<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2000
REGISTRATION STATEMENT NO. 333-94339
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GLOBAL TELESYSTEMS EUROPE B.V.
(Exact name of Registrant as specified in its charter)
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THE NETHERLANDS 4813 NONE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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WORLD TRADE CENTER
STRAWINSKYLAAN 425
1077 XX AMSTERDAM
THE NETHERLANDS
31-20-575-2160
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NY 10011
(212) 894-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for process)
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with copies to
CHRISTOPHER C. PACI, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NY 10022
212-848-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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10 1/2% Senior Notes due 2006... Euro 225,000,000 100% $231,615,000 $61,146(2)
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11% Senior Notes due 2009....... Euro 275,000,000 100% $283,085,000 $74,734(2)
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(1) Calculated based on the euro noon buying rate on January 7, 2000 of $1.0294
per Euro 1.00.
(2) The registration fee was calculated pursuant to Rule 457(f)(2) under the
Securities Act based on the euro noon buying rate on January 7, 2000 of
$1.0294 per Euro 1.00.
THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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[GLOBAL TELESYSTEMS EUROPE B.V. LOGO]
GLOBAL TELESYSTEMS EUROPE B.V.
OFFER TO EXCHANGE
ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2006
(E225,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 1/2% SENIOR NOTES DUE 2006
AND
11% SENIOR NOTES DUE 2009
(E275,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
FOR
11% SENIOR NOTES DUE 2009
OF
GLOBAL TELESYSTEMS EUROPE B.V.
TERMS OF EXCHANGE OFFER
- - Expires 5:00 p.m., London time on March 7, 2000, unless extended
- - Not subject to any other condition other than that the Exchange Offer does not
violate applicable law or any applicable interpretation of the Staff of the
Securities and Exchange Commission
- - All outstanding notes that are validly tendered and not validly withdrawn will
be exchanged
- - Tenders of outstanding notes may be withdrawn by you any time prior to 5:00
p.m., London time, on the date of the expiration of the Exchange Offer
- - The exchange of notes will not be a taxable exchange for U.S. federal income
tax purposes
- - We will not receive any proceeds from the Exchange Offer
- - The terms of the exchange notes to be issued are substantially similar to the
outstanding notes, except for transfer restrictions and registration rights
relating to the outstanding notes
- - We intend to list the exchange notes on the Luxembourg Stock Exchange
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE DISTRIBUTED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is February 7, 2000.
<PAGE> 3
The Exchange Offer is not being made to, nor will we accept surrenders of
or exchange from, holders of outstanding notes in any jurisdiction in which the
Exchange Offer or the acceptance of outstanding notes would not be in compliance
with the securities or blue sky laws of such jurisdiction.
No dealer, salesperson or other individual has been authorized to give any
information or make any representation not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by us. This prospectus does not constitute an offer or a solicitation in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus, nor any distribution
of securities made using this prospectus shall under any circumstances, create
any implication that there has not been any change in the facts set forth in
this prospectus or in our affairs since the date of this prospectus.
The securities may not be offered or sold in or into the United Kingdom
except in circumstances that do not constitute an offer to the public within the
meaning of the Public Offers of Securities Regulation 1995. All applicable
provisions of the Financial Services Act 1986 must be complied with in respect
of anything done in relation to securities in, from or otherwise involving the
United Kingdom.
Exchange Notes may not be offered in the Netherlands or elsewhere to the
account of any person or entity other than to persons or entities who or which
trade or invest in notes in the conduct of a profession or business within the
meaning of the Securities Transactions Supervision Act 1995 (Wet Toezicht
Effectenverkeer 1995) and its implementing regulations (which includes banks,
investment banks, brokers, dealers, pension funds, insurance companies,
securities firms, investment institutions, other institutional investors, and
other parties including inter alia treasuries and finance companies of large
enterprises which regularly, as an ancillary activity, trade or invest in
securities).
ii
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TABLE OF CONTENTS
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PAGE
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Where You Can Find More Information......................... iii
Incorporation of Certain Documents by Reference............. iv
Service of Process and Enforceability of Civil
Liabilities............................................... v
Disclosure Regarding Forward-Looking Statements............. v
Certain Definitions and Presentation of Information......... vi
Name Change................................................. vi
Summary..................................................... 1
Risk Factors................................................ 13
Use of Proceeds............................................. 27
The Exchange Offer.......................................... 28
Capitalization.............................................. 34
Selected Consolidated Financial Data........................ 35
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 36
Business.................................................... 43
Licenses and Regulatory Issues.............................. 57
Management.................................................. 62
Security Ownership of Principal Shareholders and
Management................................................ 70
Certain Relationships and Related Transactions.............. 71
Description of Other Indebtedness........................... 73
Description of the Exchange Notes........................... 75
Certain Tax Considerations.................................. 109
Plan of Distribution........................................ 113
Legal Matters............................................... 113
Experts..................................................... 114
General Listing Information................................. 114
Glossary.................................................... 116
Index to Financial Statements............................... F-1
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. As a result, we file periodic reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy reports, proxy statements and other information we file at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West
Madison Street, Chicago, Illinois 60661. Please call the Commission at
1-800-SEC-0330 for further information on the public reference facilities.
Copies of documents we file can also be obtained at prescribed rates by writing
to the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also access this information electronically through the
Commission's web page on the Internet at http://www.sec.gov. This website
contains reports, proxy statements and other information regarding registrants
such as ourselves that have filed electronically with the Commission.
This prospectus constitutes a part of a registration statement filed by us
with the Commission under the Securities Act of 1933, as amended. As permitted
by the rules and regulations of the Commission, this prospectus does not contain
all of the information contained in the registration statement and the exhibits
and schedules thereto. Therefore, we make in this prospectus reference to the
registration statement and to the exhibits and schedules thereto. For further
information about us and about the securities we hereby offer, you should
consult the registration statement and the exhibits and schedules thereto. You
should be aware that statements contained in this prospectus concerning the
provisions of any documents filed as an exhibit to the
iii
<PAGE> 5
registration statement or otherwise filed with the Commission are not
necessarily complete, and in each instance you should refer to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
The indentures governing the outstanding notes provide that we will furnish
to the holders of the notes copies of the periodic reports required to be filed
with the Commission under the Securities Exchange Act. Even if we are not
subject to the periodic reporting and informational requirements of the
Securities Exchange Act, we will make such filings to the extent that such
filings are accepted by the Commission. We will make these filings regardless of
whether we have a class of securities registered under the Securities Exchange
Act. Furthermore, we will provide the Trustee for the notes and the holders of
the notes within 15 days after such filings with annual reports containing the
information required to be contained in Form 10-K, and quarterly reports
containing the information required to be contained in Form 10-Q promulgated by
the Securities Exchange Act. From time to time, we will also provide such other
information as is required to be contained in Form 8-K promulgated by the
Securities Exchange Act. If the filing of such information is not accepted by
the Commission or is prohibited by the Securities Exchange Act, we will then
provide promptly upon written request, and at our cost, copies of such reports
to prospective purchasers of the notes.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to incorporate by reference the information we
file with them, which means that we can disclose important business and
financial information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information that we file later with the Commission will
automatically update and supersede this information. We incorporate by reference
into this prospectus the following documents or information filed with the
Commission (File No. 333-37719):
(a) our Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed with the Commission on March 31, 1999.
(b) our Quarterly Reports on Form 10-Q for the fiscal quarter ended
March 31, 1999, filed with the Commission on May 17, 1999, the quarter
ended June 30, 1999, filed with the Commission on August 13, 1999, and the
quarter ended September 30, 1999, filed with the Commission on November 3,
1999.
(c) our Current Report on Form 8-K filed on November 23, 1999.
(d) all documents that we file pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act after the date of the registration
statement of which this prospectus is part and prior to the effectiveness
thereof or after the date of this prospectus and prior to the termination
of the offering made hereby.
As noted above, any statement contained in this prospectus, or in any
documents incorporated or deemed to be incorporated by reference in this
prospectus shall be deemed to be modified or superseded for the purpose of this
prospectus to the extent that a subsequent statement contained in this
prospectus or in any subsequently filed document which also is or is deemed to
be incorporated by reference in this prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS PROSPECTUS. THESE DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST FROM US AT OUR PRINCIPAL EXECUTIVE OFFICES
LOCATED AT WORLD TRADE CENTER, STRAWINSKYLAAN 425, 1077 XX AMSTERDAM, THE
NETHERLANDS, TELEPHONE NUMBER (011) (31-20) 575-2160. IN ORDER TO OBTAIN TIMELY
DELIVERY, YOU MUST REQUEST THE INFORMATION NO LATER THAN FIVE BUSINESS DAYS
BEFORE THE EXPIRATION OF THE EXCHANGE OFFER.
iv
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SERVICE OF PROCESS AND
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under the laws of the Netherlands and substantially all
of our assets are located outside the United States. In addition, certain
members of our management board and supervisory board are residents of countries
other than the United States. As a result, it may not be possible for investors
to effect service of process within the United States upon such persons or to
enforce against such persons or GTS Europe judgments of courts of the United
States based upon civil liabilities under the United States federal securities
laws. We have been advised by our Netherlands counsel, Allen & Overy, Amsterdam
office, that since there is no treaty between the United States and the
Netherlands providing for the reciprocal recognition and enforcement of
judgments, United States judgments are not enforceable in the Netherlands.
However, assuming submission by GTS Europe to the jurisdiction of the United
States courts, a final judgment for the payment of money obtained in a United
States court, which is not subject to appeal or any other means of contestation
and is enforceable in the United States, would in principle be upheld by a
Netherlands court of competent jurisdiction when asked to render a judgment in
accordance with such final judgment by a United States court, without
substantive re-examination of the merits of the subject matter thereof; provided
that such judgment has been rendered by a court of competent jurisdiction, in
accordance with rules of proper procedure, that it has not been rendered in
proceedings of a penal or revenue nature and that its content and possible
enforcement are not contrary to public policy or public order of the
Netherlands. Notwithstanding the foregoing, there can be no assurance that
United States investors will be able to enforce against GTS Europe, or members
of the management board or the supervisory board, or certain experts named in
this prospectus who are residents of the Netherlands or other countries outside
the United States, any judgments in civil and commercial matters, including
judgments under the federal securities laws. In addition, there is doubt as to
whether a Netherlands court would impose civil liability on GTS Europe or on the
members of the management board or the supervisory board in an original action
predicated solely upon the federal securities laws of the United States brought
in a court of competent jurisdiction in the Netherlands against GTS Europe or
such members.
We are organized in the Netherlands as a besloten vennootschap and we
currently maintain our registered offices at World Trade Center, Strawinskylaan
425, 1077 XX Amsterdam, The Netherlands, and our telephone number is
31-20-575-2160. We have been incorporated since July 6, 1993 under the laws of
the Netherlands.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements as to how we may
perform in the future. We have based these forward-looking statements on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements are subject to risks, uncertainties and assumptions about us,
including, among other things:
- Risk of delay in implementing our business plan;
- Risks relating to our network;
- Anticipated trends and conditions in our industry;
- Heightened competition; and
- Our need for additional, substantial financing.
These forward-looking statements are principally contained in the following
sections of the prospectus:
- Risk Factors;
- Management's Discussion and Analysis of Financial Condition and Results
of Operations; and
- Business.
v
<PAGE> 7
In addition, in those and other portions of this prospectus, the words and
phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimated," "intends," "plans," "projection" and "outlook" are
intended to identify forward-looking statements. These statements should be
viewed with caution.
These forward-looking statements may differ materially from actual results
because they involve estimates, assumptions and uncertainties. In making these
forward-looking statements in this prospectus, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1998. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
CERTAIN DEFINITIONS AND PRESENTATION OF INFORMATION
As used in this prospectus, "GTS Europe" or the "Company" means Global
TeleSystems Europe B.V., formerly known as Hermes Europe Railtel B.V., a
Netherlands corporation. Unless the context otherwise requires, the terms "we",
"us", "our" and similar terms used in this prospectus refer to GTS Europe.
References to "BF" are to Belgian Francs and references to "dollars," "U.S.
dollars," "U.S.$" or "$" are to United States dollars. References to "Euro" or
"E" are to the currency of the European Communities ("EC") introduced at the
start of the third stage of European economic and monetary union on January 1,
1999, pursuant to the Treaty on European Union.
Solely for the convenience of the reader, this prospectus contains
translations of certain Euro amounts into dollars and certain dollar amounts
into Euros. These translations should not be construed as representations that
the Euro amounts actually represent such dollar amounts or vice versa, or could
have been or will be converted into dollars or Euros at the rate indicated or at
all. Unless otherwise indicated, the translations of dollars into Euros have
been made at $1.041 per Euro, the noon buying rate in The City of New York for
cable transfers in Euros as certified for customs purposes by the Federal
Reserve Bank of New York on November 17, 1999.
Technical terms used in our business are explained in the "Glossary" at the
end of this prospectus.
NAME CHANGE
A notarial deed amending our Articles of Association to change our name
from Hermes Europe Railtel B.V. to Global TeleSystems Europe B.V. was executed
on October 22, 1999. The change in our legal name became effective on November
8, 1999.
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THIS EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL WE ACCEPT SURRENDERS FOR
EXCHANGE FROM, HOLDERS OF OUTSTANDING NOTES IN ANY JURISDICTION IN WHICH THIS
EXCHANGE OFFER OR THE ACCEPTANCE OF OUTSTANDING NOTES WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
vi
<PAGE> 8
SUMMARY
This Summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the offer
fully and for a more complete description of the legal terms of the offer, you
should read carefully this entire document and the documents to which we have
referred you. See "Where You Can Find More Information" on page iii. We
encourage you to read this entire document and the documents incorporated by
reference in this document.
The Exchange Offer
On November 24, 1999, we completed a private offering consisting of:
- E225,000,000 10 1/2% Senior Notes due 2006
and
- E275,000,000 11% Senior Notes due 2009.
On the same day, we entered into a registration rights agreement relating
to the 10 1/2% Senior Notes due 2006 and the 11% Senior Notes due 2009 with the
initial purchasers in the private offering of these securities in which we
agreed, among other things, to deliver to you this prospectus and to complete
this exchange offer within 180 days of the issuance of the 10 1/2% Senior Notes
due 2006 and the 11% Senior Notes due 2009. The 10 1/2% Senior Notes due 2006
and the 11% Senior Notes due 2009 can now be tendered for exchange. You should
read the discussion under the heading "Summary Description of the Exchange
Notes" and "Description of the Exchange Notes" for further information regarding
the registered notes.
