of 2002 as it continues to implement its Restructuring and refine its
estimates. The nature of the charges will be attributable to 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 E.5.0 million and E.0.6 million in the three months ended
September 30, 2001 and 2000, respectively. The Company anticipates that it will
have recognized non-cash compensation charges in the range of E.16.0 million and
E.19.0 million, by the end of 2001.
Interest Expense. Interest expense decreased to approximately E.35.7 million
for the three months ended September 30, 2001 as compared to E.45.5 million for
the three months ended September 30, 2000. The decrease in interest expense is
primarily attributable to decreased interest on the Converted Debentures as a
result of exchanges in April, May and July of $140.0 million of these debentures
into GTS common stock and decreased interest on capital leases related to
facilities closed or in the process of being closed as part of the November 2000
Restructuring.
Interest Income. Interest income decreased to approximately E.4.5 million
for the three months ended September 30, 2001 as compared to E.22.1 million for
the three months ended September 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 Gains (Losses). The Company recognized foreign currency
gains of E.53.0 million in the three months ended September 30, 2001 as compared
to losses of (E.25.4) million in the three months ended September 30, 2000. The
changes in foreign currency gains (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 divestiture of Golden Telecom and the
Company's Business Services business operations. The Company has accounted for
the disposal of these segments under Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), and accordingly, the Company recognized a
loss from discontinued business operations of E.13.2 million and E.135.3 million
in the three months ended September 30, 2001 and 2000, respectively.
Extraordinary Item. For the three months ended September 30, 2001, the
company recorded a E.726.7 million extraordinary charge to earnings resulting
from the early extinguishment of debt obligations.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Consolidated revenues decreased to E.342.7 million, or (2.4)%, for
the nine months ended September 30, 2001 as compared to E.351.3 million for the
nine months ended September 30, 2000. Components of revenue for the nine months
ended September 30, 2001 were Ebone (E.273.6 million), Central Europe (E.82.0
million) and Corporate/Eliminations ((E.12.9) million). Components of revenues
for the nine months ended September 30, 2000 were comprised of Ebone (E.311.8
million), Central Europe (E.42.9 million) and Corporate/Eliminations (E.(3.4)
million). The decrease in Ebone revenue was due to pricing pressures in the
carrier's carrier market resulting in price declines on existing and new
contracts and cancellations of certain contracts as competitors completed
network buildout.
Access and Network Services. Access and network services costs for the nine
months ended September 30, 2001 increased to E.207.5 million or 60.5% of
revenues as compared to E.137.3 million or 39.1% of revenues for the nine months
ended September 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 nine months ended September 30, 2001 increased to E.124.3
million or 36.3% of revenues as compared to E.112.1 million or 31.9% of revenues
for the nine months ended September 30, 2000. Components of selling, general and
administrative expenses for the nine months ended September 30, 2001 were Ebone
(E.73.8 million, or 26.7% of Ebone revenues), Central Europe (E.18.3 million, or
22.3% of Central Europe revenues) and Corporate (E.32.2 million). Components of
selling, general and administrative expenses for the nine months ended September
30, 2000 were Ebone (E.48.9 million, or 15.7% of Ebone revenues), Central Europe
(E.10.3 million, or 24.1% of Central Europe revenues) and Corporate (E.52.9
million). The increase in selling, general and administrative expenses as a
percentage of revenues for Ebone, is reflective of increased sales and marketing
efforts, development of the Company's new brand identity and increased
administrative costs required for the Company's increased customer base.
Depreciation and Amortization. Depreciation and amortization increased to
E.178.5 million or 52.1% of revenues for the nine months ended September 30,
2001 as compared to E.114.0 million or 32.5% of revenues for the nine months
ended September 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.
20
Business Disposition and Restructuring Related Costs. In the first, second
and third quarters of 2001, the Company recorded a charge that aggregates
approximately E.846.8 million which is attributable to the previously discussed
November 2000 Restructuring. The charge is comprised of professional advisory
fees of E.19.5 million; write-off of impaired tangible property of E.434.4
million; write-off of impaired intangible assets of E.332.2; E.29.2 million for
contract terminations for excess backbone capacity and facility closure related
costs; and personnel related costs of E.31.5 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. In determining the write-down amounts for the tangible and intangible
assets, the Company utilized the estimated total consideration of the KPNQwest
Acquisition, including the issuance of approximately E.210 million of new senior
convertible notes and the assumption of bank debt and capital lease obligations
upon closing. 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 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 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 E.12.8 million and E.1.8 million in the nine months ended
September 30, 2001 and 2000, respectively. The Company anticipates that it will
have recognized non-cash compensation charges in the range of E.16.0 million and
E.19.0 million, by the end of 2001.
