1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
November 30, 1998
Date of Report (Date of earliest event reported)
Global TeleSystems Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-23717 94-3068423
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1751 Pinnacle Drive
North Tower, 12th Floor
McLean, VA 22102 22102
(Address of principal executive offices) (Zip Code)
(703) 918-4500
(Registrant's telephone number, including area code)
2
The undersigned registrant hereby reports the following items related to the
Registrant's acquisition of NetSource Europe ASA in a transaction accounted for
as a purchase. The Registrant filed on November 30, 1998 a Current Report on
Form 8-K, which disclosed that the acquisition had been completed. The
Registrant indicated in that report its intention to submit the financial
statements and pro forma financial information prescribed by Rule 3-05 of
Regulation S-X and Article 11 of Regulation S-X, respectively, not later than
February 15, 1999, in accordance with Subsection (a)(4) of Item 7 of the General
Instructions for the Current Report on Form 8-K. This Amendment to that Current
Report is being filed to provide that financial information.
ITEM 7. FINANCIAL STATEMENTS, PRO FROMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements.
Report of Ernst & Young AS, Independent Auditors
NetSource Europe ASA Balance Sheets as of December 31, 1997
and 1996 (Audited)
NetSource Europe ASA Income Statements for the Years Ended
December 31, 1997 and December 31, 1996 (Audited)
NetSource Europe ASA Cash Flows Statements for the Years Ended
December 31, 1997 and December 31, 1996 (Audited)
NetSource Europe ASA Accounting Policies (Footnotes)
NetSource Europe ASA Condensed Balance Sheet as of
September 30, 1998 (Unaudited)
NetSource Europe ASA Condensed Income Statement for the
Nine Months Ended September 30, 1998 (Unaudited)
NetSource Europe ASA Condensed Cash Flows Statement for the
Nine Months Ended September 30, 1998 (Unaudited)
NetSource Europe ASA Accounting Policies (Footnotes)
(b) Unaudited Pro Forma Combined Financial Statements.
Unaudited Pro Forma Combined Statements of Operations for the
Year Ended December 31, 1997 and for the Nine Months Ended
September 30, 1998.
Unaudited Pro Forma Combined Balance Sheet as of September 30,
1998.
Notes to Unaudited Pro Forma Combined Financial Statements
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S
In connection with the acquisition of NetSource, on November 30, 1998, the
Company issued 3,737,407 shares of its common stock, par value $.10 ("Common
Shares"), to holders of NetSource stock who accepted, as of October 30, 1998,
the Company's offer to purchase the NetSource stock owned by such holders. The
Company received the NetSource shares tendered as consideration for the Common
Shares. No underwriters were involved in the issuance of the Common Shares. The
Company issued the Common Shares pursuant to Rule 903 under the Securities Act
of 1933 and the Company's offer was made exclusively to non US persons, within
the meaning of Rule 902 under the Securities Act, not in the United States. The
Company extended its offer to purchase the NetSource stock to December 15, 1998
and, consequently, 136,298 additional shares of the Company's common stock were
issued at December 15, 1998 pursuant to this transaction. That additional
issuance was also effected in accordance with Rule 903 of the Securities Act.
The Company received the additional NetSource shares tendered as consideration
for this additional issuance of the Company's common stock. No underwriters were
involved in this additional issuance.
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NETSOURCE EUROPE ASA
To the Annual Shareholders' Meeting of
NetSource Europe ASA
AUDITORS' REPORT FOR 1997
We have audited the annual financial statements of NetSource Europe ASA for
1997, showing a net loss for the year of NOK 20 661 376 for the parent company
and a consolidated net loss for the year of NOK 73 388 076. The annual financial
statements, which comprise the Board of Directors' report, the profit and loss
account, balance sheet, cash flow statement, notes to the accounts and
consolidated accounts, are presented by the company's Board of Directors and its
Managing Director.
Our responsibility is to examine the company's annual financial statements, its
accounting records and other related matters.
We have conducted our audit in accordance with relevant laws, regulations and
Norwegian generally accepted auditing standards. We have performed those audit
procedures considered necessary to confirm that the annual financial statements
are free of material misstatements. We have examined selected parts of the
evidence supporting the accounts and assessed the accounting principles applied,
the estimates made by management, and the content and presentation of the annual
financial statements. To the extent required by Norwegian generally accepted
auditing standards, we have reviewed the company's internal control and the
management of its financial affairs.
The Board of Directors' proposal for the allocation of the net loss complies
with the provisions of the Norwegian Joint-Stock Companies Act.
In our opinion, the annual financial statements have been prepared in accordance
with the requirements of the Norwegian Joint-Stock Companies Act and present
fairly the financial position of the company and group as of December 31st 1997
and the result of its operations for the year then ended, in conformity with
Norwegian generally accepted accounting principles.
Kristiansand, June 16th 1998
ERNST & YOUNG AS
Ove Eriksen
State Authorized Public Accountant (Norway)
Note: The translation into English has been prepared for information purposes
only.