We believe that the notes issued in the exchange offer may be resold by you
without compliance with the registration and prospectus delivery provisions of
the Securities Act of 1933, subject to certain conditions. You should read the
discussion under the headings "Summary of the Terms of Exchange Offer" and "The
Exchange Offer" for further information regarding the exchange offer and resale
of the notes.
Our Company
We are one of the leading European providers of managed bandwidth and
related telecommunications services to telecommunications carriers, Internet
service providers and other bandwidth-intensive customers. We operate the
largest centrally managed fiber optic network in Europe over which we offer a
broad and sophisticated range of services. In addition, we operate a Tier-1
Internet backbone that connects European Internet service providers to the
Internet. We believe our early entry into the market, supported by the reach of
our high capacity network, a low-cost position and our focus on building
strategic relationships with our customers, has allowed us to create sustainable
advantages in a large and growing market.
For the three-month and nine-month periods ended September 30, 1999, we had
revenues of $90.1 million and $213.0 million, respectively, and EBITDA of $49.5
million and $112.2 million, respectively. At September 30, 1999, we had 156
customers under contract for service on our network, which represents an
increase from 133 and 137 customers at the end of the first two quarters of
1999, respectively. At September 30, 1999, our customers were contractually
obligated to pay us an aggregate of $548.2 million for future services, provided
we perform in accordance with contractual specifications. This amount increased
from $450.3 million and $498.7 million at March 31, 1999 and June 30, 1999,
respectively.
We primarily provide large capacity cross-border European and transatlantic
services over an integrated, managed network. Our network, based on dense
wavelength division multiplexing and synchronous digital hierarchy technology,
provides digital transmission capability upon which a broad range of advanced
applications may be built. Our network offers network availability, flexibility,
reliability and bandwidth speeds not widely available for transport of
telecommunications traffic across national borders in western Europe. Our
network is designed to provide customers with a wide variety of bandwidth
speeds, ranging from a data transmission rate of 2 megabits per second to a data
transmission rate of 2.5 gigabits per second. Access to our
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<PAGE> 9
network allows our customers to rapidly enter the markets they are targeting
while benefitting from low unit cost that our network provides.
Tailored to meet the diverse requirements of several customer segments, our
services include three classes of outsourcing levels. First, our unprotected
ring services provide diversely routed paths on which customers deploy their own
termination equipment and perform protection schemes themselves. Second, our
protected services provide self-healing point-to-point links managed end-to-end
by us. Finally, we offer turn-key network solutions where we perform all network
management functions on infrastructure that is fully dedicated to our customer.
Depending on the customer's bandwidth and application requirements, these three
classes of bandwidth services run on two underlying technologies: either
synchronous digital hierarchy technology over dense wavelength division
multiplexing (for speeds ranging from 2 megabits per second to 155 megabits per
second) or directly on dense wavelength division multiplexing (for speeds
ranging from 155 megabits per second to 2.5 gigabits per second).
In addition to providing sophisticated and flexible value-added services,
we intend to quickly and efficiently deploy our network presence wherever our
current and future customers need to originate and/or terminate traffic. This
has led to the rapid expansion of our network throughout Europe, as well as to
our purchase of transatlantic transmission capacity.
The current and future growth in the Internet has a significant impact on
the carrier business. In addition to increasing the amount of data that is being
transported across borders, the Internet influences the transport technologies,
the traffic patterns and the segments that require carrier-like services.
We offer, through our GTS Ebone brand name, Internet service providers,
value added network service providers, multimedia providers and Web-hosting
companies, a carriers'-grade Internet access service.
We began providing services to our customers in November 1996. We believe
that our early entry into the European carriers' carrier market has provided us
with several competitive advantages over other providers of telecommunications
services to telecommunications carriers, Internet service providers and other
bandwidth-intensive customers. We believe we are a pioneer in Europe in fiber
optic network deployment and service development. We have established long-term
contracts with telecommunications carriers, Internet service providers and other
bandwidth-intensive customers, in many instances capturing customers in some of
the most rapidly growing new market segments. In many cases, by providing
mission-critical value-added solutions to our customers, we seek to establish
ourselves as their strategic partner. This degree of integration in our
customers' operations has often provided us with the opportunity to introduce
and implement additional products and services with the customer, thereby
enabling us to further penetrate our customer base. As a result of our strong
position in the European telecommunications market, we have been able to attract
and retain a talented, multi-cultural, highly skilled workforce specialized in
our leading-edge technological industry.
Our customers include:
- European incumbent telecommunications
operators
- alternative carriers
- voice resellers
- international carriers
- national Internet service providers
- multinational Internet service providers
- value added network service providers
- Web-centric and media-centric companies
Our network, which covers approximately 17,000 kilometers connecting 29
cities in 12 European countries, reaches a substantial portion of our targeted
customer base. We expect our network to extend approximately 25,000 kilometers
with points of presence in approximately 20 European countries by the end of
2000. Thereafter, additional points of presence will be added to our network as
warranted by customer demand. We also provide services that connect Europe to
the United States in order to address a significant portion of the market growth
which is Internet and Internet protocol related. This service is currently
provided through capacity leased from third parties. We intend to purchase a
dedicated fiber pair on the FLAG
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<PAGE> 10
Atlantic-1 transatlantic fiber optic link using part of the proceeds of this
offering. We expect to begin offering unprotected services in the first quarter
of 2001 and fully protected services in the second quarter of 2001 over this
fiber pair. By owning this fiber pair, we will acquire capacity of 70 gigabits
per second, upgradeable to a maximum capacity of 400 gigabits per second of
fully protected capacity connecting the New York City area to our European
network. In order to meet and support the continuous increase in bandwidth
requirements of our current and future customers, we are upgrading our
transmission equipment used on our fiber optic network to increase our network's
transmission capacity. In addition, we intend to develop an additional ring on
our network connecting the core cities of London, Paris, Amsterdam, Frankfurt,
Dusseldorf and Brussels with cable duct that will accommodate up to 144 fibers.
We also plan to install transmission equipment on a second, currently installed
fiber pair on a number of existing routes in our network to expand our
transmission capacity on those routes.
OUR STRATEGY
Our goals are to reinforce our position as Europe's leading independent
provider of managed bandwidth and related telecommunications services to
telecommunications carriers, Internet service providers and other
bandwidth-intensive customers, and, taking advantage of our leadership position,
to capture additional revenues by extending our network closer to our customers
and providing new and enhanced services. The key elements of our strategy for
achieving these goals are to:
- Maintain our leadership position by delivering services which leverage
our low cost position
- Build on our experience as a first mover in the European carriers'
carrier market to further penetrate our existing customer base and expand
our service portfolio
- Capitalize on the experience of our management and workforce
- Focus on bandwidth-intensive customers
- Continue to invest in the reach and capacity of our network
- Extend our network closer to our customers and offer new and enhanced
services by:
- developing intra-city fiber networks
- expanding and enhancing the transatlantic capacity of our network
- capitalizing on demand for Web-based products and services
We were formed on July 6, 1993. We are a 98.7% owned subsidiary of Global
TeleSystems Group, Inc. (NYSE: GTS), a leading independent provider of
telecommunications services to businesses, other high-usage customers and
telecommunications providers in Europe.
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<PAGE> 11
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to E225,000,000 aggregate
principal amount of the outstanding 10 1/2% Senior Notes due 2006 and up to
E275,000,000 aggregate principal amount of the outstanding 11% Senior Notes due
2009 for an equal aggregate principal amount of exchange notes. The exchange
notes will be our obligations and are entitled to the benefits of the indentures
relating to the outstanding notes. The form and terms of the exchange notes are
identical in all material respects to the form and terms of the outstanding
notes, except that the exchange notes have been registered under the Securities
Act of 1933, and therefore contain no restrictive legends. Nor are the exchange
notes entitled to the benefits of the registration rights granted under the
registration rights agreement, executed as a part of the offering of the
outstanding notes, dated as of November 24, 1999, among GTS Europe and the
initial purchasers.
Registration Rights........ In November 1999, we and the initial purchasers
agreed that you, as a holder of the outstanding
notes, would be entitled to exchange your notes for
registered notes with substantially identical
terms. This exchange offer is intended to satisfy
these rights. After the exchange offer is complete,
you will no longer be entitled to any exchange or
registration rights with respect to your notes.
The Exchange Offer......... We are offering to exchange:
- E1,000 principal amount of 10 1/2% Senior Notes
due 2006 which have been registered under the
Securities Act of 1933 for each E1,000 principal
amount of our 10 1/2% Senior Notes due 2006, and
- E1,000 principal amount of 11% Senior Notes due
2009 which have been registered under the
Securities Act of 1933 for each E1,000 principal
amount of our 11% Senior Notes due 2009
which were issued on November 24, 1999 in a private
offering.
In order to be exchanged, an outstanding note must
be properly tendered and accepted. All outstanding
notes that are validly tendered and not validly
withdrawn will be exchanged.
As of this date, there are E225 million in
aggregate principal amount of outstanding 10 1/2%
Senior Notes due 2006 and E275 million in aggregate
principal amount of outstanding 11% Senior Notes
due 2009.
We will issue the exchange notes to you on or
promptly after the expiration of the exchange
offer.
Resale of the Exchange
Notes...................... Based on an interpretation by the staff of the
Securities and Exchange Commission set forth in
no-action letters issued to third parties,
including "Exxon Capital Holdings Corporation"
(available May 13, 1988), "Morgan Stanley & Co.
Incorporated" (available June 5, 1991), "Mary Kay
Cosmetics, Inc." (available June 5, 1991) and
"Warnaco, Inc." (available October 11, 1991), we
believe that the notes issued in the exchange offer
may be offered for resale, resold and otherwise
transferred by you without compliance with the
registration and prospectus delivery provisions of
the Securities Act of 1933 provided that:
- you are acquiring the notes issued in the
exchange offer in the ordinary course of
business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the notes issued to you in
the exchange offer;
4
<PAGE> 12
- you are not a broker-dealer who purchased the
outstanding notes directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933; and
- you are not an "affiliate" of ours.
If our belief is inaccurate and you transfer any
note issued to you in the exchange offer without
delivering a prospectus meeting the requirements of
the Securities Act of 1933 or without an exemption
from registration of your notes from such
requirements, you may incur liability under the
Securities Act of 1933. We do not assume or
indemnify you against such liability, but we do not
believe that any such liability should exist.
Each broker-dealer that is issued notes in the
exchange offer for its own account in exchange for
notes which were acquired by such broker-dealer as
a result of market-making or other trading
activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act of 1933, in connection with any
resale of the notes issued in the exchange offer.
The letter of transmittal states that by so
acknowledging and by delivering a prospectus, such
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act of 1933. A broker-dealer may use
this prospectus for an offer to resell or otherwise
retransfer of the notes issued to it in the
exchange offer. We have agreed that, for a period
of 180 days after the date of this prospectus, we
will make this prospectus and any amendment or
supplement to this prospectus available to any such
broker-dealer for use in connection with any such
resales. We do not believe that any registered
holder of the outstanding notes is an affiliate (as
such term is defined in Rule 405 of Securities Act
of 1933) of ours.
The exchange offer is not being made to, nor will
we accept surrenders for exchange from, holders of
outstanding notes in any jurisdiction in which this
exchange offer or the acceptance thereof would not
be in compliance with the securities or blue sky
laws of such jurisdiction.
Expiration of Exchange
Offer...................... The exchange offer will expire at 5:00 p.m., London
time, for the outstanding notes, on March 7, 2000,
unless we decide to extend the expiration date.
Accrued Interest on the
Exchange Notes and the
Outstanding Notes........ The exchange notes will bear interest from November
24, 1999. Holders of outstanding notes whose notes
are accepted for exchange will be deemed to have
waived the right to receive any payment in respect
of interest on such outstanding notes accrued from
November 24, 1999 to the date of the issuance of
the exchange notes. Consequently, holders who
exchange their outstanding notes for exchange notes
will receive the same interest payment on June 1,
2000 (the first interest payment date with respect
to the outstanding notes and the exchange notes)
that they would have received had they not accepted
the exchange offer.
Termination of the Exchange
Offer.................... We may terminate the exchange offer if we determine
that our ability to proceed with the exchange offer
could be materially impaired due to any legal or
governmental action, new law, statute, rule or
regulation or any interpretation of the staff of
the Securities and Exchange Commission of
5
<PAGE> 13
any existing law, statute, rule or regulation. We
do not expect any of the foregoing conditions to
occur, although there can be no assurance that such
conditions will not occur. Holders of outstanding
notes will have certain rights against our company
under the registration rights agreement executed as
part of the offering of the outstanding notes
should we fail to consummate the exchange offer.
Procedures for Tendering
Outstanding Notes........ If you are a holder of an outstanding note and you
wish to tender your note for exchange pursuant to
the exchange offer, you must transmit to Deutsche
Bank AG, London branch, as exchange agent for the
notes, on or prior to the expiration date:
- a computer-generated message transmitted in
accordance with Euroclear's or Clearstream
Banking, societe anonyme, as the case may be,
standard operating procedures for electronic
tenders and received by Euroclear or Clearstream
Banking, societe anonyme and forming a part of a
confirmation of book-entry transfer in which you
acknowledge and agree to be bound by the terms of
the letter of transmittal which accompanies this
prospectus; and
- a timely confirmation of book-entry transfer of
your outstanding euro notes to either Euroclear
or Clearstream Banking, societe anonyme, as the
case may be, pursuant to the procedure for
book-entry transfers described in this prospectus
under the heading "The Exchange
Offer -- Procedure for Tendering," must be
received by the exchange agent in London on or
prior to the expiration date.
By agreeing to the terms of the letter of
transmittal which accompanies this prospectus, each
holder will represent to us that, among other
things, (i) the notes to be issued in the exchange
offer are being obtained in the ordinary course of
business of the person receiving such exchange
notes whether or not such person is the holder,
(ii) neither the holder nor any such other person
has an arrangement or understanding with any person
to participate in the distribution or such exchange
notes and (iii) neither the holder nor any such
other person is an "affiliate," as defined in Rule
405 under the Securities Act of 1933, of ours.