Interest Expense. Interest expense increased to approximately E.146.1
million for the nine months ended September 30, 2001 as compared to E.134.1
million for the nine months ended September 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 E.16.0 million
for the nine months ended September 30, 2001 as compared to E.72.0 million for
the nine months ended September 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 Gain (Loss). The Company recognized foreign currency gains
of E.2.9 million in the nine months ended September 30, 2001 as compared to
losses of (E.48.2) million in the nine months ended September 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 divestiture of Golden Telecom and the
Company's Business Services business operations. The Company has accounted for
the disposal of these segments under Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), and accordingly, the Company recognized a
loss from discontinued business operations of E.214.4 million and E.364.0
million in the nine months ended September 30, 2001 and 2000, respectively.
Extraordinary item. For the nine months ended September 30, 2001, the
Company recorded E.825.6 million of extraordinary charges 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 E.200 million to E.250
million in cash capital expenditures in 2001 to implement our business plan, and
these amounts include the requirements for our Central European business segment
and the transatlantic capacity participation discussed below. The cash capital
expenditure amounts disclosed above excludes the cash capital expenditure
requirements for our Golden Telecom and Business Services businesses that we
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 E.65
million to its Business Services business operations during 2001, the E.65
million includes funding since the beginning of the year.
On May 14, 2001, the Company announced that it had closed the sale to a
group of buyers of 12.2 million shares of the common stock of Golden Telecom for
approximately E.143.7 million. Of the E.143.7 million, approximately E.68.1
million of cash was received at closing with the remaining E.75.6 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 E.28.4
million of Golden Telecom shares at a price of E.12.51 per share, and, if
certain conditions are met, the right to purchase the Company's remaining
interest in Golden Telecom during the twelve-month period following May 14th for
the greater of E.12.51 price per share or a 20% premium to the average closing
share price for the 60-day period preceding the purchase date. After the closing
discussed above, the Company owned approximately 2.9 million common shares of
Golden Telecom, or approximately 11.6% of the outstanding Golden Telecom common
shares. In addition, in connection with such closing, three of 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 10, 2001, the buyers notified the Company of the exercise of
their right to cause the Company to sell certain shares of Golden Telecom held
by the Company. The buyers designated Golden Telecom as the purchaser of such
shares. On July 24, 2001, the Company completed the sale of 2.3 million shares
of Golden Telecom to Golden Telecom (as designee of each of the buyers) for $25
million. After the conclusion of this sale, the Company owned approximately 2.4%
of Golden Telecom. On October 31, 2001, one of the buyers in the May 14, 2001
sale purchased from the Company the remaining shares, approximately 2.4% of
Golden Telecom held by the Company for approximately $6 million.
On June 1, 2001, the Company and GTS Europe BV, 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.
In view of these plans and ongoing discussions with security holders of the
Company and GTS Europe BV, GTS Europe BV did not make cash interest payments,
due on June 1, 2001, of E.15.1 million on its E.275 million aggregate principal
amount of 11% Senior Notes due 2009 and E.11.8 million on its E.225 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 E.13.8
million) on its $362.4 million (approximately E.426.6 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 E.11.6
million) on its $200 million (approximately E.235.4 million) aggregate principal
amount of its 10.375% Senior Notes due 2009 and E.4.4 million on its E.85
million aggregate principal amount of its 10.375% Senior Notes due 2006. Such
payment defaults matured into events of default under the indentures related to
these notes on August 15, 2001. Also related to its recapitalization plans, GTS
did not make the $5.2 million (approximately E.5.9 million) cash interest
payment due on August 15, 2001 on its $105 million (approximately E.123.6
million) aggregate principal amount of its 9.875% Senior Notes due 2005; and GTS
Europe BV did not make the $15.2 million (approximately E.17.3 million) cash
interest payment due on August 15, 2001 on its $265 million (approximately
E.311.9 million) aggregate principal amount of its 11.5% Senior Notes due 2007.