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NETSOURCE EUROPE ASA
BALANCE SHEET
AS AT 31 DECEMBER
(I NOK)
PARENT COMPANY GROUP
1997 1996 ASSETS NOTE 1997 1996
CURRENT ASSETS
8,587,817 14,744,319 Cash and bank deposits 6 24,987,331 16,210,067
0 324,325 Accounts receivable 4 22,559,261 3,971,176
0 520,365 Intercompany receivables 0 0
88,480 544,867 Other current assets 69,380,258 713,651
0 0 Inventory 14,096,481 247,888
----------- ----------- ------------ -----------
8,676,297 16,133,876 TOTAL CURRENT ASSETS 131,023,331 21,142,782
----------- ----------- ------------ -----------
FIXED ASSETS
14,348,789 1,787,164 Shares in subsidiaries 1, 7 0 0
1 1 Other shares 2,047 1
123,030,853 1,677,000 Long term intercompany receivables 9 0 0
1,048,500 0 Other receivables 1,104,219 0
0 0 Product rights 2,3 431,246 0
981,000 1,177,000 Goodwill 2,3 16,842,090 2,304,000
0 992,000 Routers 2,3 31,205,199 992,000
0 393,300 Machinery, equipment and fixtures 2,3 8,467,901 595,653
----------- ----------- ------------ -----------
139,409,143 6,026,465 TOTAL FIXED ASSETS 58,052,702 3,891,654
----------- ----------- ------------ -----------
148,085,440 22,160,341 TOTAL ASSETS 189,076,033 25,034,436
----------- ----------- ------------ -----------
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NETSOURCE EUROPE ASA
BALANCE SHEET
AS AT 31 DECEMBER
(I NOK)
PARENT COMPANY GROUP
1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY NOTE 1997 1996
CURRENT LIABILITIES
0 0 Bank overdraft 6 3,615,867 0
2,682,071 1,458,445 Accounts payable 36,615,048 3,012,974
0 517,762 Accrued wages and social security expenses 13,451,240 458,581
0 0 Tax payable 5 0 17,022
231,850 0 Current liabilities intercompanies 0 0
27,206,192 4,244,353 Other current liabilities 69,746,082 5,029,558
30,120,113 6,220,560 TOTAL CURRENT LIABILITIES 123,428,237 8,518,135
------------ ----------- ------------ -----------
LONG TERM LIABILITIES
0 1,520,000 Long term liabilities 10 637,118 3,143,470
------------ ----------- ------------ -----------
0 1,520,000 TOTAL LONG TERM LIABILITIES 637,118 3,143,470
------------ ----------- ------------ -----------
0 0 Minority interest 0 0
SHAREHOLDERS'S FUNDS
4,617,709 2,630,274 Share capital (23 088 543 shares of NOK 0,20) 4,617,709 2,630,274
113,347,618 11,789,507 Statutory reserve fund 113,428,536 11,789,507
------------ ----------- ------------ -----------
117,965,327 14,419,781 Total restricted equity 118,046,245 14,419,781
0 0 Loss carried forward (53,035,567) (1,046,950)
117,965,327 14,419,781 TOTAL SHAREHOLDERS'S EQUITY 11 65,010,678 13,372,831
------------ ----------- ------------ -----------
148,085,440 22,160,341 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 189,076,033 25,034,436
------------ ----------- ------------ -----------
Mortgages 12
Guaranties 13
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INCOME STATEMENT
1 JANUARY - 31 DECEMBER
(I NOK)
PARENT COMPANY GROUP
1997 1996 NOTE 1997 1996
OPERATING INCOME
7,213,079 2,858,777 Sales 135,822,072 9,611,520
----------- ----------- ------------ ----------
7,213,079 2,858,777 TOTAL OPERATING INCOME 135,822,072 9,611,520
----------- ----------- ------------ ----------
OPERATING EXPENSES
4,900,597 2,355,774 Cost of sales 108,217,961 9,021,367
3,700,212 3,558,643 Salaries, wages and social expenses 36,486,852 6,983,956
13,477,515 5,016,864 Other operating expenses 46,543,644 9,154,766
1,732,809 874,590 Depreciation 2 10,944,731 1,232,904
201,472 107,154 Bad debt expenses 3,241,275 107,154
----------- ----------- ------------ ----------
24,012,605 11,913,025 TOTAL OPERATING EXPENSES 205,434,463 26,500,147
----------- ----------- ------------ ----------
(16,799,526) (9,055,248) OPERATING PROFIT (69,612,391) (16,888,627)
FINANCIAL INCOME AND EXPENSES
(1,933,600) (84,950) Interest from group companies 0 0
(526,010) (33,963) Interest income (1,080,053) (98,822)
3,245,900 8,987,578 Loss on intercompany receivables 0 0
40,028 0 Interest expenses 0 0
3,035,532 689,238 Other financial expenses 4,939,932 1,014,069
----------- ----------- ------------ ----------
3,861,850 9,557,903 NET FINANCIAL ITEMS 3,859,879 915,247
----------- ----------- ------------ ----------
(20,661,376) (18,613,151) PROFIT BEFORE TAXES (73,472,270) (17,803,874)
0 0 Taxes 5 (84,194) 0
----------- ----------- ------------ ----------
(20,661,376) (18,613,151) NET LOSS FOR THE YEAR (73,388,076) (17,803,874)
----------- ----------- ------------ ----------
ALLOCATION OF NET LOSS
(20,661,376) (18,613,151) Transferred from statutory reserve
----------- -----------
(20,661,376) (18,613,151) TOTAL ALLOCATIONS
----------- -----------
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NETSOURCE EUROPE ASA
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER
(I NOK)
PARENT COMPANY GROUP
1997 1996 NOTE 1997 1996
---- ---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
(20,661,376) (18,613,150) Profit before tax (73,472,270) (17,803,874)
436,678 0 Loss/gain at disposals of fixed assets (63,050) 0
0 0 Tax payable (67,172) 0
1,732,809 874,590 Ordinary depreciations 10,944,731 1,232,904
3,245,900 9,126,786 Extraordinary depreciations 0 139,209
0 769,882 Change in inventory (13,648,489) 556,539
324,325 (231,034) Change in accounts receivables (9,929,161) (3,861,413)
1,223,626 659,395 Change in accounts payables 21,594,649 1,786,110
3,652,679 (545,115) Change in other accruals (21,460,429) 4,716,881
(124,599,754) 0 Change in long term receivables on subsidiaries 0 0
0 0 Translation differences 1,057,620 (95,123)
- ------------ ----------- ------------ -----------
(134,645,113) (7,958,646) NET CASH FROM OPERATING ACTIVITIES (85,043,571) (13,328,767)
- ------------ ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
14,860,000 0 Proceeds from sale of fixed assets 404,000 0
(15,448,187) (1,511,890) Purchase of fixed assets (41,553,431) (2,776,170)
(11,581,789) (820,854) Acquisitions of shares in subsidiaries 18 (11,299,321) 0
0 0 Acquisitions of other shares (2,046) 0
(1,048,500) (10,049,410) Other investments (1,104,219) 0
- ------------ ----------- ------------ -----------
(13,218,476) (12,382,154) NET CASH FROM INVESTING ACTIVITIES (53,555,017) (2,776,170)
- ------------ ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
0 1,520,000 Proceeds from long term borrowings 0 2,229,570
20,000,000 3,965,042 Proceeds from short term borrowings 20,000,000 0
(1,520,000) (1,975,000) Repayment of long term borrowings (3,526,483) (1,975,000)
0 (1,353,415) Repayment of short term borrowings 0 0
0 0 Increased bank overdraft 3,615,867 (1,799,299)
123,227,087 32,857,498 Proceeds from issuance of share capital 127,286,468 32,857,500
0 0 Change in minority interests 0 921,105
- ------------ ----------- ------------ -----------
141,707,087 35,014,125 NET CASH FROM FINANCING ACTIVITIES 147,375,852 32,233,876
- ------------ ----------- ------------ -----------
(6,156,502) 14,673,325 Net change in cash and cash equivalents 8,777,264 16,128,939
14,744,319 70,994 Cash and cash equivalents at the beginning of the 16,210,067 81,128
year
- ------------ ----------- ------------ -----------
8,587,817 14,744,319 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 24,987,331 16,210,067
- ------------ ----------- ------------ -----------
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NETSOURCE EUROPE ASA
ACCOUNTING POLICIES
GENERALLY
The financial statements are prepared and presented in conformity with the Joint
Stock Companies Act and generally accepted accounting principles in Norway.