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner of registered notes
that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender such notes or
registered notes in the exchange offer, you should
contact such person whose name your notes or
registered notes are registered promptly and
instruct such person to tender on your behalf. If
you, as such beneficial holder, wish to tender on
your own behalf you must, prior to completing and
executing the letter of transmittal and delivering
your outstanding notes, either make appropriate
arrangements to register ownership of the
outstanding notes in your name or obtain a properly
completed bond power from the registered holder.
The transfer of record ownership may take
considerable time.
Guaranteed Delivery
Procedures for Outstanding
Notes.................... If you wish to tender your outstanding notes and
time will not permit your required documents to
reach the exchange agent by the expiration date, or
the procedure for book-entry transfer cannot be
completed on time or certificates for registered
notes cannot be delivered on time, you
6
<PAGE> 14
may tender your outstanding notes pursuant to the
procedures described in this prospectus under the
heading "The Exchange Offer Guaranteed Delivery
Procedure for Outstanding Notes."
Withdrawal Rights.......... You may withdraw the tender of your outstanding
notes at any time prior to 5:00 p.m., London time,
on March 7, 2000, the business day prior to the
expiration date, unless your notes were previously
accepted for exchange.
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes........... Subject to the conditions summarized above in
"Termination of the Exchange Offer" and described
more fully under the "The Exchange
Offer -- Termination", we will accept for exchange
any and all outstanding notes which are properly
tendered in the exchange offer prior to 5:00 p.m.,
London time, on the expiration date. The notes
issued pursuant to the exchange offer will be
delivered promptly following the expiration date.
Certain U.S. Federal Income
Tax Consequences........... The exchange of the notes will generally not be a
taxable exchange for United States federal income
tax purposes. We believe you will not recognize any
taxable gain or loss or any interest income as a
result of such exchange.
Use of Proceeds............ We will not receive any proceeds from the issuance
of notes pursuant to the exchange offer. We will
pay all expenses incident to the exchange offer.
Exchange Agents for
Outstanding Notes.......... Deutsche Bank AG, London branch, is serving as
principal exchange agent in connection with the
outstanding notes. The principal exchange agent for
the outstanding notes can be reached at Winchester
House, 1 Great Winchester Street, London, EC2N 2DB
United Kingdom. Deutsche Bank Luxembourg S.A. is
serving as Luxembourg exchange agent in connection
with the outstanding notes. The Luxembourg exchange
agent for the outstanding notes can be reached at 2
Boulevard Konrad, Adenauer, L-1115 Luxembourg. For
more information with respect to the exchange of
outstanding notes, the telephone number of the
principal exchange agent in London is (44
20)7545-8000 and the facsimile number is (44
20)7547-0271.
7
<PAGE> 15
DESCRIPTION OF THE EXCHANGE NOTES
Securities Offered.................. E225,000,000 aggregate principal amount
of 10 1/2% Senior Notes due 2006 and
E275,000,000 aggregate principal amount
of 11% Senior Notes due 2009.
Maturity............................ The exchange notes due 2006: December
1, 2006.
The exchange notes due 2009: December
1, 2009.
Interest Payment Dates.............. December 1 and June 1, commencing June
1, 2000.
Ranking............................. The exchange notes will be general
unsecured obligations and will rank
senior to all our future subordinated
indebtedness. The exchange notes will
rank equally with all our existing and
future unsecured senior indebtedness,
including the exchange notes, the
11 1/2% senior notes due 2007, the
10 3/8% senior notes due 2006 and the
10 3/8% senior notes due 2009. The
exchange notes will effectively rank
junior to our secured liabilities to
the extent of the assets securing such
liabilities. In addition, the exchange
notes will effectively rank junior to
all liabilities (including a new senior
credit facility with one or more
institutional lenders in an aggregate
amount of up to E500.0 million that one
of our subsidiaries may enter into) of
our subsidiaries.
As of September 30, 1999, on a pro
forma basis, we would have had total
long-term debt (including long-term
portion of capital leases) of $1,264.2
million (including the exchange notes,
the 11 1/2% senior notes due 2007, the
10 3/8% senior notes due 2009 and the
10 3/8% senior notes due 2006), and our
subsidiaries would have had $454.3
million of total liabilities reflected
on our balance sheet.
Optional Redemption................. We may redeem the exchange notes due
2009, in whole or in part, at any time
on or after December 1, 2004 at the
redemption prices set forth in this
prospectus.
The exchange notes due 2006 are not
subject to redemption, except as set
forth in this prospectus.
Public Equity Offering Option
Redemption.......................... Before December 1, 2002, we may redeem
up to 35% of the principal amount of
the exchange notes due 2009 at a price
equal to 111% of the principal amount
thereof, plus accrued and unpaid
interest to the date of redemption,
with the net cash proceeds of one or
more public equity offerings or
strategic equity investments; provided,
however, that at least 65% of the
principal amount of the exchange notes
due 2009 originally issued remains
outstanding after each such redemption.
Optional Redemption for Changes in
Withholding Taxes................... We may redeem the exchange notes at a
price equal to 100% of the principal
amount thereof, plus accrued and unpaid
interest to the date of redemption, if
we have to pay any additional amounts
as a result of change in law or in the
interpretation or administration
thereof, if such change is announced
and becomes effective on or after
November 24, 1999.
8
<PAGE> 16
Change of Control................... Following the occurrence of a change of
control event, each holder of exchange
notes will have the right to require us
to purchase all or any portion of such
holder's exchange notes at a price in
cash equal to 101% of the principal
amount thereof, plus accrued and unpaid
interest to the date of purchase. There
can be no assurance that we will have
the financial resources necessary to
purchase the exchange notes upon a
Change of Control. See "Description of
the Exchange Notes -- Change of
Control."
Certain Covenants................... The indentures under which the exchange
notes will be issued will contain
certain covenants that limit our
ability and the ability of our
restricted subsidiaries to, among other
things:
- incur additional indebtedness,
- make certain restricted payments,
- create certain liens,
- sell certain assets,
- enter into certain transactions with
affiliates,
- merge or consolidate with any other
person or transfer all or
substantially all of their assets, or
- sell or issue capital stock of
restricted subsidiaries.
These covenants are subject to a number
of important exceptions and
qualifications. See "Description of the
Exchange Notes -- Certain Covenants."
Withholding Tax..................... Unless required by law, all payments
with respect to the exchange notes will
be made without withholding or
deduction for any present or future
taxes or governmental charges of
whatever nature imposed or levied by
any tax authority within the
Netherlands or within any other
jurisdiction. We will pay such
additional amounts so that the net
amounts receivable by the holders after
any payment, withholding or deduction
in respect of such tax or liability
shall equal the respective amounts
which would have been receivable in
respect of the exchange notes in the
absence of such payments, withholding
or deduction. See "Description of the
Exchange Notes -- Additional Amounts."
Trustee, New York Paying Agent and
Registrar........................... United States Trust Company of New
York.
London Paying and Transfer Agent.... Deutsche Bank AG, London branch.
Luxembourg Paying and Transfer
Agents.............................. Banque Internationale a Luxembourg S.A.
and Bankers Trust Luxembourg S.A.
Listing............................. The Notes are listed on the Luxembourg
Stock Exchange.
Consequences of Failure to
Exchange............................ Untendered outstanding notes will
remain restricted securities and will
continue to be subject to the following
restrictions on transfer:
9
<PAGE> 17
(i) outstanding notes may be
resold only if registered pursuant to
the Securities Act of 1933, if an
exemption from registration is
available, or if neither such
registration nor such exemption is
required by law,
(ii) outstanding notes shall bear
a legend restricting transfer in the
absence of registration or an exemption
therefrom, and
(iii) a holder of outstanding
notes who desires to sell or otherwise
dispose of all or any part of its
outstanding notes under an exemption
from registration under the Securities
Act of 1933, if requested by us, must
deliver to us an opinion of independent
counsel experienced in Securities Act
matters, reasonably satisfactory in
form and substance to us, that such
exemption is available. See "Risk
Factors -- Consequences of Failure to
Exchange Your Notes for Exchange
Notes."
Risk Factors........................ See "Risk Factors" on page 12 for a
discussion of factors you should
carefully consider before investing in
the exchange notes.
10
<PAGE> 18
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data for the years
ended December 31, 1995, 1996, 1997 and 1998 are derived from our audited
consolidated financial statements. The following unaudited summary historical
consolidated financial data as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 are derived from our unaudited consolidated
financial statements. The summary historical consolidated financial data
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- -------------------
1995 1996 1997 1998 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ -- $ 48 $ 5,373 $ 85,251 $ 42,933 $213,012
Operating costs and expenses:
Telecommunication
services.................. -- 4,694 6,842 41,848 22,259 64,913
Selling, general and
administrative............ 6,626 9,894 17,868 28,273 16,747 35,940
Depreciation and
amortization.............. 560 1,266 5,229 28,638 18,642 45,152
(Loss) income from
operations.................. (7,186) (15,806) (24,566) (13,508) (14,715) 67,007
Other income (expense)......... 135 (771) (6,597) (33,084) (21,406) (40,296)
Net (loss) income.............. (7,051) (16,577) (31,163) (48,935) (37,940) 22,062
OTHER DATA:
EBITDA(1)...................... $(6,626) $(14,540) $ (19,337) $ 15,130 $ 3,927 $112,159
Net cash (used in) provided by
operating activities........ (2,655) (11,540) (4,417) 44,957 20,527 19,227
Net cash used in investing
activities.................. (4,405) (20,781) (107,466) (92,758) (34,541) (96,805)
Net cash provided by (used in)
financing activities........ 11,644 28,924 317,500 (21,463) 493 245,853
Ratio of earnings to fixed
charges(2).................. -- -- -- -- -- 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
---------------------------
ACTUAL AS ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total current assets...................................... $ 476,173 $1,031,242
Property and equipment, net............................... 528,487 528,487
Total assets.............................................. 1,142,803 1,713,303
Total current liabilities................................. 176,808 176,808
Total debt, including capital leases...................... 764,011 1,284,511
Total liabilities......................................... 1,022,798 1,543,298
Total shareholders' equity................................ 120,005 170,005
</TABLE>
- ------------------------------
(1) EBITDA is earnings (loss) from operations before foreign currency gains
(losses), interest, taxes, depreciation and amortization. EBITDA is a
measure of a company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income (loss)
determined in accordance with generally accepted accounting principles
("GAAP") as an indicator of operating performance or as an alternative to
cash from operating activities determined in accordance with GAAP as a
measure of liquidity.
(2) Earnings consist of income before income taxes, plus fixed charges, except
where capitalized. Fixed charges consist of interest charges and
amortization of debt issuance costs, in each case whether expensed or
capitalized, and the portion of rent expense under operating leases
representing interest. Earnings were insufficient to cover fixed charges in
1995 by $7.1 million, in 1996 by $16.6 million, in 1997 by $31.2 million, in
1998 by $51.3 million and for the nine months ended September 30, 1998 by
$38.5 million.
(3) Adjusted to reflect the offering of the outstanding notes and the
application of net proceeds from that offering and a capital contribution
from our parent GTS as described in "Use of Proceeds."
11
<PAGE> 19
SUPPLEMENTAL HISTORICAL CONSOLIDATED QUARTERLY FINANCIAL DATA
The following supplemental historical consolidated quarterly financial and
operating data as of and for the three months ended December 31, 1998 and March
31, June 30, and September 30, 1999 are derived from our unaudited consolidated
financial statements and our operating records. It is intended to supplement the
aforementioned summary historical consolidated financial data.
The supplemental historical consolidated quarterly financial data presented
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999
------------ --------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 42.3 $ 55.7 $ 67.1 $ 90.1
Gross margin................................... 22.7 36.4 47.7 64.0
Net income (loss).............................. (11.0) (1.9) 7.5 16.4
OTHER DATA:
EBITDA(1)...................................... 11.2 $ 25.3 $ 37.4 $ 49.5
Cities on network (at end of period)........... 17 19 23 24
Kilometers operational (at end of period)...... 9,662 12,067 14,163 15,395
Number of contracted customers................. 126 133 137 156
Backlog (at end of period)..................... $ 418.0 $ 450.3 $ 498.7 $ 548.2
</TABLE>
- ------------------------------
(1) EBITDA is earnings (loss) from operations before foreign currency gains
(losses), interest, taxes, depreciation and amortization. EBITDA is a
measure of a company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income (loss)
determined in accordance with GAAP as an indicator of operating performance
or as an alternative to cash from operating activities determined in
accordance with GAAP as a measure of liquidity.
12
<PAGE> 20
RISK FACTORS
Prospective participants in the Exchange Offer should consider carefully
the following factors in evaluating our Company and our business in addition to
the other information contained in this prospectus.
RISKS RELATING TO THE NOTES
WE MAY BE UNABLE TO MEET OUR SUBSTANTIAL DEBT OBLIGATIONS
We have incurred substantial debt and may incur substantial additional debt
to implement our business plans.
The following chart shows certain important credit statistics as of
September 30, 1999 and as adjusted.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total debt, including capital leases................ $764,011 $1,284,511
Shareholder's equity................................ $120,005 $ 170,005
Debt to equity ratio................................ 6.4x 7.6x
</TABLE>
- ---------------
(1) Gives effect to the offering of the outstanding notes and the $50.0 million
capital contribution from our parent GTS as if they occurred on September
30, 1999.
We are currently evaluating entering into, through one of our subsidiaries,
a new senior credit facility with one or more institutional lenders in an
aggregate amount of up to E500.0 million. If we enter into this new credit
facility, debt incurred under it would be structurally senior to the Notes. In
the event of a bankruptcy, liquidation or reorganization of any of our
subsidiaries, creditors of our subsidiaries (including lenders under our new
credit facility) will generally be entitled to payment of their claims from the
assets of those subsidiaries before any assets are made available for
distribution to us.
Our ability to make principal and interest payments on our debt, including
the Notes, will depend upon, among other things, our future operating
performance. Our future operating performance depends on a variety of factors,
many of which are beyond our control. Because of this uncertainty, we cannot
assure you that we will generate sufficient cash flow to make payments on our
debt. Insufficient future cash flow could impair our ability to raise additional
equity or debt financing, to expand the reach and capacity of our network, and
to construct our intracity fiber networks and data- and Web-hosting centers. Our
cash flow could also be insufficient to make principal and interest payments on
our debt, including the principal and interest owed to you as a holder of the
Notes. If this happens, we may be required to renegotiate the terms of, or to
refinance, our long-term debt. We cannot assure you that we would be able to
refinance or renegotiate the terms of our debt when required.