These payment defaults matured 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
Banc of America Securities Limited, Bank of America International Limited,
Deutsche Bank AG London, Dresdner Bank AG London Branch and, E.N. Investment
Company, Centaurus Alpha Master Fund Limited, Lehman Commercial Paper Inc.,
Morgan Stanley & Co. International Limited, certain investment funds and
accounts managed by Oaktree Capital Management, LLC and certain other funds
described as the "Mackay Funds" (collectively, the "Bank Group"), which are
parties to a E.250.0 million revolving credit facility with the Company and
certain of its subsidiaries (including Global TeleSystems Europe Holdings B.V.,
an indirect subsidiary of the Company and a direct subsidiary of GTS Europe BV),
waived 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. The Bank Group also waived certain
other defaults under such credit facility. These waivers may expire 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 the Company or GTS Europe
BV in the U.S. or The Netherlands other than a bankruptcy pursuant to the
proposed voluntary restructuring of the Company and its subsidiaries.
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 recognized an extraordinary gain of approximately
E.39.4 million (this amount is net of unamortized debt issuance costs of
approximately E.0.9 million) within its third quarter 2001 consolidated
statements of operations in connection with this transaction.
The above transactions is in addition to deleveraging transactions effected
by GTS during April and May 2001 to extinguish $104.0 million aggregate
principal amount of GTS's 5.75% Senior Subordinated Convertible Debentures due
2010. In connection with such previously reported transactions, GTS recognized
an extraordinary gain within its second quarter consolidated statements of
operations of approximately E.98.9 million (this amount is net of unamortized
debt issuance costs of approximately E.3.1 million). After giving effect to all
the above-described transactions, as of September 30, 2001, GTS had
approximately E.359.3 million of such debentures outstanding.
On October 18, 2001 the Company and certain of its subsidiaries (including
Global TeleSystems Europe Holdings B.V.) entered into a Second Supplemental
Agreement dated 18 October 2001 with the Bank Group, which Second Supplemental
Agreement amended and restated the existing Loan Agreement providing for a
revolving credit facility available to Global TeleSystems Europe Holdings B.V
(such facility, as it was amended pursuant to the Second Supplemental Agreement,
the "Amended Bank Facility"). The Amended Bank Facility provides, on the terms
and conditions therein, for a revolving credit facility of up to E.250.0 million
which terminates upon consummation of the bankruptcy restructuring of the
Company and its subsidiaries. As of November 14, 2001, E.170.0 million is
outstanding under the Amended Bank Facility. The Amended Bank Facility comprises
two tranches, "Tranche A" of up to E.150.0 million and "Tranche B" of up to
E.100.0 million. No utilizations may be made under Tranche B if the Company's
gross cash balances are more than E.10.0 million. In addition, utilizations
under Tranche B must be consistent with the Company's agreed monthly budget and
must not exceed a cumulative weekly limit of E.10.0 million.
On October 19, 2001, the Company announced that it had signed a definitive
share purchase agreement with KPNQwest. The agreement provides that KPNQwest
will acquire, under the terms and conditions therein, (the "KPNQwest
Acquisition") (i) GTS Europe BV and (ii) the Company's Central European
businesses. KPNQwest will acquire these companies through the issuance of
approximately E.210 million of new senior convertible notes and the assumption
of bank debt and capital lease obligations upon closing. The transaction is
expected to close during the first quarter of 2002.
The Company also reached agreements with the informal committees
representing the holders of the Company's and GTS Europe BV's debt securities
with respect to existing events of default under such debt securities, the terms
of the transaction with KPNQwest and the allocation of the KPNQwest senior
convertible notes. Holders of approximately 67% of the approximately E.1.1
billion outstanding principal amount of the publicly traded GTS Europe BV Senior
Notes, approximately 78% of the approximately E.116 million outstanding
principal amount of the GTS Senior Notes and approximately 35% of the
approximately E.362 million outstanding principal amount of GTS Convertible
Debentures signed forbearance agreements committing them to support, on the
terms and conditions therein, the proposed transaction subject to certain terms
and conditions, and to forbear from exercising and from supporting any exercise
of remedies against the Company or GTS Europe BV arising under such debt
securities.