CONSOLIDATION PRINCIPLES
Consolidated companies
The consolidated accounts comprise the parent company Netsource Europe ASA and
the subsidiaries NetSource Norge AS, NetSource Invest II AS, NetSource Sverige
AB, NetSource Communication AB, NetSource Danmark ApS, NetSource Telecom Benelux
B.V, Teleon Holding B.V, International Telecommunications Ltd (ITL), Atlantic
Telecom Venray B.V. and WESTCom GmbH.
The income statement for the year ended 1997 for the parent company reflect
activity for the period from January 1st to June 30th as the activity was
transferred to the 100 % owned subsidiary NetSource Norge AS at July 1st 1997.
Since July 1st NetSource Europe ASA has been a holding company.
The subsidiaries have been consolidated according to the past equity method. In
the case of aquisition the difference between the cost of the shares and the
fair value of the net assets at the time of aquisition has been capitalized as
goodwill. Goodwill is depreciated by 10 % per year on a straight line basis. In
1996 goodwill was depreciated by 20 % per year. Compared to 1996 the change in
depreciation rate results in reduced depreciation on goodwill in 1997 amounted
to NOK 196,000 for the parent company and NOK 1,131,000 for the group. The
change in depreciation rate is based on a reevaluation of the useful economic
lifetime of the goodwill.
In 1997 the Board of Directors in NetSource Europe ASA signed a merger agreement
with NetSource Invest AS which ownes Teleon Holding B.V., International
Telecommunications Ltd (ITL), Atlantic Telecom Venray B.V. and WestCom GmbH. In
an extraordinary meeting in 1997 the shareholders in NetSource Europe ASA and
NetSource Invest AS approved the merger agreement. The merger was set out in
accordance with chapter 14 in the Joint Stock Companies Act in Norway. The
assets and liabilities of NetSource Invest were transferred to NetSource Europe
ASA in exchange of an issue of 1,880,298 shares at NOK 0,20 per share in
NetSource Europe ASA and cash payment amounted to NOK 11,299,321. The business
combination is accounted for according to the pooling of interests method.
Elimination of internal transactions
All significant transactions and balances between the parent company and
subsidiaries are eliminated.
Translations of accounts in foreign currencies
For consolidation purposes the income statement and the balance sheet of the
foreign group companies have been translated into NOK at the average exchange
rate of the year and the exchange rate prevailing on the balance sheet date,
respectively. The translation differences have been adjusted against equity.
ACCOUNTS RECEIVABLES
The accounts receivables have been reduced with a provision for bad debt.
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NETSOURCE EUROPE ASA
INVENTORIES
Inventories comprise routers for sales and are valued at the lower of cost or
market value.
PRODUCT RIGHTS
Product rights that have been aquired and external expenses related to the
aquisitions have been capitalised.
FIXED ASSETS AND DEPRECIATION
Fixed assets where the historic cost is capitalised, are depreciated on a
straight line basis over the estimated useful economic life of the asset.
PENSION EXPENSES AND PENSION OBLIGATIONS
Certain group companies are obliged to pay contributions into to employees'
pension funds. The contribution is fixed and the companies have no foreseeable
obligation, either in legal form or in substance, to pay further contribution if
the funds do not hold sufficient assets to pay all employee benefits relating to
the service in the current and prior period.
Pension premiums are expensed as incurred and are included in <<Salaries, wages
and social expenses>> in the income statement.
TAXES AND DEFERRED TAX BENEFIT
Taxes in the income statement include current tax payable and changes in
deferred tax.
Deferred tax and deferred tax benefits are calculated on the temporary
differences between the balance sheet items for taxation purposes and accounting
purposes. Deferred tax is entered into and classified as long term debt in the
balance sheet. Deffered tax assets have not been accounted for
FOREIGN EXCHANGE
Current liabilities/current assets are recorded at the higher/lower of the rate
the date of transaction or the rate prevailing on year end.
MINORITY INTERESTS
The losses applicable to the minority in consolidated subsidiaries that exceed
the minority interest in the equity in the subsidiaries are charged against the
majority interest.
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NETSOURCE EUROPE ASA
NOTES TO THE ACCOUNTS
(I NOK)
1. ACQUISITION OF COMPANIES AND ESTABLISHMENT OF NEW COMPANIES
The following acquisitions and establishments have been consolidated subsequent
to the establishment of the parent company. Refer to note 7 for details on the
group companies.