As a result of our current high level of debt, we:
- will need significant cash to service our debt, which will reduce funds
available for operations, future business opportunities and investments
in new or developing technologies and make us more vulnerable to adverse
economic conditions;
- may increase our vulnerability to general adverse economic and industry
conditions;
- may find it more difficult to make interest and principal payments on
our other debt, which could be a default under the indentures relating
to the outstanding notes, the exchange notes, our 11 1/2% senior notes
due 2007, our 10 3/8% senior notes due 2006 and our 10 3/8% senior notes
due 2009;
- may not be able to refinance our existing debt or raise additional
financing to fund future working capital, capital expenditures, debt
service requirements, acquisitions or other general corporate
requirements;
13
<PAGE> 21
- may be less flexible in planning for, or reacting to, changes in our
business and in the telecommunications industry that affect how we
implement our financing, construction or operating plans; and
- will have more debt than some of our competitors, which may place us at
a competitive disadvantage with respect to such competitors.
If we fail to make the required payments or to comply with our debt
covenants, we will default on our debt. A default would permit our debtholders
to accelerate the maturity of the debt, which in turn could cause defaults under
our other debt.
COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR OPERATIONS
The covenants in our currently outstanding debt may materially and
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities. Among other things, these covenants
limit our ability to:
- incur additional debt;
- pay dividends or make certain other restricted payments;
- limit our ability to use our assets as collateral for loans;
- dispose of our assets;
- enter into transactions with affiliates; or
- consolidate, merge or sell all or substantially all of our assets and
the assets of our subsidiaries.
WE WILL DEPEND ON THE CASH FLOW OR OUR SUBSIDIARIES TO SATISFY OUR OBLIGATIONS
UNDER THE NOTES
We are a holding company with limited assets. Accordingly, we rely entirely
upon distributions from our subsidiaries for the funds necessary to meet our
obligations, including payments on the Notes. You should be aware that our
subsidiaries are separate and distinct legal entities. Because they are separate
and distinct our subsidiaries have no obligation to make any payments on the
Notes or to make any funds available for such payment. Therefore, our operating
cash flow and ability to meet our debt obligations, including payment on your
Notes, will depend on the cash flow provided by our subsidiaries. Cash flow from
our subsidiaries comes to us in the form of loans, dividends or other payments
to us as a shareholder of our subsidiaries. The ability of our subsidiaries to
make payments to us (in any form) will depend on their earnings, tax
considerations and legal restrictions. We also expect that the new credit
facility we are contemplating, if entered into, would limit the ability of our
subsidiaries to make payments or otherwise transfer assets to us.
ALTHOUGH YOUR NOTES ARE REFERRED TO AS "SENIOR NOTES," THEY WILL BE EFFECTIVELY
SUBORDINATED TO THE DEBT OF OUR SUBSIDIARIES
The Notes will be general unsecured obligations of GTS Europe. This means
that the Notes will rank senior in right of payment to all of our future
indebtedness that is expressly junior in right of payment to the Notes.
Otherwise, the Notes will rank equally in right of payment with all of our
existing and future unsecured debt. See "Capitalization".
We and our subsidiaries may incur other debt in the future, including
secured debt. We expect that we may incur future indebtedness that will be
secured. As a result, any claims against us by you, as a holder of the Notes,
will be effectively subordinated to those who have claims secured by mortgages
or other security interests or liens on the assets of GTS Europe or our
subsidiaries. All or substantially all of our fixed assets could become security
for our debt. The value of much of these fixed assets is derived from employing
them in a telecommunications business. These assets are highly specialized and,
taken individually, can be expected to have limited marketability. Consequently,
in the event that the secured creditors seek to realize their claim on our
assets, they would likely seek to sell the business as a going concern in order
to maximize the proceeds realized by any such sale. The price obtained upon any
such sale might be less due to the necessity to obtain
14
<PAGE> 22
approval of the sale or permits from the applicable regulatory authorities and
to comply with other applicable governmental regulations. Because of this, there
may not be sufficient assets left to pay our debt obligations, including those
payments owed to you as a holder of the Notes.
In the event of the insolvency, liquidation, dissolution or reorganization
of any of our subsidiaries, the creditors of each subsidiary would be entitled
to payment in full from such subsidiary's assets. After paying their own
creditors, our subsidiaries may not have any remaining assets for distribution
to us as shareholder and, consequently, there may not be any assets available
for payment to you, as a holder of the Notes. The Notes, therefore, are
effectively subordinated to the obligations of our subsidiaries.
RISKS RELATING TO OUR BUSINESS
COMPETITORS WITH GREATER RESOURCES MAY ADVERSELY AFFECT OUR REVENUES
We compete with various telecommunications companies, including MCI
WorldCom, Inc., Viatel, Inc., KPN Qwest B.V., COLT Telecom Group plc, Level 3
Communications, Inc., Carrier1 International S.A., Deutsche Telekom AG, France
Telecom S.A., Global Crossing Ltd. and British Telecommunications plc. Some of
these entities have announced plans to construct, have begun to construct or are
operating high bandwidth fiber optic networks across various European countries
and in several European metropolitan markets and in some cases, providing
transatlantic connectivity, which do or will compete with our network and our
planned intracity fiber networks. In addition, a number of telecommunications
companies and Internet service providers have begun offering or announced their
intentions to offer data- and Web-hosting services in key European cities.
We compete primarily on the basis of the range and quality of services
offered, customer service and price. Competitors may force us to lower our
prices or modify our service offerings to remain competitive. We cannot assure
you that we will be able to effectively market our expanded service offerings,
keep prices at a profitable level or attract and retain customers. Many
competitors have established customer bases and extensive brand name recognition
and have greater financial, management and other resources.
The ongoing liberalization of the European telecommunications market has
coincided with technological innovation to create an increasingly competitive
market, characterized by still-dominant incumbent telecommunications operators
as well as an increasing number of new market entrants. In addition, these
carriers own and operate fully built networks and infrastructure which provide
them with significant cost advantages. Since we utilize these networks in part
to provide many of our services, our failure to gain economical access to these
networks could have a material adverse effect on our business, results of
operations and financial condition.
WE ANTICIPATE THAT PRICES FOR FIBER ASSETS AND BANDWIDTH SERVICES WILL CONTINUE
TO DECLINE
We anticipate that prices for network transmission capacity will continue
to decline over the next several years due primarily to the following:
- price competition as various network providers complete construction of
networks that might compete with our network;
- installation by us and our competitors of excess fiber capacity; and
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber optic networks.
These and other factors could create pressure on us to reduce our prices. If we
do not continue to introduce product and service enhancements or if there are no
increases in volume and reductions in cost in the services we now provide to
offset these lower prices, our future gross margins will decrease.
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<PAGE> 23
OUR COMPETITIVE POSITION MAY BE COMPROMISED BY OUR DEPENDENCE ON LOCAL ACCESS
PROVIDERS
We need to enter into agreements with local access providers operating in
our target markets. We may also need to enter into agreements which permit us to
place our equipment at the facilities of such local access providers and/or
lease telecommunications transport capacity from such local access providers. We
cannot assure you that we will be able to enter into these agreements on
satisfactory terms.
EUROPEAN USE OF THE INTERNET, ELECTRONIC COMMERCE, DATA TRANSMISSION SERVICES,
MULTIMEDIA AND OTHER BANDWIDTH INTENSIVE APPLICATIONS MAY NOT INCREASE AS WE
EXPECT
Our business plan assumes that European use of the Internet, electronic
commerce, data transmission services, multimedia and other bandwidth-intensive
applications will increase substantially in the next few years, in a manner
similar to the increased use in the United States market in the past few years.
If the use of data transmission services, multimedia and bandwidth-intensive
applications in Europe does not increase as we anticipate, demand for many of
our value added products and services, including managed bandwidth services,
Internet protocol transit services and data- and Web-hosting services, will be
lower than we currently anticipate. Reduced demand for our services will have a
negative effect on our pricing power and our financial condition, including our
ability to make payments to you, as a holder of the Notes.
WE MAY EXPERIENCE A POTENTIAL LACK OF CUSTOMER DEMAND
Although we have been delivering services to a number of customers and have
experienced demand for services in the past, we cannot assure you that customer
demand for services over our network will continue to grow. Further, we cannot
assure you that there will be enough customer demand to realize the anticipated
cash flow, operating efficiencies and cost benefits of our network.
SUBSTANTIAL ADDITIONAL CAPITAL IS REQUIRED TO EXPAND OUR NETWORK
We will require significant amounts of capital to develop and expand our
network. We expect to incur between $750.0 million to $850.0 million through
2000 in additional capital expenditures, including capital lease obligations, to
expand the reach and capacity of our network, construct intracity fiber networks
and data-and Web-hosting centers in our target metropolitan markets and purchase
a dedicated fiber pair on the FLAG Atlantic-1 transatlantic cable system and
related equipment to upgrade its capacity. We believe that the net proceeds that
we received from the offering of the Notes, combined with existing cash
balances, the $50.0 million capital contribution from GTS and projected
internally generated funds, will be sufficient to fund our future capital
expenditures through at least December 31, 2000, as well as payments on the
long-term fiber lease arrangements. However, the actual amount and timing of our
future capital requirements may differ from our estimates. Thus, additional
financing may be needed to expand the reach and capacity of our network, to
construct our intracity fiber networks and data- and Web-hosting centers and
purchase the dedicated fiber pair on FLAG Atlantic-1 and related equipment. We
cannot assure you that such additional financing will be available on terms
acceptable to us or at all. If we fail to obtain this financing, we might have
to delay or abandon our plans for expanding the reach and capacity of our
network, constructing our intracity fiber networks and data- and Web-hosting
centers and purchasing the dedicated fiber pair on FLAG Atlantic-1 and related
equipment. Delaying or abandoning these plans could have a negative effect on
our financial condition.
OUR ACTUAL COSTS AND REVENUES MAY VARY FROM WHAT WE EXPECT THEM TO BE
Our revenues and the costs of expanding the reach and capacity of our
network, constructing our intracity fiber networks and data- and Web-hosting
centers and operating our business depend upon a variety of factors, including
our ability to:
- efficiently manage the enhancement of our network and operations;
- negotiate favorable contracts with suppliers;
- obtain additional licenses, regulatory approvals, rights-of-way and
infrastructure contracts;
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<PAGE> 24
- access markets and attract a sufficient number of customers; and
- provide and develop services to which our customers will subscribe.
Our revenues and costs are also dependent upon factors that are not within our
control, including:
- regulatory changes;
- changes in technology;
- increased competition;
- strikes;
- weather; and
- performance by third-parties, including our vendors, infrastructure
providers and customers, in connection with the enhancement of our
network.
Due to the uncertainty of these factors, our actual costs and revenues may vary
from what we expect them to be and our future capital requirements might
increase. Accordingly, we cannot assure you that the amount of funds required to
enhance our network and construct our intracity fiber networks and data- and
Web-hosting centers will not be greater than anticipated. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE MAY ENCOUNTER DELAYS IN IMPLEMENTING KEY ELEMENTS OF OUR BUSINESS STRATEGY
Our ability to achieve our strategic objectives will depend in large part
on the successful, timely and cost-effective realization of numerous elements of
our business plan, including:
- our plan to develop and offer seamless connectivity between Europe and
the United States;
- our plan to construct intracity fiber networks in fourteen major
European cities by year-end 2001;
- our plan to offer data- and Web-hosting centers;
- the execution of agreements with various parties regarding, among other
things, rights-of-way, lease of dark fiber and development and
maintenance of infrastructure and equipment;
- the timely performance by third parties of their contractual obligations
to engineer, design and construct the infrastructure underlying our
intracity fiber networks, the extension of our network and the planned
additional transatlantic capacity that we intend to purchase from the
FLAG Atlantic-1 joint venture; and
- activation of full capacity on the FLAG Atlantic-1 transatlantic cable
could be delayed or prevented if the FLAG Atlantic-1 joint venture fails
to comply with interest coverage and other financial ratios in the
credit facility it has entered into to finance construction of the
cable.
We cannot assure you that we will execute such actions. In addition, any delays
in concluding such agreements would materially and adversely affect the timely
or successful realization of our business plan.
We believe that our cost estimates and the build-out schedule are
reasonable with respect to these projects. However, the actual construction
costs or time required to complete the plans could substantially exceed current
estimates. Any significant delay or increase in the costs to develop such plans
could have a material adverse effect on our operations.
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<PAGE> 25
WE HAVE A LIMITED OPERATING HISTORY AND HAVE SUSTAINED SUBSTANTIAL NET LOSSES
We have a limited operating history and have historically sustained
substantial operating and net losses. We cannot assure you that our operations
will sustain profitability or positive cash flow in the future. For the
following periods, we reported net losses of:
<TABLE>
<CAPTION>
PERIOD NET LOSS
- ------ -------------
<S> <C>
Year ended December 31, 1996................................ $16.6 million
Year ended December 31, 1997................................ $31.2 million
Year ended December 31, 1998................................ $48.9 million
Inception through September 30, 1999........................ $82.1 million
</TABLE>
Our operations, infrastructure and customer base have grown significantly
in the last three years as we have expanded into new European markets. In
addition, we intend to enter additional European markets and offer new
telecommunications services. You should evaluate our prospects in light of the
risks, costs and time constraints that we face in establishing operations and
introducing new telecommunications services in newly liberalizing markets.
WE ARE DEPENDENT ON THIRD PARTIES FOR CONSTRUCTING OUR INTRACITY FIBER NETWORKS
AND EXTENDING OUR NETWORK
Our ability to achieve our strategic objectives will depend in part on our
successful, timely and cost-effective construction of our intracity fiber
networks and extension of our network. The development of our intracity fiber
networks and extension of our network may be adversely affected by a variety of
factors. Many of these factors, such as the regulatory environment, strikes,
natural disasters and other casualties, are beyond our control. In addition, we
will need to negotiate and conclude agreements with various parties. These
agreements are necessary to establish rights-of-way and to develop and maintain
our infrastructure and equipment.
For development of the intracity fiber networks and extension of our
network to be successful we need to obtain and maintain a number of agreements,
including:
- additional long-term leases of dark fiber;
- rights-of-way and other permits from railroads, utilities, governmental
authorities, transit authorities and private landowners to install fiber
optic cable; and.
- rights of access to buildings, such as Internet protocol exchange points,
that we intend to link to our intracity fiber networks.