To ensure the binding nature of the sale arrangement on all of the holders
of their debt securities, the Company and GTS Europe BV expect that the
transaction will be effectuated through "pre-arranged" court proceedings by the
Company and GTS Europe BV under U.S. bankruptcy laws and a corresponding
application by GTS Europe BV for "surseance" and "deposition for composition" in
The Netherlands.
23
On November 14, 2001, the Company and GTS Europe BV filed petitions for
relief under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. Pursuant to the Bankruptcy
Code, the Company and GTS Europe BV will continue in the management and
possession of their properties as debtors in possession. Also on November 14,
2001, GTS Europe BV commenced a proceeding in the District Court of Amsterdam
under the Netherlands Bankruptcy Act relating to a moratorium of payments to
creditors and a binding composition. The plan of reorganization filed in the
U.S. and Dutch court proceedings provide for the E.210.0 million KPNQwest senior
convertible notes and other assets of the Company and GTS Europe BV to be
distributed to the debt security holders of the Company and GTS Europe BV as
agreed between the Company and the informal committees representing the debt
security holders. The Company anticipates that the plan would also include
provisions for mergers and other restructuring transactions necessary to
effectuate the acquisition, payment in the ordinary course of the Company's
trade creditors, and releases from liability of the parties involved in
negotiating the transaction for their roles in the transaction. The plan would
not provide for a distribution to equity security holders of the Company.
Approval of the plan in the United States would be subject to, among
other things, acceptance by more than one-half in number and two-thirds in
dollar amount of voting holders of debt securities in the requisite classes.
Approval of the plan in The Netherlands would be subject to, among other things,
approval by two-thirds in number and three-quarters in value of the GTS Europe
BV debt security holders participating in the proceedings. The transaction also
may require approval by the European Commission and is subject to other
conditions.
The Company anticipates that none of the operating subsidiaries of the
Company will be involved in either court proceeding and both the Dutch and U.S.
plans will call for all vendor claims of the Company's operating subsidiaries to
be paid in the ordinary course of business.
Pursuant to the agreement between the Company and the informal
committees representing its debt security holders, the E.210 million of new
KPNQwest senior convertible notes will be allocated as follows: (i)
approximately E.40.0 - 55.0 million principal amount will be distributed to
bondholders participating in the interim financing agreement based upon peak
interim borrowings; (ii) approximately E.5.3 million principal amount, plus part
of the allocation outlined below, will be allocated to the GTS Convertible
Debentures, which will result in a total allocation to the GTS Convertible
Debentures of E.10.0 million in principal amount of senior convertible notes;
(iii) 76 percent of the remaining net amount of the new senior convertible notes
will be allocated to the GTS Europe BV bondholders and (iv) the remaining 24
percent of the senior convertible notes, less the approximately E.4.7 million
principal amount required to increase the allocation to the GTS Convertible
Debentures to E.10.0 million principal amount, will be allocated to the holders
of the GTS Senior Notes. In addition, the holders of the GTS Senior Notes will
receive the Company's investments in the common stock, warrants and a portion of
the preferred shares of Ventelo BV, the Company's reorganized business services
voice operations unit that was divested by the Company earlier this year.
In addition, the Company caused, as of October 18, 2001, certain of its
affiliates to enter into the Share and Asset Purchase Agreement with KPNQwest
and certain of its affiliates, calling for the sale of all of the outstanding
shares of GTS Transatlantic, the owner of the Company's rights in the System,
together with the equipment used by certain affiliates of the Company to operate
and maintain the System. The Purchase Price is payable in installments of E.5
million, E.10 million, E.15 million and E.20 million on October 19, 2001,
November 15, 2001, December 15, 2001 and February 28, 2002, respectively.
Additionally, pursuant to the Share and Asset Purchase Agreement, GTS Network
(Ireland) Limited, an affiliate of the Company, will provide at cost network
management services for KPNQwest and its affiliates in respect of the equipment
purchased under the Share and Asset Purchase Agreement.
During the third quarter, holders of 378,000 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 547,793 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 5.1 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.