Aquistions and mergers
o NetSource Sverige AB (consolidated from January 1st 1995)
o NetSource Telecom Benelux B.V (consolidated from January 1st 1997)
o Teleon Holding B.V (consolidated from July 1st 1997)
o International Telecommunications Ltd (consolidated from July 1st 1997)
o Atlantic Telecom Venray B.V. (consolidated from July 1st 1997)
o WESTCom GmbH (consolidated from July 1st 1997)
The last four companies listed above were aquired by merger between NetSource
Europe ASA and NetSource Invest AS.
Establishment of new businesses
o NetSource Communication AS (consolidated from January 1st 1997)
o NetSource Norge AS (consolidated from August 1st 1997)
o NetSource Invest 2 AS (consolidated from August 1st 1997)
o NetSource Danmark ApS (consolidated from December 1st 1996)
The parent company has per December 29th 1997 exercised the option of purchasing
the remaining 49 % of the shares in ITL Ltd. held by the minority interests. The
purchase will be executed both in legal and substance form in 1998. The former
share owners of ITL Ltd. have option to repurchase the shares from NetSource
Europe ASA at 97,3 % of NetSource' purchase price if certain conditions are not
fullfilled.
Furthermore, NetSource Europe ASA has the option of purchasing the remaining 49
% of the shares in WestCom GmbH held by the minority interests. The option has
to be exercised in the period from August 1st to December 31st 1998.
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\ NETSOURCE EUROPE ASA
2. FIXED ASSETS
Parent company
Parent company
Machinery,
fixtures and
Goodwill equipment Routers Total
------------ ---------- ---------- ----------
Historical cost as at 1.1 1,960,790 578,280 1,364,000 3,903,670
Accumulated depreciation 1.1 783,790 184,980 372,600 1,341,370
---------- ---------- ---------- ----------
Book value 1.1 1,177,000 393,300 992,000 2,562,300
Additions 0 586,411 14,861,776 15,448,187
Disposals at cost 0 1,164,690 16,226,376 17,391,066
Accumulated depr. disposals 0 305,788 1,788,600 2,094,388
Ordinary depreciation 196,000 120,809 1,416,000 1,732,809
---------- ---------- ---------- ----------
Booked value as at 31.12 981,000 0 0 981,000
---------- ---------- ---------- ----------
Depreciation rate 10% 20-30% 33%
Group
Machinery,
Product- fixtures and
rights Goodwill equipment Routers Total
---------- ---------- ---------- ---------- ----------
Historical cost as at 1.1 0 3,477,790 859,864 1,364,600 5,702,254
Accumulated depreciation 1.1 0 1,173,790 264,211 372,600 1,810,601
---------- ---------- ---------- ---------- ----------
Booked value as at 1.1 0 2,304,000 595,653 992,000 3,891,653
Additions 453,846 15,669,090 9,953,931 38,263,597 64,340,464
Disposals at cost 0 0 66,038 750,000 816,038
Accumulated depr. disposals 0 0 12,388 462,700 475,088
Ordinary depreciation 22,600 1,131,000 2,028,033 7,763,098 10,944,731
---------- ---------- ---------- ---------- ----------
Booked value as at 31.12 431,246 16,842,090 8,467,901 31,205,199 56,946,436
---------- ---------- ---------- ---------- ----------
Depreciation rate 20% 10% 20-30% 33%
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NETSOURCE EUROPE ASA
3. INVESTMENT IN AND DISPOSAL (AT SALES PRICE) OF FIXED ASSETS THE LAST 3
YEARS (NOK 1 000)
Parent company
1997 1996 1995
Inv. Sold Inv. Sold Inv. Sold
Machinery/equip. 586 859 148 0 1,180 750
14,862 14,001 1,365 0 0 0
Routers
Goodwill 0 0 0 0 1,961 0
------- ------- ------- ------- ------- -------
Total
15,448 14,860 1,513 0 3,141 750
------- ------- ------- ------- ------- -------
Group
1997 1996 1995
Inv. Sold Inv. Sold Inv. Sold
Productrights 453 0 0 0 0 0
Machinery/equip. 9,954 0 325 0 1,302 750
38,264 404 1,365 0 0 0
Routers
Goodwill 15,669 0 0 0 1,961 0
------- ------- ------- ------- ------- -------
Total
64,340 404 1,690 0 3,263 750
------- ------- ------- ------- ------- -------
4. ACCOUNTS RECEIVABLES
Parent company 1997 1996
Face value 0 424,325
Provision for bad debt 0 100,000
---------- ----------
Book value 0 324,325
---------- ----------
Group 1997 1996
Face value 32,112,261 4,071,176
Provision for bad debt 9,553,000 100,000
---------- ----------
Book value 22,559,261 3,971,176
---------- ----------
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NETSOURCE EUROPE ASA
5. TAXES
Tax income in the group profit and loss account, amounting to NOK 84 194,
relates to reimbursement of income tax paid previous years from the german
subsidiary WestCom GmbH.
Taxation basis for the year
Result before taxes (20,661,376)
Permanent differences 14,804
Change in temporary differences 147,164
Issue expenses charged to the shareholders' equity (13,180,532)
------------
Taxation basis for the year (33,679,940)
------------
Payable tax 28% 0
------------
Temporary differences - parent company
At the end of the year, the following temporary differences and losses carried
forward exist:
1997 1996
Current assets/ current liabilities 0 (79,137)
Fixed assets/ long term liabilities (8,616,572) (8,390,270)
----------- -----------
Total temporary differences (8,616,572) (8,469,407)
Loss carried forward (51,613,600) (17,933,660)
----------- -----------
Total temp. differences/ losses carried forward (60,230,172) (26,403,067)
----------- -----------
Deferred tax benefit 28% 16,864,448 7,392,858
----------- -----------
The taxation basis for the year for the subsidiaries are negative and
consequently no taxes have been taken to the group profit and loss account.