We cannot assure you that we will be able to maintain all of our existing
agreements, rights and permits or that we will be able to obtain and maintain
the additional agreements, rights and permits needed to extend our network and
build our intracity fiber networks on acceptable terms. In addition, we may not
be able to conclude such agreements, rights or permits on time. Any delay in
concluding or failure to conclude or maintain these agreements could adversely
affect the operation and/or expansion of our network. This, in turn, could have
a negative effect on our financial condition, including our ability to make
payments to you on the Notes.
The successful and timely completion of our intracity fiber networks and
extension of our network will also depend on, among other things:
- the timely performance of independent contractors hired to engineer,
design and construct portions of our intracity fiber networks and core
network; and
- our ability to obtain and maintain applicable government approvals to
build and operate our intracity fiber networks and extend our network.
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<PAGE> 26
Development of our intracity fiber networks and extension of our network
might cost more or take longer than our current estimates. Although we believe
that our cost estimates and schedule are reasonable, we cannot assure you that
the actual construction costs or time required to construct our intracity
networks and extend our network will not be greater than we currently expect.
Delays or increased costs in developing the intracity networks or extending our
network could have a negative effect on our financial condition.
WE MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF EXPANDING OUR NETWORK INTO THE
UNITED STATES
Our strategy includes expanding our network into select cities in the
United States. The following are particular risks we may experience as a result
of expanding our network into the United States:
- we may not be able to obtain leases on intercity and intracity dark fiber
in our target markets in the United States on favorable terms, if at all;
- we may not be able to successfully compete with U.S. service providers;
- complying with applicable U.S. laws and regulations, including tax laws
and industry related regulations, could be burdensome or expensive; and
- if there are delays in the commencement of services on the FLAG
Atlantic-1 transatlantic fiber optic link, we may incur additional costs
as a result of having to lease additional transatlantic capacity from
third party providers.
We cannot assure you that we will be successful in overcoming these risks
or any other problems arising because of our expansion into the United States.
WE MAY BECOME DEPENDENT ON A SMALL NUMBER OF SIGNIFICANT CUSTOMERS
Our customers are, and a significant portion will continue to be,
telecommunications companies. For that reason, we may become dependent on a
small number of significant customers. In 1998, we had two major customers,
representing $9.5 million and $9.3 million or 11.1% and 10.9% of revenues,
respectively. The loss of a significant customer could significantly decrease
our revenues and, hence, adversely affect our financial condition.
WE MAY NOT BE ABLE TO UPGRADE OR EXPAND THE REACH AND CAPACITY OF OUR NETWORK TO
MEET THE EVOLVING DEMANDS OF OUR CUSTOMERS OR THE TECHNOLOGICAL ADVANCES BY
COMPETITORS
We anticipate that future expansions and adaptions of our network's
infrastructure, including the electronic and software components used in the
infrastructure, may be necessary in order to respond to growth in the number of
customers served, increased demands to transmit larger amounts of data, changes
in our customers' service requirements and technological advances by
competitors. Our ability to expand the reach and capacity of our network may
depend on our continued ability to lease dark fiber or bandwidth at a cost which
allows us to offer bandwidth at attractive prices for our customers. The
expansion and adaptation of our network will require substantial financial,
operational and managerial resources. We cannot assure you that we will be able
to expand or adapt our network to meet the evolving standards, demands and
requirements of our customers or advances of our competitors on a timely basis,
at a commercially reasonable cost, if at all. We also cannot assure you that we
will be able to deploy successfully an expanded and adapted network
infrastructure or that we will have access to capital to realize these goals.
Any failure to expand or adapt our network to the needs of our customers could
have a material adverse effect on our financial condition and results of
operations, including our ability to make payments on the Notes.
OUR BUSINESS WILL SUFFER IF WE LOSE KEY PERSONNEL OR FAIL TO ATTRACT AND RETAIN
OTHER QUALIFIED PERSONNEL
Our operations are managed by a small number of key executive officers. The
loss of any of these officers could have a negative effect on our business. The
loss of senior management or the failure to recruit additional qualified
personnel in the future could significantly impede our financial plans, network
development, marketing and other objectives. Although we have designed incentive
and compensation programs to retain
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<PAGE> 27
key employees and have entered into employment agreements with certain executive
officers, we cannot assure you as to the continued availability of qualified key
executive officers. See "Management."
We believe that our growth and future success will depend in large part on
our continued ability to attract and retain highly skilled and qualified
management, marketing, technical and sales executives and other personnel who
are in high demand and often have multiple employment options. The competition
for qualified management, marketing, technical and sales executives and other
personnel in the telecommunications industry is intense. We may lose key
employees or be forced to increase their compensation. We cannot assure you that
we will be able to hire or retain necessary personnel.
WE MAY ENCOUNTER DELAYS, OPERATIONAL PROBLEMS AND INCREASED COSTS IF WE ARE
UNABLE TO ACQUIRE KEY EQUIPMENT FROM OUR MAJOR SUPPLIERS
We are significantly dependent on the technology and equipment which we
acquire from telecommunications equipment manufacturers that may provide vendor
financing for, and maintenance of, this equipment. Without this equipment, we
would face delays, operational disruption and higher expenses. Our main
equipment suppliers are Alcatel, CIENA, Cisco Systems and Nortel Networks. While
we could obtain equipment of comparable quality from several alternative
suppliers, we may be unable to acquire compatible equipment from such
alternative sources on a timely and cost-efficient basis.
WE MAY FACE DIFFICULTIES IN INTEGRATING, MANAGING AND OPERATING NEW TECHNOLOGY
Our operations depend on our ability to successfully integrate new and
emerging technologies and equipment. These include the technology and equipment
required for dense wavelength division multiplexing and Internet protocol
transmission using dense wavelength division multiplexing technology.
Integrating these new technologies could increase the risk of system failure.
Additionally, any damage to our network management center could harm our ability
to monitor and manage the network operations.
THE TECHNOLOGY OF OUR NETWORK COULD BECOME OBSOLETE
The telecommunications industry is subject to rapid and significant changes
in technology and such technological advances may reduce the relative
effectiveness of existing technology and equipment. The cost of implementation
of emerging and future technologies could be significant.
Development and operation of our network are also subject to certain
technological risks. Our network has been designed to utilize dense wavelength
division multiplexing and synchronous digital hierarchy technology. While the
current operational network segment has performed at or above design
specifications since November 1996, there can be no assurance that our network
will achieve the technical specifications for which we designed it or that we
will be able to upgrade our network as technological improvements in
telecommunications equipment are introduced.
IF WE EXPERIENCE SYSTEM FAILURE OR SHUTDOWN, WE MAY NOT BE ABLE TO DELIVER
SERVICES
Our success depends on our ability to deliver uninterrupted high quality
network services and reliable, high-speed access to the Internet. Our network
and our Internet backbone network are, and our intracity networks and data- and
Web-hosting centers will be, vulnerable to damage or cessation of operations
from:
- fire;
- earthquakes;
- severe storms;
- power loss;
- natural disasters;
- damage from human error and tampering;
- software defects;
- capacity limitations;
- breaches of security;
- physical break-ins;
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<PAGE> 28
- intentional acts of vandalism;
- telecommunications failures; and
- other factors that can cause interruptions in service or reduced capacity
for our customers.
We have designed our network to minimize the risk of such system failure but we
cannot assure that we will not experience failures or shutdowns relating to
individual points of presence or even catastrophic failure of the entire
network. Such significant or prolonged system failures or shutdowns could damage
our reputation and result in the loss of customers.
ALTHOUGH WE HAVE IMPLEMENTED NETWORK SECURITY MEASURES, OUR NETWORK MAY BE
SUSCEPTIBLE TO VIRUSES, BREAK-INS OR DISRUPTIONS
We have implemented many network security measures, such as limiting
physical and network access to our routers. Nonetheless, our network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by our customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. Furthermore,
such inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers. This could, in turn, deter potential customers and
adversely affect our existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins or
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of such problems may result in
claims against us or could have a material adverse effect on our business or
reputation or on our ability to attract and retain customers for our products.
Moreover, until more consumer reliance is placed on security technologies
available, the security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet service industry and our customer base
and revenues.
OUR INFRASTRUCTURE MAY NOT KEEP PACE WITH OUR RAPID GROWTH
Our operating and financial control systems and infrastructure may not be
adequate to maintain and effectively manage future growth. If we fail to
continuously upgrade our administrative, operating and financial control systems
or unexpected expansion difficulties arise resulting from our rapid growth, our
business, results of operations and financial condition could suffer a material
adverse effect. We must also purchase additional telecommunications facilities
and expand, train and manage the employee base. Inaccuracies in our forecasts of
market demand could result in insufficient or excessive telecommunications
facilities and fixed expenses that are not in line with our operations. As we
proceed with our development and expansion, there will be additional demands on
our customer support, sales and marketing and administrative resources and
network infrastructure.
FAILURE OF OUR COMPUTER SYSTEMS TO RECOGNIZE THE YEAR 2000 COULD DISRUPT OUR
BUSINESS AND OPERATIONS
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including among others, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
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<PAGE> 29
We have undertaken a comprehensive program to address the Year 2000 issue
with respect to the following:
- our information technology systems;
- our non-information technology systems;
- our business partners;
- the systems of our telecommunications, hardware and software vendors;
and
- our customers.
Our Year 2000 program involved four phases:
(1) a wide ranging assessment of Year 2000 problems that might affect us;
(2) the development and implementation of remedies to address discovered
problems;
(3) preventing future Year 2000 problems from arising; and
(4) the testing of our system.
We completed the first phase at the end of the fourth quarter of 1998. We
began the last three phases of this program during the first quarter of 1999.
All important upgrades were performed on our systems by the end of the second
quarter. The remaining actions include some upgrades on non-critical systems and
the installation of the latest year 2000 patches on certain systems. These were
completed by the end of the third quarter. Testing was performed through the
fourth quarter of 1999.
We also have taken steps to determine whether third parties significant to
our business will be Year 2000 compliant and are also working towards Year 2000
compliance. We cannot assure you that our Year 2000 program or the programs of
third parties who do business with us will be effective or that our estimates
about the timing and cost of completing our program will be accurate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
We spent approximately $0.8 million for our Year 2000 compliance through
December 31, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
DELAYS IN LIBERALIZATION OF THE EU TELECOMMUNICATIONS MARKET MAY ADVERSELY
AFFECT EXECUTION OF OUR BUSINESS STRATEGY
A substantial portion of our strategy depends on the timely implementation
of regulatory liberalization of the EU telecommunications market. We may
implement our business plan and make capital expenditures in a given country in
anticipation of regulatory liberalization which may not occur. This
liberalization is occurring in accordance with existing European Commission
directives. Even if an EU member state promptly adopts liberalization measures
in a timely fashion, established national or regional telecommunications
operators, regulators, trade unions and other sources may resist implementing
such measures. Further, our provision of services in Europe and the
implementation of our business plan may be materially adversely affected if any
EU member state imposes greater restrictions on international services between
the EU member state and non-EU countries.
DELAYS IN OBTAINING REGULATORY LICENSES AND APPROVALS COULD ADVERSELY AFFECT OUR
PLANS TO OFFER SERVICES IN OUR TARGETED MARKETS
Because we plan to provide an expanded array of telecommunications services
in Europe, we will become subject to significant additional regulation at the
EU, national and local levels. In particular, we must obtain additional
agreements for the long-term lease of dark fiber, rights-of-way and other
permits to install fiber optic cable from railroads, utilities and governmental
authorities to expand the geographic reach of the
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<PAGE> 30
network. We must also apply for permits and other regulatory approval from
government and local authorities to construct our intracity fiber networks. In
addition, we are dependent on FLAG Atlantic Limited applying for and obtaining
the permits and other regulatory approvals required to build and operate the
FLAG Atlantic-1 transatlantic cable link. We cannot assure you that we or (as to
FLAG Atlantic-1) FLAG Atlantic Limited will be able to obtain or maintain the
necessary lease agreements, regulatory approvals, rights and permits on a timely
basis or that we will not be adversely affected by regulatory developments,
which could have a material adverse effect on these planned businesses. Delays
in receiving regulatory approvals, or the enactment of adverse regulations or
regulatory requirements, may delay or prevent us from expanding the geographic
reach of our network or building out our intracity fiber networks in our
targeted markets.
WE MAY BE LIABLE FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK
The law relating to the regulation and liability of Internet service
providers in relation to information carried or disseminated is developing.
The EU Commission has prepared a proposal for a directive on certain legal
aspects of electronic commerce, which, if adopted by the European Parliament and
Council, would require member states to make certain changes to national laws.
The proposed directive would apply to us and other service providers established
in the EU and aims to establish a consistent legal framework for electronic
commerce within the EU.
The proposed directive includes provisions which would limit the liability
(other than for prohibitory injunctions) of "intermediaries" (such as Internet
service providers and carriers that transmit or host information provided by
third party users of the service) in respect of certain access, caching and
hosting services provided by them, subject to compliance with certain
conditions. The limitations potentially limit civil and criminal liability for
all types of illegal activities initiated by third parties on-line (e.g.
copyright piracy, unfair competition practices, misleading advertising,
copyright infringements, defamation, trademark infringements). If an
intermediary fails to qualify for such limitations, the nature and scope of his
liability will be established on the basis of member states' existing
legislation which may not provide us with the same protections from liability.
The proposed directive is still under review with member states and it is
impossible to predict whether it will eventually be adopted and, if so, in what
form. Decisions, laws, regulations and other activities regarding regulation and
content liability may adversely affect the development and profitability of
companies offering Internet access services, including us.
The imposition upon Internet and Web-hosting service providers of potential
liability for material carried on or disseminated through their systems could
require us to implement measures to reduce our exposure to liability. Such
measures may require that we spend substantial resources or discontinue some
product or service offerings. Any of these actions could have a material adverse
effect on our business, operating results and financial condition.
THERE MAY BE RESTRICTIONS ON OUR ABILITY TO CARRY CERTAIN TRAFFIC THROUGH OUR
NETWORK
In October 1999, the EU adopted a directive on data protection which
establishes minimum levels of protection for personal information and imposes
limits on the collection, processing, storage and dissemination of such data
without the subject's consent. The directive is being implemented in EU member
states in various stages. Certain functions typically carried out by
telecommunications carriers, including GTS Europe and its carrier customers
(e.g. storage of routing and billing information) are subject to the directive.