24
Based on the Company's current existing cash balances (including net
proceeds from the sale of the remaining 0.6 million common shares in Golden
Telecom); projected internally generated funds and funds from the sale of assets
under the Share and Asset Purchase Agreement; available borrowings under the
Amended Bank Facility, 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, the Company believes that it will be
able to address its funding requirements into first quarter 2002. There can be
no assurance that the Company will be able to address its longer-term funding
needs, or that the KPNQwest acquisition will be successfully consummated.
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 (i) consummate the KPNQwest acquisition, (ii) consummate the restructuring of
the Company's and GTS Europe BV's debt obligations and GTS' depositary shares
described above, (iii) meet the conditions to borrowing under the Amended Bank
Facility, (iv) 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, (v) implement its strategy
to become a leading provider of data and IP to corporate businesses, (vi) limit,
to the extent possible, price erosion for broadband services, (vii) access
markets, attract sufficient numbers of customers and provide and develop
services for which customers will subscribe, and (viii) 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.
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 consummate the KPNQwest acquisition or otherwise raise
additional capital through these steps or otherwise, however, the Company may be
compelled to examine and pursue other alternatives, including instituting
further 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 other wise disposed of as part of the Restructuring) or
a liquidation of the Company
LIQUIDITY ANALYSIS
The Company had cash and cash equivalents of E.34.0 million and E.219.1
million as of September 30, 2001 and December 31, 2000, respectively. The
Company had restricted cash of E.49.2 million and E.89.1 million as of September
30, 2001 and December 31, 2000, respectively. The restricted cash relates to
cash held in escrow that is primarily related to bank guarantees issued in
connection with leases in the ordinary course of business in 2001 and 2000 and
additionally, for the Company's funding requirements for the FLAG Atlantic
Limited joint venture in 2000.
The Company used cash of E.166.2 million and provided cash of E.32.5 million
for its operating activities for the nine months ended September 30, 2001 and
2000, respectively. In addition, at September 30, 2001, the Company had E.47.9
million of accrued expenses associated with unpaid liabilities that have
resulted from our Restructuring. The Company also provided cash of E.6.8 million
and used cash of E.400.2 million for its investing activities in the nine months
ended September 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
25
exposure on an ongoing basis and the Company will use the output of this process
to execute financial hedges to cover foreign exchange exposure when practical
and economically justified.
IMPACT OF THE EURO
On January 1, 2000, eleven of the fifteen member countries of the European
Union, including Belgium, The Netherlands, Ireland, France, Germany, Italy and
Spain, where the Company has operations, established fixed conversion rates
between their existing sovereign currencies and a new currency called the 'Euro'
(E.). These countries adopted the Euro as their common legal currency on that
date. The Euro trades on currency exchanges and is available for non-cash
transactions. Hereafter and until January 1, 2002, the existing sovereign
currencies will remain legal tender in these countries. On January 1, 2002, the
Euro is scheduled to replace the sovereign legal currencies of these countries.
The Company has significant operations within the European Union including
many of the countries that have adopted the Euro. The Company continues to
evaluate the impact the Euro will have on its continuing business operations and
no assurances can be given that the Euro will not have material adverse affect
on the Company's business, financial condition and results of operations.
However, the Company does not expect the Euro to have a material effect on the
Company's competitive position as a result of price transparency within the
European Union as the Company has always operated as a pan-European business
with transparent pricing in ECU for the majority of its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes since December 31, 2000.
PART II OTHER INFORMATION
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
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 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 had retained independent advisors, that the
advisors had begun their due diligence investigations and that the Company would
make a formal recapitalization proposal to these representatives in the near
future.
In view of these plans and ongoing discussions with security holders of the
Company and GTS Europe BV, GTS Europe BV did not make cash interest payments,
due on June 1, 2001, of E.15.1 million on its E.275 million aggregate principal
amount of 11% Senior Notes due 2009 and E.11.8 million on its E.225 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 E.13.8
million) on its $362.4 million (approximately E.426.6 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 E.11.6
million) on its $200 million (approximately E.235.4 million) aggregate principal
amount of its 10.375% Senior Notes due 2009 and E.4.4 million on its E.85
million aggregate principal amount of its 10.375% Senior Notes due 2006. Such
payment defaults matured into events of default under the indentures related to
these notes on August 15, 2001. Also related to its recapitalization plans, GTS
did not make the $5.2 million (approximately E.5.9 million) cash interest
payment due on August 15, 2001 on its $105 million (approximately E.123.6
million) aggregate principal amount of its 9.875% Senior Notes due 2005; and GTS
Europe BV did not make the $15.2 million (approximately E.17.3 million) cash
interest payment due on August 15, 2001 on its $265 million (approximately
E.311.9 million) aggregate principal amount of its 11.5% Senior Notes due 2007.