6. BANK DEPOSIT
PARENT COMPANY GROUP
1997 1996 1997 1996
Total bank deposit 8,587,817 14,744,319 24,987,331 16,210,067
Restricted deposits incl. above 1,026,186 138,124 1,414,227 138,124
Bank overdraft limit 1,500,000 1,500,000 6,557,993 1,971,000
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NETSOURCE EUROPE ASA
7. SHARES IN SUBSIDIARIES
Share Number of Par Historical Book Our
Company name capital shares value cost value holding
- -------------------------------------- ------------ ------------- --------- ------------- ------------- ----------
NetSource Sverige AB SEK 1,250,000 12,500 100 1,599,902 1,599,902 100%
NetSource Danmark ApS DKK 125,000 125 1,000 137,263 137,263 100%
NetSource Norge AS NOK 50,000 50 1,000 50,000 50,000 100%
NetSource Invest II AS NOK 50,000 50 1,000 50,000 50,000 100%
NetSource Telecom Benelux B.V. NLG 40,000 40 1,000 603,775 603,775 100%
Teleon Holding B.V. NLG 40,000 40 1,000 4,605,242 4,605,242 100%
WESTCom GmbH DEM 50,000 50 1,000 5,177,558 5,177,558 51%
Atlantic Telecom Venray B.V NLG 40,000 40 1,000 1,737,580 1,737,580 100%
NetSource Communication AB SEK 250,000 2,500 100 231,850 231,850 100%
International Telecommunication Ltd IEP 100,000 10,000,000 0.01 155,619 155,619 51%
------------- -------------
14,348,789 14,348,789
------------- -------------
8. OTHER SHARES
Share Number Par Historical Book Our
Company name capital of shares value cost value holding
- ------------------------------- -------------- ---------- ----------- -------------- --------------- ---------------
Owned by parent company:
MTC Europe S.A. Usd 42,000 21 1,000 139,210 1 50%
Owned by subsidiary:
Sundry 2,046
--------------
2,047
--------------
9. INTERCOMPANY RECEIVABLES
The parent company has granted loans to subsidiaries at a net book value of NOK
123 030 853. Loan - agreements have been made including terms of interest and
installments. The parent company has no security for the loans and some of them
are granted as subordinated loans.
10. LONG TERM LIABILITIES
Long term liabilities due in 1998, amounting to NOK 260 000, is included in
other current liabilities.
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NETSOURCE EUROPE ASA
11. SHAREHOLDERS' EQUITY
Parent Company
Shares Share capital Statutory
reserve fund
Shareholders' equity as at 1 January 1997 2,630,274 2,630,274 11,789,507
New issue included share premium 14 February 1997 29,600 29,600 1,302,400
Number of shares before split 2,659,874 -- --
Split (1:5) 13,299,370 -- --
New issue 18 April 1997 3,018,875 603,775 0
New issue included share premium 21 April 1997 1,890,000 378,000 32,697,000
Merger with NetSource Invest AS 1,880,298 376,060 619
New issue included share premium 30 September 1997 3,000,000 600,000 101,400,000
Issue expenses 0 0 (13,180,532)
Net loss for the year 1997 0 0 (20,661,376)
----------- ----------- -----------
Shareholders' equity as at 31 December 1997 23,088,543 4,617,709 113,347,618
----------- ----------- -----------
Group
Equity as at 1 January 1997 13,372,831
New issues 128,266,303
Translation differences 1,057,620
Minority interests' part of loss (4,298,000)
Net loss for the year (73,388,076)
-----------
Equity as at 31 December 1997 65,010,678
-----------
12. MORTGAGES
Parent company Group
1997 1996 1997 1996
Mortgage secured by pledge 20,000,000 3,965,042 45,323,000 4,465,042
Pledged assets:
Group receivables 20,000,000 0 0 0
Shares in subsidiaries 1,787,165 0 0 0
Fixed assets 0 992,000 1,964,000 1,492,000
---------- ---------- ---------- ----------
Other receivables 0 324,325 90,433,000 1,198,325
---------- ---------- ---------- ----------
Total 21,787,165 1,316,325 92,397,000 2,690,325
---------- ---------- ---------- ----------
The pledged assets listed above are also security for credit facilities in bank.
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NETSOURCE EUROPE ASA
13. GUARANTIES
The parent company has issued guaranties amounting to NOK 42 947 000. In
addition a subsidary has issued a guaranty amounting to NOK 464 000.
The parent company has issued a guaranty to secure the operation of one of the
subsidiaries.
14. LEASING AND RENT AGREEMENTS
The group companies have entered into agreements for renting office premises and
leasing agreements for cars and other fixed assets with a remaining rent period
up to 4 years.
15. SHARE OPTION PLAN
Share option plan for employees as at 31.12.97:
Number of shares Call date Strike price
Option 1 105,820 May 31st 1998 Nok 26,88 per share
Option 2 105,820 May 31st 1999 Nok 29,76 per share
16. MANAGEMENT RENUMERATION
The managing director in one subsidiary is entitled to salary in two years after
leaving the company.
17. TRANSACTIONS WITH RELATED PARTIES
NetSource Europe ASA has at 31 December 1997 recorded a short term loan of NOK
20.000.000 from Viking Supply AS. Viking Supply AS and Data Finans Holding AS
are related through common shareholders. Data Finans Holding AS ownes 18,2 % of
the shares in NetSource Europe ASA.
In 1997 consultancy fees were paid to Ivar Formo via Viking Supply AS, Nicolai
Jarlsby via S0r Part AS and Ulf Atle Hansen via NetUp AS at the amounts of NOK
225,000, NOK 550,000 and NOK 250,000, respectively. Ivar Formo, Nicolai Jarlsby
and Ulf Atle Hansen are members of the Board of Directors and ownes 0,5 %, 1,1 %
and 1,0 % of the shares in NetSource Europe ASA.