The directive forbids the transfer of personal information collected in the EU
to countries that lack "adequate" privacy protection. At the moment, the United
States is not judged to have "adequate" privacy protection. The EU and U.S.
authorities are currently holding discussions aimed at resolving this issue and
enabling the free circulation of personal information between the EU and the
United States. However, if these discussions are not successful, there is a
possibility that the movement of certain types of telecommunications traffic
from the EU to the United States could be disrupted, with consequent impact on
our revenues.
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<PAGE> 31
OUR RELATIONSHIP WITH OUR MAJORITY SHAREHOLDER COULD RESULT IN CONFLICTS OF
INTEREST
As of the date hereof, our parent, GTS, directly and through its wholly
owned subsidiary GTS Carrier Services, Inc., beneficially owns 98.5% of our
company. GTS therefore has the ability to strongly influence and/or control our
affairs and our business. Circumstances may occur in which the interests of GTS
could be in conflict with our interests. In addition, GTS may have an interest
in pursuing transactions that may involve risks to our company. We cannot assure
you that any such conflicts of interest will be resolved in our favor. We expect
to enter into capacity arrangements on an arms' length basis with other
subsidiaries of GTS.
GTS plans to offer a broad range of integrated telecommunications services
to businesses and other high usage customers in certain European metropolitan
markets. These services could compete with the services we offer to customers as
an independent carriers' carrier. The offerings of competing services by GTS
could affect the perception that we are an independent operator and could
negatively impact our ability to attract and retain customers.
WE MAY BE SUBJECT TO RISKS BASED ON FLUCTUATIONS IN THE VALUE OF FOREIGN
CURRENCY
As of January 1, 1999, our functional currency is the Euro. Our reporting
currency is the U.S. dollar. Still, we conduct, and will continue to conduct,
business transactions in currencies other than our functional and reporting
currencies; for this reason, appreciation or depreciation in the value of other
currencies as compared to our functional or reporting currency could result in a
material transaction or translation gain or loss to us.
We have entered into hedging transactions to limit our exposure to foreign
currency fluctuations; however, we find it impractical to protect ourselves
against all of this exposure and as a result we will continue to experience
foreign currency gains and losses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
ENFORCING JUDGMENTS AGAINST US COULD BE DIFFICULT
Substantially all of our assets are located outside the United States. As a
result, it will be necessary for investors to comply with foreign laws in order
to enforce judgments obtained in a U.S. court against our assets, including in
order to foreclose upon such assets. In addition, it may not be possible for
investors to: (i) effect service of process within the United States upon us or
(ii) enforce U.S. court judgements against such persons obtained in such courts
predicated upon U.S. federal securities laws. See "Service of Process and
Enforceability of Civil Liabilities."
DUTCH INSOLVENCY LAWS MAY ADVERSELY AFFECT A RECOVERY BY THE HOLDERS OF THE
NOTES
We are organized under the laws of the Netherlands. Dutch insolvency laws
differ significantly from insolvency proceedings in the United States and may
make it more difficult for holders of the Notes to effect a restructuring of our
company or to recover the amount they would have recovered in a liquidation or
bankruptcy proceeding in the United States. There are two primary insolvency
regimes under Dutch law: the first, moratorium of payment (surseance van
betaling), is intended to facilitate the reorganization of a debtor's debts and
enable the debtor to continue as a going concern. The second, bankruptcy
(faillissement), is primarily designed to liquidate and distribute the assets of
a debtor to its creditors.
Upon commencement of moratorium of payment proceedings, the court will
grant a provisional moratorium. The definitive moratorium will generally be
granted upon the approval of a qualified majority of the unsecured creditors. In
both cases, certain creditors will be precluded from attempting to recover their
claims from the assets of the debtor. This moratorium is subject to exceptions,
the most important of which excludes certain secured and certain preferential
creditors (such as tax and social security authorities) from the protection of
the moratorium. Unlike Chapter 11 proceedings under U.S. bankruptcy law, during
which both secured and unsecured creditors are generally barred from seeking to
recover on their claims, during Dutch moratorium of payment proceedings, certain
secured creditors may proceed against the assets that secure their claims to
satisfy their claims. A recovery under Dutch law, therefore, could involve a
sale of the
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<PAGE> 32
assets of the debtor in a manner that does not reflect the going concern value
of the debtor. Consequently, Dutch insolvency laws could preclude or inhibit the
ability of the holders of the Notes to effect a restructuring of our Company and
could reduce the recovery in a Dutch insolvency proceeding.
In connection with Dutch bankruptcy proceedings, the assets of a debtor are
generally liquidated and the proceeds distributed to the debtor's creditors on
the basis of the relative claims of those creditors, and certain parties (such
as secured creditors) will have special rights that may adversely affect the
interests of holders of the Notes. The claim of a creditor may be limited
depending on the date the claim becomes due and payable in accordance with its
terms. Generally, claims of holders of Notes which were not due and payable by
their terms on the date of a bankruptcy of our company will be accelerated and
become due and payable as of that date. Each of these claims will have to be
submitted to the receiver of our company to be verified by the receiver.
"Verification" under Dutch law means that the receiver determines the value of
the claim and whether and to what extent it will be admitted in the bankruptcy
proceedings. The valuation of claims that otherwise would not have been payable
at the time of the bankruptcy proceedings may be based on a net present value
analysis. Creditors that wish to dispute the valuation of their claims by the
receiver will need to commence a court proceeding. These verification procedures
could cause holders of Notes to recover less than the principal amount of their
Notes or less than they could recover in a U.S. liquidation. Such verification
procedures could also cause payments to the holders of Notes to be delayed
compared with holders of undisputed claims.
POSSIBLE INABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a change of control event, each holder of Notes will
be entitled to require us to purchase any or all of the Notes held by such
holder at the prices stated herein. However, our ability to purchase the Notes
upon a change of control event may be limited by the terms of our and our
subsidiaries' then existing contractual obligations. In addition, we may not
have adequate financial resources to effect such a purchase, and we cannot
assure you that we would be able to obtain such resources through a refinancing
of the Notes to be purchased or otherwise. If we fail to purchase all of the
Notes tendered for purchase upon the occurrence of a change of control event,
such failure will constitute an Event of Default under the Indentures.
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under the relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear whether a Change of Control has occurred and whether
the Notes are subject to an offer to purchase.
The Change of Control provision may not necessarily afford the holders
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving us
that may adversely affect the holders, because such transactions may not involve
a shift in voting power or beneficial ownership or, even if they do, may not
involve a shift of the magnitude required under the definition of Change of
Control to trigger such provisions. Except as described under "Description of
the Notes -- Change of Control," the Indentures do not contain provisions that
permit the holders of the Notes to require us to purchase or redeem the Notes in
the event of a takeover, recapitalization or similar transaction.
A LIQUID TRADING MARKET FOR THE NOTES MAY NOT DEVELOP
There is no established trading market for the notes. The initial
purchasers in the private offering informed us that they intended to make a
market in the outstanding notes and, if issued, these exchange notes. However,
the initial purchasers are under no obligation to do so and may discontinue
making a market at any time without notice.
The outstanding notes are listed, and the exchange notes are expected to be
listed, on the Luxembourg Stock Exchange. Nonetheless, the liquidity of any
market for the notes will depend upon the following:
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<PAGE> 33
- the number of holders of the notes;
- our performance;
- the market for similar securities; and
- the prospects for our industry generally.
Also, the market for non-investment grade debt like the notes has been subject
to substantial price swings. Therefore, it is not certain that an active trading
market will develop or, if a market develops, what the liquidity of that market
will be.
CONSEQUENCES OF FAILURE TO EXCHANGE YOUR NOTES FOR EXCHANGE NOTES
If you do not tender your outstanding notes to be exchanged in this
exchange offer, your notes will remain restricted securities and will be subject
to certain transfer restrictions. As restricted securities, your outstanding
notes:
- may be resold only if registered pursuant to the Securities Act of 1933,
if an exemption from registration is available thereunder, or if neither
such registration nor such exemption is required by law; and
- shall bear a legend restricting transfer in the absence of registration
or an exemption therefrom.
In addition, a holder of outstanding notes who desires to sell or otherwise
dispose of all or any part of its outstanding notes under an exemption from
registration under the Securities Act of 1933, if requested by us, must deliver
to us an opinion of independent counsel experienced in Securities Act matters,
reasonably satisfactory in form and substance to us, that such exemption is
available.
RISK OF ERROR IN FORWARD LOOKING STATEMENTS
All statements in this prospectus that are not clearly historical in nature
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements concerning the following areas of our
business are examples of forward looking statements:
- operations;
- prospects;
- markets;
- technical capabilities;
- funding needs;
- financing sources;
- spending;
- commercial operations schedule; and
- future regulatory approvals.
Information concerning expected characteristics of competing systems and
expected actions of third parties, such as equipment suppliers and partners, are
also examples of forward looking statements. These forward looking statements
are inherently speculative. Therefore, we cannot assure you that any of such
statements will prove to be correct. Actual results and developments may be
materially different from those expressed or implied by such statements. You, as
prospective investors, should carefully review the other risk factors set forth
in this section to see which factors could result in incorrect forward looking
statements.
Moreover, we do not intend to publish updates or revisions of any
forward-looking statements included herein to reflect events or circumstances
after the date hereof or to reflect subsequent market analysis.
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<PAGE> 34
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes due 2006 (the "Exchange Notes due 2006") or the exchange notes due 2009
(the "Exchange Notes due 2009" and together with the Exchange Notes due 2006,
the "Exchange Notes") offered hereby. In consideration for issuing the Exchange
Notes contemplated by this prospectus, we will receive in exchange Outstanding
Notes (as defined below) in like principal amount. The Outstanding Notes
surrendered in exchange for the Exchange Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in any change in our indebtedness.
The net proceeds from the November 24, 1999 private offering (the
"Offering") of E225,000,000 10 1/2% Senior Notes due 2006 (the "Outstanding
Notes due 2006") and E275,000,000 11% Senior Notes due 2009 (the "Outstanding
Notes due 2009" and together with the Outstanding Notes due 2006, the
"Outstanding Notes"), after deducting the underwriting discounts and commissions
and estimated expenses, were approximately $505.1 million. Such net proceeds,
together with the proceeds of a $50.0 million capital contribution from GTS, our
parent, and existing cash balances, will be used to purchase a dedicated fiber
pair on the FLAG Atlantic-1 transatlantic cable system and related equipment to
upgrade its transmission capacity, build our intracity networks and our data-
and Web-hosting centers, expand the reach and capacity of our network, pursue
business development opportunities and for other general corporate purposes.
Until such time as the net proceeds of the offering are used for such purposes,
we will invest such proceeds in short term investment grade instruments.
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<PAGE> 35
THE EXCHANGE OFFER
GENERAL
In connection with the Offering, we entered into a registration rights
agreement with Donaldson, Lufkin & Jenrette International, Merrill Lynch
International, Lehman Brothers International (Europe), Deutsche Bank AG London
and Dresdner Bank AG London Branch (the "Initial Purchasers") relating to the
Outstanding Notes (the "Registration Rights Agreement"). Under the Registration
Rights Agreement, we agreed to file within 90 days of the date of the original
issuance of the Outstanding Notes a registration statement (the "Exchange Offer
Registration Statement") of which this prospectus is a part with respect to a
registered offer to exchange the Outstanding Notes for the Exchange Notes with
terms identical in all material respects to the Outstanding Notes (the "Exchange
Offer"). We further agreed to use our reasonable best efforts to (i) cause the
Exchange Offer Registration Statement to become effective and commence the
Exchange Offer on or prior to the 150th day after the Issue Date, (ii) keep the
Exchange Offer open for 30 days (or longer if required by applicable law) (the
last day of such period, the "Expiration Date") and (iii) exchange Exchange
Notes for all Notes validly tendered and not withdrawn pursuant to the Exchange
Offer on or prior to the fifth day following the Expiration Date.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept all Outstanding
Notes validly tendered prior to 5:00 p.m., London time on March 7, 2000 (the
"Expiration Date"). We will issue E1,000 principal amount of Exchange Notes in
exchange for each E1,000 principal amount of Outstanding Notes accepted in the
Exchange Offer. Holders may tender some or all of their Outstanding Notes
pursuant to the Exchange Offer in denominations of E1,000, and integral
multiples thereof.
Based on no-action letters issued by the staff of the Commission to third
parties, we believe that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than (i) a broker-dealer who
purchased such Outstanding Notes directly from us to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that the holder is acquiring the
Exchange Notes in its ordinary course of business and is not participating and
does not intend to participate, and has no arrangements or understanding with
any person to participate, in the distribution of the Exchange Notes. Holders of
Outstanding Notes wishing to accept the Exchange Offer must represent to us that
such conditions have been met.
Each broker-dealer that receives Exchange Notes in exchange for Outstanding
Notes held for its own account, as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, such broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. The prospectus, as it may be amended or supplemented from time to time, may
be used by such broker-dealer in connection with resales of Exchange Notes
received in exchange for Outstanding Notes. We have agreed that, for a period of
180 days after the Expiration Date, we will make this prospectus and any
amendment or supplement to this prospectus available to any such broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
As of the date of this prospectus, E225 million aggregate principal amount
of the Outstanding Notes due 2006 and E275 million aggregate principal amount of
the Outstanding Notes due 2009 are outstanding. In connection with the issuance
of the Outstanding Notes, we arranged for the Outstanding Notes initially
purchased by Qualified Institutional Buyers and certain eligible persons in
"offshore transactions" (within the meaning of Regulation S under the Securities
Act) pursuant to Regulation S under the Securities Act of 1933 to be issued and
transferable in book-entry form through the facilities of Euroclear or
Clearstream Banking, societe anonyme ("Clearstream, Luxembourg"), acting as
depositary for the Outstanding Notes. The Exchange Notes will also be issuable
and transferable in book-entry form through Euroclear or Clearstream,
Luxembourg, as the case may be.
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<PAGE> 36
This prospectus, together with the accompanying letter of transmittal, is
being sent to all registered holders as of January 15, 2000 (the "Record Date").