These payment defaults matured 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.
The Bank Group, as parties to a E.250.0 million revolving credit facility
with the Company and certain of its subsidiaries (including Global TeleSystems
Europe Holdings B.V., an indirect subsidiary of the Company and a direct
subsidiary of GTS Europe BV) have waived any defaults under such credit facility
caused by the failure to make cash interest payments on the above-
26
described GTS Europe BV Senior Notes and GTS Senior Notes and Convertible
Debentures. The Bank Group also waived certain other defaults under such credit
facility. These waivers may expire 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 the Company or GTS Europe BV in the U.S. or The Netherlands other
than a bankruptcy pursuant to the proposed voluntary restructuring of the
Company and its subsidiaries.
ITEM 5 - OTHER INFORMATION
DELEVERAGING TRANSACTIONS
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 recognized an extraordinary gain of approximately E.39.4 million
(this amount is net of unamortized debt issuance costs of approximately E.0.9
million) within its third quarter 2001 consolidated statements of operations in
connection with this transaction.
During the third quarter, holders of 378,000 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 547,793 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 5.1 million Depositary Shares.
The above transactions are in addition to deleveraging transactions effected
by GTS during April and May 2001 to extinguish $104.5 million aggregate
principal amount of GTS's 5.75% Senior Subordinated Convertible Debentures due
2010. In connection with such previously reported transactions, GTS recognized
an extraordinary gain within its second quarter consolidated statements of
operations of approximately E.98.9 million (this amount is net of unamortized
debt issuance costs of approximately E.3.1 million). After giving effect to all
the above-described transactions, as of September 30, 2001, GTS had
approximately E.359.3 million of such debentures outstanding.
On September 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 $19.2 million on
such Depositary Shares representing non-payment of four 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.
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
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
27
("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
Ventelo BV, 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 or its affiliates will own through a subsidiary the remaining 10% of
the equity in Ventelo BV, and will hold preferred shares that will be
convertible into a 1% interest in Ventelo BV as well as warrants to acquire an
additional 10% of Ventelo BV. The Scheme is consistent with GTS's overall
program to recapitalize its balance sheet by eliminating or reducing its debt
obligations and preferred stock. The Company fulfilled all material conditions
to effectiveness of the Scheme on or about August 23, 2001.
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 did 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. 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.
Following the August 1, 2001 hearing, the Company decided not to take any
further action with respect to this matter and the NYSE filed with the
Securities and Exchange Commission an application to strike the listing and
registration of GTS shares. The Securities and Exchange Commission issued an
order granting the application of the NYSE to strike the listing and
registration of the GTS shares, effective at the opening of business on August
31, 2001. The Company's shares currently trade on the Over the Counter Bulletin
Board market under the symbol "GTLS.OB".
INVOLUNTARY CHAPTER 7 BANKRUPTCY PETITION
On October 11, 2001, three holders of GTS Convertible Debentures filed an
involuntary petition against the Company under chapter 7 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The filing of the petition itself does not mean that the Company is a
debtor in a chapter 7 bankruptcy case or is otherwise inhibited from undertaking
business or operating in the normal course. Under the Bankruptcy Code, the
Company must file an answer within twenty days after it has been served with the
petition. On November 1, 2001, the Company was served with the involuntary
petition. On November 14, 2001, the Company consented to the relief sought in
the petition and voluntarily converted its case from chapter 7 to chapter 11 of
the Bankruptcy Code.
28
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
July 13, 2001 Announcement of (i) the exchange of certain
of the senior subordinated debenture and
cumulative convertible preferred stock of
the Company and (ii) the approval of the
Esprit Telecom bondholders and (iii) the
default under the GTS Europe BV bonds.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has have duly caused this report to be signed on its 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: November 19, 2001
30