17
NETSOURCE EUROPE ASA
18. ACQUISITIONS
Value of net assets acquired : 1997
Trade debtors and inventories 8,859,028
Other accruals (18,346,393)
Fixed assets (tangibles) 7,118,562
Long term liabilities (1,020,131)
Cash and cash equivalents 1,749,158
------------
(1,640,157)
Goodwill 15,669,090
------------
Total acquisition cost 14,028,314
less:
- - cash and cash equivalents acquired (1,749,158)
- - fair value of issued shares in parent company (979,835)
------------
Total outflow of cash on aquistions 11,299,321
------------
19. FUTURE SHARE ISSUES
At 18 June 1997 the General Shareholders Meeting of NetSource Europe ASA decided
to give the Board of Directors proxy to issue up to 9,000,000 shares at NOK 0,20
per share. The proxy will last until the ordinary General Shareholders Meeting
in 1999.
Of the total number of shares of 9,000,000, 4,880,298 shares have been issued in
1997. The remaining number of shares available for new share issues is
4,119,702.
18
NETSOURCE EUROPE ASA
UNAUDITED CONDENSED BALANCE SHEET
(in thousands)
As of
September 30, 1998
- ------------------------------------------------------------------------- --------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 3,049
Accounts receivable, net 13,602
Prepaid expenses 3,255
Other assets 3,602
--------------------
TOTAL CURRENT ASSETS 23,508
Property and equipment, net 4,329
Goodwill and intangible assets, net 22,068
Other noncurrent assets 222
--------------------
TOTAL ASSETS $ 50,127
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 27,296
Debt maturing within one year 13,302
Related party debt maturing within one year 8,333
--------------------
TOTAL CURRENT LIABILITIES 48,931
Taxes and other non-current liabilities 1,486
--------------------
TOTAL LIABILITIES 50,417
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock 745
Additional paid-in capital 23,402
Accumulated deficit (24,437)
--------------------
TOTAL SHAREHOLDERS' EQUITY (290)
--------------------
--------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,127
====================
See accompanying notes.
19
NETSOURCE EUROPE ASA
UNAUDITED CONDENSED INCOME STATEMENT
(in thousands)
For the Nine
Months Ended
September 30, 1998
- ------------------------------------------------------------------ --------------------
(unaudited)
Revenues,net $ 29,364
--------------------
OPERATING COSTS AND EXPENSES
Cost of revenues 31,089
Selling, general and administrative 27,741
Depreciation and amortization 3,077
--------------------
LOSS FROM OPERATIONS (32,543)
OTHER INCOME/(EXPENSE):
Interest income 675
Interest expense (1,319)
--------------------
(644)
--------------------
Net loss before income taxes (33,187)
Income taxes 0
--------------------
NET LOSS $ (33,187)
====================
See accompanying notes.
20
NETSOURCE EUROPE ASA
Unaudited Condensed Statement of Cash Flows
(in thousands)
For the Nine
Months Ended
September 30, 1998
- ------------------------------------------------ ------------------
(in thousands)
OPERATING ACTIVITIES
Net income $(33,187)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,077
Provision for doubtful accounts 11,169
Changes in assets and liabilities:
Accounts receivable (13,841)
Inventory (4,128)
Accounts payable and accrued expenses 21,314
--------
Net cash used in operating activities (15,596)
INVESTING ACTIVITIES
Purchases of property and equipment (2,184)
--------
Net cash used in investing activities (2,184)
FINANCING ACTIVITIES
Proceeds from Share Capital 7,856
Proceeds from Borrowings 9,558
--------
Net cash provided by financing activities 17,414
--------
Net decrease in cash and cash equivalents (366)
Cash and cash equivalents at beginning of period 3,415
--------
Cash and cash equivalents at end of period $ 3,049
========
21
NETSOURCE EUROPE ASA
Notes to Condensed Financial Statements
(unaudited)
1. Financial Presentation and Disclosures
General
Netsource Europe ASA is a limited liability company organized under the laws
of Norway. Netsource ASA has controlling ownership in several European
telecommunication resellers and has an established presence in Sweden,
Norway, Denmark, Germany, the Benelux and Ireland. The service offerings
differ from country to country but include switched voice least cost
routing, carrier reseller services and prepaid calling card services. The
retail business is primarily directed to the small and medium sized business
market in each country. The selling of telecommunications services is
conducted principally through indirect distribution channels. Customers
remit payments through direct debit, check payment and credit card methods.
Financial Presentation and Disclosures
In the opinion of management, the accompanying unaudited condensed financial
statements of Netsource Europe ASA contain all adjustments (consisting only
of normal recurring accruals) necessary to present fairly the Company's
financial position as of September 30, 1998, and the results of operations
and cash flows for the periods indicated.
2. Policies and Procedures
Consolidated Companies
The consolidated accounts comprise the parent company Netsource Europe ASA
and the subsidiaries Netsource Norge AS, NetSource Invest II AS, Net Source
Invest III AS, Net Source Invest IV AS, NetSource Sverige AB, Netsource
Communications AB, Netsource Phonsystem AB, Netsource Danmark ApS,
Netsource Danmark AS, NetSource Telecom Belgium, The Netherlands, and
Luxembourg B.V, Teleon Holding B.V, International Telecommunications Ltd
(ITL), Atlantic Telecom Venray B.V and WESTCom Gmbh.
The consolidated accounts are prepared in accordance with Norwegian GAAP.
Certain adjustments have been made to these accounts in order that they may
be presented in accordance with US GAAP. Under Norwegian GAAP, all business
combinations are accounted for following the pooling method of accounting,
whereas, under US GAAP business combinations are accounted for following the
purchase method unless certain requirements are met for the pooling method.
Further, other adjustments are related to certain accrued revenue and
expenses, foreign currency translation, and depreciation and valuation of
property and equipment. The preparation of financial statements, in
conformity with USGAAP, requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Material accruals have been
recorded; however, other adjustments may have been required had an audit
been performed.