We will be deemed to have accepted validly tendered Outstanding Notes when,
as and if we have given oral or written notice thereof to the relevant Exchange
Agent. See "-- Exchange Agent." The Exchange Agent will act as agent for the
tendering holders of Outstanding Notes for the purpose of receiving Exchange
Notes from us and delivering Exchange Notes to such holders.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Outstanding Notes will be returned, without
expenses, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders of Outstanding Notes who tender in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean March 7, 2000 unless we, in our sole
discretion, extend the Exchange Offer, in which case the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, we will notify the Exchange Agent
of any extension by oral or written notice and will mail to the record holders
of Outstanding Notes an announcement thereof, each prior to 9:00 a.m., London
time, on the next business day after the previously scheduled Expiration Date.
Such announcement may state that we are extending the Exchange Offer for a
specified period of time.
We reserve the right (i) to delay acceptance of any Outstanding Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Outstanding Notes not previously accepted, if any of the conditions set
forth herein under "-- Termination" shall have occurred and shall not have been
waived by us (if permitted to be waived by us), by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, and (ii) to amend
the terms of the Exchange Offer in any manner deemed by it to be advantageous to
the holders of the Outstanding Notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof. If the Exchange Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of the Outstanding Notes of such amendment.
Without limiting the manner by which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, we will have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than making a timely
release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from November 24, 1999, payable
semiannually in arrears on June 1 and December 1 of each year, commencing on
June 1, 2000, at the rate of 10 1/2% per annum, in the case of the Exchange
Notes due 2006, and 11% per annum, in the case of the Exchange Notes due 2009.
Holders of Outstanding Notes whose Outstanding Notes are accepted for exchange
will be deemed to have waived the right to receive any payment in respect of
interest on the Outstanding Notes accrued from November 24, 1999 until the date
of the issuance of the Exchange Notes. Consequently, holders who exchange their
Outstanding Notes for Exchange Notes will receive the same interest payment on
June 1, 2000 (the first interest payment date with respect to the Outstanding
Notes and the Exchange Notes) that they would have received had they not
accepted the Exchange Offer.
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<PAGE> 37
PROCEDURES FOR TENDERING
To tender Outstanding Notes in the Exchange Offer, a holder must effect
such tender pursuant to the standard operating procedures of Euroclear or
Clearstream, Luxembourg, as the case may be, for book-entry transfers, prior to
5:00 p.m., London time, on the Expiration Date.
Any financial institution that is a participant in the Euroclear or
Clearstream, Luxembourg system, as the case may be, may make book-entry delivery
of the Outstanding Notes to Euroclear or Clearstream, Luxembourg in accordance
with Euroclear's or Clearstream, Luxembourg's standard procedures for such
transfer. In lieu of delivering a letter of transmittal to the Exchange Agent, a
computer-generated message, in which the holder of the Outstanding Notes
acknowledges and agrees to be bound by the terms of the letter of transmittal,
must be transmitted and received or confirmed by Euroclear or Clearstream,
Luxembourg, as the case may be, prior to 5:00 p.m., London time, on the
Expiration Date.
The tender by a holder of Outstanding Notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
Holders may also request that their respective brokers, dealers, commercial
banks, trust companies or nominees effect such tender for such holders.
The method of delivery of Outstanding Notes and all other required
documents, to the Exchange Agent is at the election and risk of the holders.
Instead of delivery by mail, we recommend that holders use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
timely delivery. No letter of transmittal or Outstanding Notes should be sent to
us.
Only a holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Outstanding Notes are registered on our books or the books
of any other person who has obtained a properly completed bond power from the
registered holder, or any person whose Outstanding Notes are held of record by
Euroclear or Clearstream, Luxembourg, who desires to deliver such Outstanding
Notes by book-entry transfer at Euroclear or Clearstream, Luxembourg, as the
case may be.
Any beneficial holder whose Outstanding Notes are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf. If such beneficial holder wishes
to tender on his own behalf, such beneficial holder must, prior to completing
and executing the letter of transmittal and delivering his Outstanding Notes,
either make appropriate arrangements to register ownership of the Outstanding
Notes in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" (an "Eligible Institution")
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), unless the Outstanding Notes tendered pursuant
thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the letter of transmittal or (ii) for the account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by appropriate bond powers which authorize
such person to tender the Outstanding Notes on behalf of the registered holder,
in either case signed as the name of the registered holder or holders appears on
the Outstanding Notes.
If the letter of transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by us,
evidence satisfactory to us of their authority to so act must be submitted with
the letter of transmittal.
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All the questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Outstanding Notes will be
determined by us in our sole discretion, which determinations will be final and
binding. We reserve the absolute right to reject any and all Outstanding Notes
not validly tendered or any Outstanding Notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the absolute right to
waive any irregularities or conditions of tender as to particular Outstanding
Notes. Our interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
we will determine. Neither we, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of Outstanding Notes nor shall any of them incur any liability for
failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such irregularities have been cured or waived.
Any Outstanding Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost by the Exchange Agent to the tendering
holder of such Outstanding Notes unless otherwise provided in the letter of
transmittal, as soon as practicable following the Expiration Date.
In addition, we reserve the right in our sole discretion to (a) purchase or
make offers for any Outstanding Notes that remain outstanding subsequent to the
Expiration Date, or, as set forth under "Termination," to terminate the Exchange
Offer and (b) to the extent permitted by applicable law, purchase Outstanding
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
By tendering, each holder of Outstanding Notes will represent to the
Company that, among other things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the holder,
that neither the holder nor any other person has an arrangement or understanding
with any person to participate in the distribution of the Exchange Notes and
that neither the holder nor any such other person is an "affiliate" of ours
within the meaning of Rule 405 under the Securities Act.
GUARANTEED DELIVERY PROCEDURES FOR OUTSTANDING NOTES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available, or (ii) who cannot deliver
their Outstanding Notes, the Letter of Transmittal, or any other required
documents to the Exchange Agent prior to the Expiration Date, or if such holder
cannot complete the procedure for book-entry transfer on a timely basis, may
effect a tender if:
(a) the tender is made through an Eligible Institution or pursuant to
Euroclear's or Clearstream, Luxembourg's standard operating procedures;
(b) prior to the Expiration Date (i) the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed "notice of
guaranteed delivery" in the form accompanying this prospectus (by facsimile
transmission, mail or hand delivery) setting forth the name and address of
the holder of the Outstanding Notes, the certificate number or numbers of
such Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby, and guaranteeing
that, within five business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificate(s)
representing the Outstanding Notes to be tendered in proper form for
transfer and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent, or
(ii) Euroclear or Clearstream, Luxembourg receives an electronic
transmission which contains the character by which the participant
acknowledges its receipt of and agrees to be bound by the guaranteed
delivery procedures set forth herein; and
(c) such properly completed and executed letter of transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Outstanding Notes in proper form for transfer (or to Euroclear or
Clearstream, Luxembourg, as the case may be, of Outstanding Notes delivered
electronically) and all
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<PAGE> 39
other documents required by the Letter of Transmittal are received by the
Exchange Agent within five business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., London time on the Expiration Date
unless previously accepted for exchange.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a notice
of withdrawal must be transmitted to Euroclear and Clearstream, Luxembourg, as
the case may be, in accordance with the standard operating procedures of
Euroclear or Clearstream, Luxembourg, as the case may be, prior to 5:00 p.m.,
London time, on the business day prior to the Expiration Date and prior to
acceptance for exchange thereof by the Company. Any written or facsimile notice
of withdrawal for Outstanding Dollar Notes must (i) specify the name of the
person having deposited the Outstanding Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Outstanding Notes), (iii) be
signed by the Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Outstanding Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfers
sufficient to permit the Trustee with respect to the Outstanding Notes to
register the transfer of such Outstanding Notes into the name of the Depositor
withdrawing the tender and (iv) specify the name in which any such Outstanding
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
for such withdrawal notices will be determined by us, and our determination
shall be final and binding on all parties. Any Outstanding Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no Exchange Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly tendered. Any Outstanding Notes which
have been tendered but which are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Outstanding Notes may be tendered by following the procedures
described above under "-- Procedures for Tendering" at any time prior to the
Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, we will not be
required to accept for exchange, or Exchange Notes for, any Outstanding Notes
not therefore accepted for exchange, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of such Outstanding Notes if: (i)
any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer, which, in our
reasonable judgment, might materially impair our ability to proceed with the
Exchange Offer or (ii) any law, statute, rule or regulation is proposed, adopted
or enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission or court of competent jurisdiction in a manner,
which, in our reasonable judgment, might materially impair our ability to
proceed with the Exchange Offer.
If we determine that we may terminate the Exchange Offer, as set forth
above, we may (i) refuse to accept any Outstanding Notes and return any
Outstanding Notes that have been tendered to the holders thereof, (ii) extend
the Exchange Offer and retain all Outstanding Notes tendered prior to the
Expiration of the Exchange Offer, subject to the rights of such holders of
tendered Outstanding Notes to withdraw their tendered Outstanding Notes, or
(iii) waive such termination event with respect to the Exchange Offer and accept
all properly tendered Outstanding Notes that have not been withdrawn. If such
waiver constitutes a material change in the Exchange Offer, we will disclose
such change by means of a supplement to this prospectus that will be distributed
to each registered holder of Outstanding Notes, and we will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders of the
Outstanding Notes, if the Exchange Offer would otherwise expire during such
period.
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EXCHANGE AGENTS
Deutsche Bank AG, London branch, has been appointed as Principal Exchange
Agent for the exchange of the Outstanding Notes. Questions and requests for
assistance relating to the exchange of the Outstanding Notes should be directed
to the Exchange Agent in London addressed as follows:
<TABLE>
<S> <C>
By Mail or Hand Delivery: Deutsche Bank AG, London branch
Winchester House
1 Great Winchester Street
EC2N 2DB London
United Kingdom
Attention:
Corporate Trust and Agency Services
Facsimile Transmission: (44 20) 7547-0271
Confirm by Telephone: (44 20) 7545-8000
</TABLE>
Deutsche Bank Luxembourg S.A. has been appointed as Luxembourg Exchange
Agent for the exchange of the Outstanding Notes.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the Exchange
Offer. The principal solicitation for tenders pursuant to the Exchange Offer is
being made by mail. Additional solicitations may be made by officers and regular
employees of the Company and its affiliates in person, by telegraph or
telephone.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. We, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. We may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this prospectus, letters of transmittal and related documents to the
beneficial owners of the Outstanding Notes and in handling or forwarding tenders
for exchange.
We will pay the expenses to be incurred in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Trustee and
accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of
Outstanding Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Outstanding Notes tendered, or if tendered Outstanding Notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Outstanding Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
person) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the letter of
transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
33
<PAGE> 41
CAPITALIZATION
The following table sets forth as of September 30, 1999 (i) our historical
capitalization and (ii) our capitalization as adjusted to reflect the
consummation of the private offering of the Notes, and the $50.0 million capital
contribution from our parent GTS. This table should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes thereto included
elsewhere in this prospectus. There has been no material change in our
capitalization since September 30, 1999.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
(DOLLARS)IN THOUSANDS
<S> <C> <C>
Cash and cash equivalents................................... $309,590 $ 864,659(1)
======== ==========
Debt:
11 1/2% Senior Notes due 2007............................. $265,000 $ 265,000
10 3/8% Senior Notes due 2009............................. 200,000 200,000
10 3/8% Senior Notes due 2006............................. 90,508 90,508
Senior Notes offered hereby............................... -- 520,500(1)
Capital lease obligations (including current
maturities)............................................ 208,231 208,231
Other..................................................... 272 272
-------- ----------
Total debt (including current maturities)......... 764,011 1,284,511(1)
-------- ----------
Shareholders' Equity:
Common stock, 1,000 Dutch guilders par value (297,000
shares authorized and 199,683 shares issued and
outstanding)........................................... 101,518 101,518
Additional paid-in capital................................ 104,180 154,180
Accumulated other comprehensive loss...................... (3,559) (3,559)
Accumulated deficit....................................... (82,134) (82,134)
-------- ----------
Total shareholders' equity........................ 120,005 170,005
-------- ----------
Total capitalization........................................ $884,016 $1,454,516(1)
======== ==========
</TABLE>
- ---------------
(1) Assumes conversion of proceeds of the issuance of the Notes at a Euro
conversion rate of 1.0410.
34
<PAGE> 42
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
Statement of Operations Data for the years ended December 31, 1995, 1996, 1997
and 1998 and Balance Sheet Data as of December 31, 1995, 1996, 1997 and 1998
have been derived from our consolidated financial statements audited by Ernst &
Young Reviseurs d'Entreprises S.C.C. The selected consolidated financial data as
of September 30, 1999 and for the nine months ended September 30, 1998 and 1999
have been derived from unaudited financial statements which, in the opinion of
management, include all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of such information for the
unaudited interim periods. The operating results for the nine months ended
September 30, 1998 and 1999 are not necessarily indicative of results for the
full fiscal year. We did not declare or pay any cash dividends during the
periods indicated. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------
1995 1996 1997 1998 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ -- $ 48 $ 5,373 $ 85,251 $ 42,933 $213,012
Operating costs and expenses:
Telecommunication services....................... -- 4,694 6,842 41,848 22,259 64,913
Selling, general and administrative.............. 6,626 9,894 17,868 28,273 16,747 35,940
Depreciation and amortization.................... 560 1,266 5,229 28,638 18,642 45,152
(Loss) income from operations...................... (7,186) (15,806) (24,566) (13,508) (14,715) 67,007
Other income/(expense):
Interest expense................................. (9) (153) (12,826) (30,852) (23,419) (54,181)
Foreign currency gains (losses).................. 19 (1,126) (367) (11,308) (5,227) (1,183)
Other, net....................................... 125 508 6,596 9,076 7,240 15,068
Net (loss) income.................................. (7,051) (16,577) (31,163) (48,935) (37,940) 22,062
OTHER DATA (IN THOUSANDS):
EBITDA(1).......................................... $(6,626) $(14,540) $ (19,337) $ 15,130 $ 3,927 $112,159
Net cash (used in) provided by operating
activities....................................... (2,655) (11,540) (4,417) 44,957 20,527 19,227
Net cash used in investing activities.............. (4,405) (20,781) (107,466) (92,758) (34,541) (96,805)
Net cash provided by (used in) financing
activities....................................... 11,644 28,924 317,500 (21,463) 493 245,853
Ratio of earnings to fixed charges(2).............. -- -- -- -- -- 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1999
-------------------------------- ----------------------------
1996 1997 1998 ACTUAL AS ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Total current assets.................... $ 7,528 $249,325 $240,151 $ 476,173 $1,031,242
Property and equipment, net............. 20,303 204,944 438,984 528,487 528,487
Total assets............................ 29,466 504,668 744,110 1,142,803 1,713,303
Total current liabilities............... 11,915 61,744 169,413 176,808 176,808
Capital leases, including current
portion............................... -- 139,185 227,513 208,231 208,231
Other debt, including current portion... 562 265,383 265,353 555,780 1,076,280
Total liabilities....................... 12,414 445,008 688,403 1,022,798 1,543,298
Shareholders' equity(4)................. 17,052 59,660 27,948 120,005 170,005
</TABLE>
- ------------------------------
(1) EBITDA is earnings (loss) from operations before foreign currency gains
(losses), interest, taxes, depreciation and amortization. EBITDA is a
measure of a company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income (loss)
determined in accordance with GAAP as an indicator of operating performance
or as an alternative to cash from operating activities determined in
accordance with GAAP as a measure of liquidity.