Foreign Currency Translation
For consolidation purposes the income statement and the balance sheet of the
foreign group companies have been translated into USD directly from the
operating companies' local currency financials statements at the average
exchange rate of the period and the period end exchange rate, respectively.
The translation differences have been charged against equity.
Accounts Receivable
Accounts receivable are shown at their net realizable value which
approximates their fair value. Accounts receivable are shown in the balance
sheet net of an allowance for uncollectible accounts of $11,169 at September
30, 1998. Of the gross receivable balance at September 30, 1998, 57% relates
to customer accounts in Sweden.
22
NETSOURCE EUROPE ASA
Notes to Condensed Financial Statements
(unaudited)
Property and Equipment
Property and Equipment are recorded at their historical cost. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives:
Network equipment 3-5 years
Routers 3 years
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair market value
of the net assets of acquired businesses and is being amortized on a
straight-line basis over their estimated useful lives ranging from 5 to 10
years.
Share Capital
Shares Share Capital
Shareholders'
equity as at 31 December 1997 23,088,543 631,179
New Issues 4,470,825 114,001
---------- -------
Equity as at 30 September 1998 27,559,368 745,180
23
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined statement of operations for the year
ended December 31, 1997 and nine months ended September 30, 1998 gives effect to
the acquisition of NetSource Europe ASA ("NetSource") as if it had occurred on
January 1, 1997. The unaudited pro forma combined balance sheet as of
September 30, 1998 gives effect to the acquisition of NetSource as if it had
occurred on September 30, 1998. No adjustments has been included in the pro
forma amounts for any anticipated cost savings or other synergies.
The unaudited pro forma statements of operations are based on available
information and on certain assumptions and adjustments described in the
accompanying notes which Global TeleSystems Group, Inc. ("GTS") believes are
reasonable. The unaudited pro forma combined statements of operations are
provided for informational purposes only and do not purport to present the
results of operations of GTS had the transaction assumed therein occurred on or
as of the date indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future. The unaudited pro forma combined
statements of operations and related notes should be read in conjunction with
the consolidated financial statements of GTS filed on its Form 10-K and Form
10-Q and the financial statements of NetSource including the notes thereto.
Global TeleSystems Group, Inc.
Pro Forma Combined Statement of Operations
Year ended December 31, 1997
(in thousands, except per share data)
(unaudited)
Historical(2)
---------------------- Pro Forma Pro Forma
NetSource Adjustments Combined
GTS Europe (1)(3)(4) (GTS & NetSource)
REVENUES, NET:
Telecommunication and other services $ 41,300 $ 14,102 $ 55,402
Equipment sales 5,798 5,798
--------- --------- --------- ---------
47,098 14,102 -- 61,200
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and other services 37,206 13,593 50,799
Equipment sales 5,513 -- 5,513
Selling, general and administrative 68,425 12,250 80,675
Depreciation and amortization 6,227 2,120 9,726 18,073
Non-income taxes 2,085 -- 2,085
--------- --------- --------- ---------
119,456 27,963 9,726 157,145
Write-off of venture-related assets 1,673 -- 1,673
Equity in losses of ventures 14,599 -- 14,599
--------- --------- --------- ---------
LOSS FROM OPERATIONS (88,630) (13,861) (9,726) (112,217)
OTHER INCOME/(EXPENSE):
Interest income 11,361 -- 11,361
Interest expense (39,086) (538) (39,624)
Foreign currency losses (1,826) (1,826)
--------- --------- --------- ---------
(29,551) (538) -- (30,089)
--------- --------- --------- ---------
Net loss before income taxes and minority interest (118,181) (14,399) (9,726) (142,420)
Income taxes 2,482 (12) 2,470
--------- --------- --------- ---------
Net loss before minority interest (120,663) (14,387) (9,726) (142,306)
Minority interest 3,677 -- 3,677
--------- --------- --------- ---------
NET LOSS ($116,986) ($ 14,387) ($ 9,726) ($141,099)
========= ========= ========= =========
Net loss per share ($ 3.55)
=========
Weighted average common shares outstanding 39,799
=========
See accompanying notes.
24
Global TeleSystems Group, Inc.
Pro Forma Combined Statement of Operations
For the nine months ended September 30, 1998
(in thousands, except per share data)
(unaudited)
Historical(2)
---------------------- Pro Forma Pro Forma
NetSource Adjustments Combined
GTS Europe (1)(3)(4) (GTS & NetSource)
REVENUES, NET:
Telecommunication and other services $ 111,195 $ 29,364 $ 140,559
Equipment sales 6,104 -- 6,104
--------- --------- --------- ---------
117,299 29,364 146,663
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of revenues:
Telecommunication and other services 77,525 31,089 108,614
Equipment sales 4,542 -- 4,542
Selling, general and administrative 75,150 27,741 102,891
Depreciation and amortization 13,953 3,077 7,295 24,325
Non-income taxes 5,140 -- 5,140
--------- --------- --------- ---------
176,310 61,907 7,295 245,512
Equity in losses of ventures (4,142) -- (4,142)
--------- --------- --------- ---------
LOSS FROM OPERATIONS (54,869) (32,543) (7,295) (94,707)
OTHER INCOME/(EXPENSE):
Interest income 28,110 675 28,785
Interest expense (52,603) (1,319) (53,922)
Foreign currency losses (10,364) (10,364)
--------- --------- --------- ---------
(34,857) (644) -- (35,501)
--------- --------- --------- ---------
Net loss before income taxes, minority interest and
extraordinary loss (89,726) (33,187) (7,295) (130,208)
Income taxes 2,151 -- 2,151
--------- --------- --------- ---------
Net loss before minority interest and extraordinary loss (91,877) (33,187) (7,295) (132,359)
Minority interest 3,746 -- 3,746
--------- --------- --------- ---------
Net loss before extraordinary loss $ (88,131) $ (33,187) $ (7,295) $(128,613)
Extraordinary loss --- extinguishment of debt
NET LOSS
Loss per share before extraordinary loss $ (2.25)
=========
Weighted average common shares outstanding 57,219
=========
See accompanying notes.
25
Global TeleSystems Group, Inc.
Pro Forma Combined Balance Sheet
as of September 30, 1998
(in thousands)
(unaudited)
Historical(2)
------------------------ Pro Forma Pro Forma
NetSource Adjustments Combined
GTS Europe (1)(3)(5) (GTS & NetSource)
CURRENT ASSETS
Cash and cash equivalents $ 993,928 $ 3,049 ($ 46,099) $ 950,878
Accounts receivable, net 59,822 13,602 73,424
Restricted cash 42,047 -- 42,047
Prepaid expenses 22,122 3,255 25,377
Other assets 12,539 3,602 16,141
----------- -------- --------- ----------
TOTAL CURRENT ASSETS 1,130,458 23,508 (46,099) 1,107,867
Property and equipment, net 436,019 4,329 440,348
Investments in and advances to ventures 61,705 -- 61,705
Goodwill and intangible assets, net 161,893 22,068 145,894 329,855
Restricted cash and other noncurrent assets 24,818 222 25,040
----------- -------- --------- ----------
TOTAL ASSETS $ 1,814,893 $ 50,127 $ 99,795 $1,964,815
=========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 135,565 $ 27,296 $ 2,000 $ 164,861
Debt maturing within one year 23,741 13,302 37,043
Current portion of capital lease obligations 31,130 -- 31,130
Related party debt maturing within one year 8,333 8,333
Other current liabilities 32,408 -- 32,408
----------- -------- --------- ----------
TOTAL CURRENT LIABILITIES 222,844 48,931 2,000 273,775
Long-term debt, less current portion 962,232 -- 962,232
Long-term portion of capital lease obligations 187,900 -- 187,900
Related party long-term debt, less current portion 3,530 -- 3,530
Taxes and other non-current liabilities 27,378 1,486 28,864
----------- -------- --------- ----------
TOTAL LIABILITIES 1,403,884 50,417 2,000 1,456,301
COMMITMENTS AND CONTINGENCIES
Minority interest 43,957 -- 43,957
Common stock, subject to repurchase (463,489 shares
outstanding) 15,643 -- 15,643
SHAREHOLDERS' EQUITY
Common stock 64,461,828 Pro Forma combined shares
issued and outstanding 6,050 745 396 6,446
Additional paid-in capital 696,574 23,402 97,109 793,683
Accumulated other comprehensive loss (7,496) -- (7,496)
Accumulated deficit (343,719) (24,437) (343,719)
----------- -------- --------- ----------
TOTAL SHAREHOLDERS' EQUITY 351,409 (290) 97,505 448,914
----------- -------- --------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,814,893 $ 50,127 $ 99,505 $1,964,815
=========== ======== ========= ==========
See accompanying notes.
26
GLOBAL TELESYSTEMS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. The accompanying unaudited pro forma combined financial statements do not
include any transition costs and expenses which are expected to be incurred
in connection with consummating the combination and integrating the
operations of GTS and NetSource Europe ASA. It is not feasible to determine
the actual amount of these costs and expenses until the combination is
completed and the related operational and transitional plans are complete.
These costs and expenses relate directly to completing the transaction, such
as professional and registration fees; employee benefit-related costs such
as severance, relocation and retention incentives, facility consolidations,
systems integration, and satisfaction of contractual obligations.
Additionally, the pro forma combined statement of operations does not
reflect any anticipated cost savings or other synergies that may be achieved
by the combination.
2. These columns represent historical results of operations and financial
position.
3. On November 30, 1998 GTS completed the acquisition of NetSource in a
transaction accounted for as a purchase for aggregate consideration
consisting of up to 4,037,500 shares of the Company's common stock and $46.1
million in cash. In addition, the Company has agreed to make additional
"earn out" payments of up to $35 million in either cash or Company common
stock contingent on NetSource's achieving certain quarterly performance
targets during the quarters ended March 31, and June 30, 1999. GTS's results
of operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 have been adjusted to give effect to the acquisition of
NetSource as if it had occurred as of the January 1, 1997. GTS's balance
sheet as of September 30, 1998 has been adjusted to give effect to the
acquisition of NetSource as if it had occurred on that date.
4. This entry reflects the adjustment to amortization expense for the effect of
the excess of consideration over net assets acquired in the NetSource
acquisition. For purposes of the unaudited pro forma combined financial
statements, the excess consideration has been amortized over an estimated
life of 15 years. A final determination of the lives attributable to the
intangible assets has not yet been made. As discussed in Note 5, a portion
of the excess consideration may be allocated to certain in-process research
and development projects. To the extent amounts are allocated to certain
in-process research and development projects, pro forma amortization expense
would be reduced accordingly.
5. These adjustments reflect the acquisition of NetSource by GTS. A
preliminary allocation of the purchase price has been presented in the
unaudited pro forma combined financial statements. The excess of
consideration over the fair value of the net assets acquired from NetSource
has been preliminarily allocated to goodwill and other intangibles. A final
allocation of the purchase price to the fair values of the NetSource assets
acquired and liabilities assumed is dependent upon certain valuations and
studies that have not progressed to a stage where there is sufficient
information to make such an allocation in the accompanying pro forma
financial information. GTS's management believes that the consideration in
excess of the historical book value of NetSource's net assets acquired, is
comprised of goodwill, certain in-process research and development projects
and other intangible assets. To the extent that a portion of the purchase
price is allocated to in-process research and development projects, a
charge, which may be material to GTS's results of operations, would be
recognized in the quarter ended December 31, 1998. See Note 4.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to the report to be signed on its
behalf by the undersigned hereunto duly authorized.
Global TeleSystems Group, Inc.
(Registrant)
Date: January 19, 1999 /s/ Alan Krenek
Vice President -
Corporate Accounting