(2) Earnings consist of income before income taxes, plus fixed charges, except
where capitalized. Fixed charges consist of interest charges and
amortization of debt issuance costs, in each case whether expensed or
capitalized, and the portion of rent expense under operating leases
representing interest. Earnings were insufficient to cover fixed charges in
1995 by $7.1 million, in 1996 by $16.6 million, in 1997 by $31.2 million, in
1998 by $51.3 million and for the nine months ended September 30, 1998 by
$38.5 million.
(3) Adjusted to reflect the offering of the Notes and the application of net
proceeds as described in "Use of Proceeds."
(4) Includes shareholders' loans and shareholders' equity of $34.9 million and
$(17.8) million for 1996, respectively.
35
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition and results of
operations as of September 30, 1999 and 1998, December 31, 1998, 1997 and 1996
and for the three and nine months ended September 30, 1999 and 1998 and for the
years ended December 31, 1998, 1997 and 1996. The following discussion should be
read in conjunction with the audited consolidated financial statements, the
notes related thereto and the other financial data included elsewhere in this
prospectus.
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 our competitive environment, contain forward-looking
statements concerning our 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 prospectus.
Among the key factors that have a direct bearing on our results of operations
are the potential risk of delay in implementing our business plan; the
political, economic and legal aspects of the markets in which we operate;
competition and our need for additional substantial financing. These and other
factors are discussed herein under "Risk Factors," "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this prospectus.
The factors described in this prospectus could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on behalf of us, 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 we undertake 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, we cannot assess the impact of each such
factor on our 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. Factors that could cause such differences
include, but are not limited to those discussed under "Risk Factors."
OVERVIEW
We are one of the leading European providers of managed bandwidth services
and related telecommunications services to telecommunications carriers, Internet
service providers and other bandwidth-intensive customers. As of September 30,
1999, we operated a centrally managed fiber optic network in Europe over
approximately 15,300 kilometers connecting 24 cities in 10 European countries,
with service to the United States provided through capacity leased on
transatlantic cables. On June 24, 1998, we acquired a 75% interest in Ebone A/S
("Ebone"). Ebone operates a Tier-1 Internet backone network that connects
European service providers to the Internet. We purchased the remaining 25%
interest on May 25, 1999. The results of Ebone have been included in the
accompanying consolidated financial statements from the date of acquisition.
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<PAGE> 44
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
Revenue. Our consolidated revenues for the three and nine months ended
September 30, 1999 were $90.1 million and $213.0 million, respectively, as
compared to $27.0 million and $42.9 million for the comparable periods in 1998.
The growth in revenue is attributable to the continued deployment of our
network.
Telecommunications Services. Our telecommunications services costs for the
three and nine months ended September 30, 1999 were $26.1 million and $64.9
million, respectively, as compared to $13.2 million and $22.3 million for the
comparable periods in 1998. The increase in telecommunications services costs
for the three and nine months ended September 30, 1999 was primarily due to
increased costs related to operating and maintaining the network as it continues
to be deployed, as well as the increase in local access costs resulting from
increased volume of traffic.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three and nine months ended September 30, 1999
were $14.5 million and $35.9 million, respectively, as compared to $6.7 million
and $16.7 million for the same periods in 1998. The increase in selling, general
and administrative expenses is reflective of the growth of our business
operations and support personnel. At September 30, 1999 we had 380 employees as
compared to 208 employees at September 30, 1998.
Depreciation and Amortization. Depreciation and amortization expense for
the three and nine months ended September 30, 1999 was $18.8 million and $45.2
million, respectively, as compared to $8.7 million and $18.6 million for the
comparable periods in 1998. The increase in depreciation and amortization
expense is attributable to depreciation of additional network assets due to the
continued build-out of our network.
Interest. Interest expense for the three and nine months ended September
30, 1999 was $20.2 million and $54.2 million, respectively, as compared to $7.9
million and $23.4 million for the comparable periods in 1998. The increase was
primarily attributable to the interest and related costs associated with the
issuance in January 1999 of $200 million aggregate principal amount of 10 3/8%
senior notes due 2009 ("Senior Notes due 2009") and E85 million aggregate
principal amount of 10 3/8% senior notes due 2006 ("Senior Notes due 2006").
Interest income for the three and nine months ended September 30, 1999 was
$7.5 million and $15.5 million, respectively, as compared to $1.9 million and
$7.8 million in the comparable periods in 1998. The increase is due to the
interest earned through our short-term investments that have increased as a
result of the investment of the proceeds from the issuance of the Senior Notes
due 2009 and the Senior Notes due 2006.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 VS. DECEMBER 31, 1997
Revenue. Our consolidated revenue for the year ended December 31, 1998 was
$85.3 million as compared to $5.4 million for the comparable period in 1997. The
growth in revenue is attributable to the continued deployment of our network as
well as the inclusion of Ebone, whose revenue was $17.7 million for the period
from the date of acquisition through December 31, 1998.
Telecommunication Services. Our telecommunication services costs for the
year ended December 31, 1998 were $41.8 million compared to $6.8 million for the
comparable period in 1997. The increase in cost of revenue for the year ended
December 31, 1998 was primarily due to increased costs related to operating and
maintaining the network as it is continued to be deployed, as well as the
increase in local access costs.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 1998 were $28.3 million as compared to
$17.9 million for the comparable period in 1997. The increase in selling,
general and administrative expenses is reflective of the growth of our business
operations
37
<PAGE> 45
and support personnel as the number of employees grew to 265 at December 31,
1998 from 130 at December 31, 1997.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1998 was $28.6 million as compared to $5.2 million
in 1997. The increase in depreciation and amortization expense is attributable
to depreciation of additional network assets due to the continued build-out of
our network.
Interest. Interest expense for the year ended December 31, 1998 was $30.9
million as compared to $12.8 million for the comparable period in 1997. The
increase was primarily the result of incurring a full year of interest and
related costs associated with our issuance in August 1997 of $265.0 million
aggregate principal amount of 11 1/2% Senior Notes due 2007 (the "Senior Notes
due 2007") in 1998 as compared to only five months of interest and costs in
1997.
Interest income for the year ended December 31, 1998 was $10.0 million as
compared to $6.6 million for the comparable period in 1997. The increase in
interest income was the result of investing the excess cash generated from the
issuance of the Senior Notes due 2007 in various highly liquid investments.
Foreign Currency Losses. Foreign currency losses were $11.3 million for the
year ended December 31, 1998 as compared to $0.4 million for the comparable
period in 1997. The losses in 1998 were primarily the result of foreign exposure
from the issuance of the Senior Notes due 2007 in U.S. dollars and other U.S.
dollar cash and payables balances, the weakening of the dollar versus European
currencies in the third and fourth quarter and losses on several forward
exchange contracts.
YEAR ENDED DECEMBER 31, 1997 VS. DECEMBER 31, 1996
Revenue. Our consolidated revenue for the year ended December 31, 1997 was
$5.4 million. The revenues for the year ended December 31, 1996 were minimal.
Our first route, Brussels-Amsterdam, began to generate revenues in the fourth
quarter of 1996 and in the fourth quarter of 1997, the Amsterdam-London-Paris
routes came into operation and began to generate revenues.
Telecommunication Services. Our telecommunication services costs for the
years ended December 31, 1997 and 1996 were $6.8 million and $4.7 million,
respectively. The increase in cost of revenues in 1997 as compared with 1996 was
associated with the costs related to operating and maintaining the network
routes and local access costs.
Selling, General and Administrative. Selling, general and administrative
expenses for the years ended December 31, 1997 and 1996, were $17.9 million and
$9.9 million, respectively. The increase in operating expenses was reflective of
the growth of our business operations and support personnel. We had 130
employees as of December 31, 1997 as compared to 101 employees as of December
31, 1996.
Depreciation and Amortization. Depreciation and amortization expense for
the year ended December 31, 1997 was $5.2 million as compared to $1.3 million in
1996. The increase in depreciation and amortization expense is attributable to
an increase in depreciation on network assets due to the continued deployment of
our network.
Interest. Interest expense for the years ended December 31, 1997 and 1996
was $12.8 million and $0.2 million, respectively. The increase in interest
expense in 1997 is attributable to the interest and related costs associated
with the Senior Notes due 2007.
Interest income for the years ended December 31, 1997 and 1996 was $6.6
million and $0.5 million, respectively. The increase in 1997 was the result of
investing the excess cash generated from the issuance of the Senior Notes due
2007 in various highly liquid investments.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of our funding through September 30, 1999, have been
net proceeds of $251.3 million from the issuance in 1997 of the $265.0 million
aggregate principal amount of the Senior Notes
38
<PAGE> 46
due 2007, net proceeds of $289.3 million from the issuance in January 1999 of
the Senior Notes due 2009 and Senior Notes due 2006 and cash equity
contributions of $103.2 million in 1997. The Senior Notes due 2009 and the
Senior Notes due 2006 are general unsecured obligations and have substantially
the same terms of the Senior Notes due 2007.
In November 1999, we conducted an offering in which we issued E500 million
of general unsecured senior notes (the "Notes"). In addition, we are currently
evaluating entering into, through a wholly owned subsidiary, a new credit
facility (the "New Credit Facility") with one or more institutional lenders in
an aggregate amount of between $400.0 million to $750.0 million. Borrowings
under the New Credit Facility would be structurally senior to the Senior Notes
due 2007, the Senior Notes due 2006, the Senior Notes due 2009 and the Notes.
Development of our fiber optic network has been capital intensive. We
currently expect that we will incur, in the fourth quarter of 1999 through
December 31, 2000, between $750.0 million to $850.0 million in capital
expenditures, including capital lease obligations, to expand the reach and
capacity of our network, construct intracity fiber networks and data- and
Web-hosting centers in our target metropolitan markets and purchase a dedicated
fiber pair on the FLAG Atlantic-1 transatlantic cable system and related
equipment to upgrade its capacity. We believe that the net proceeds from the
issuance of the Notes, combined with existing cash balances, the $50.0 million
capital contribution from GTS and our projected internally generated funds,
should be sufficient to fund our currently identified capital expenditures, at
least through December 31, 2000, including payments on the long-term fiber lease
arrangements. However, the actual amount and timing of our future requirements
may differ materially from our estimates. Any failure to obtain necessary
financing may require that we delay or abandon our plans for expanding the reach
and capacity of our network, constructing our planned intracity fiber networks
and data- and Web-hosting centers and purchasing a dedicated fiber pair on the
FLAG Atlantic-1 transatlantic cable system and related equipment to upgrade its
capacity and could jeopardize our viability.
We had a positive working capital of $299.4 million and $70.7 million as of
September 30, 1999 and December 31, 1998, respectively. We had cash and cash
equivalents of $309.6 million and $130.1 million at September 30, 1999 and
December 31, 1998, respectively. We did not have restricted cash at September
30, 1999. We had $30.1 million of restricted cash at December 31, 1998. The
restricted cash at December 31, 1998 primarily represents our obligation to
place into escrow the first four scheduled semi-annual interest payments on the
Senior Notes due 2007.
During the three and nine months ended September 30, 1999, operating
activities provided $19.0 million and $19.2 million, respectively, and provided
cash of $33.5 million and $20.5 million for the comparable periods in 1998.
Investing activities used cash of $33.2 million and $96.8 million for the three
and nine months ended September 30, 1999 as compared to using cash of $30.7
million and $34.5 million for the comparable periods in 1998.
We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We continuously evaluate the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. We have designed reporting processes to
monitor the potential exposure on an ongoing basis. We have limited our foreign
currency exposure by entering into a foreign currency swap agreement. We find it
impractical to hedge all foreign currency exposure and as a result, will
continue to experience foreign currency gains and losses.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year (the "Year 2000 Issue"). Because
of this programming convention, software, hardware or firmware may recognize a
date using "00" as the year 1900 rather than the year 2000. Use of non-Year 2000
compliant programs could result in system failures, miscalculations or errors
causing disruptions of operations or other business problems, including, among
others, a temporary inability to process transactions and invoices or engage in
similar normal business activities.
39
<PAGE> 47
Issues Posed by the Year 2000 Issue. We are exposed to the Year 2000 Issue
in a number of ways. Among other things, the Year 2000 Issue might affect our:
(i) computer hardware and software; (ii) telecommunications equipment and other
systems with embedded logic (among other things, this includes our fire
detection, access control systems, heating, ventilation and air conditioning,
and uninterruptible power supply; (iii) operating partners and organizations
upon which we are dependent; (iv) local access connections, upon which we are
dependent; and (v) supply chain.
Year 2000 Compliance Program. We have substantially completed a Year 2000
compliance program to address the aforementioned risks which the Year 2000 Issue
poses and to avoid any material loss or impact to us or our customers due to
these risks (the "Year 2000 Compliance Program"). The object of the Year 2000
Compliance Program is to ensure that neither the performance nor functionality
of our operations is affected by dates, prior to, during and after 2000. The
scope of the Year 2000 Compliance Program includes all of the business
functions, locations and resources that are essential. The resources that are
within the scope of the Year 2000 Compliance Program are, among other things,
our computer systems, software, vendor supplied software, telecommunications
equipment, third party telecommunications partners and other network service
suppliers, environmental and building control systems, internal communications
systems and other interfaces with third party services. As explained below, our
efforts to assess systems as well as non-system areas related to Year 2000
compliance involve (i) a wide-ranging assessment of the Year 2000 problems that
may affect us, (ii) the development of remedies to address the problems
discovered in the assessment phase and (iii) testing of the remedies.
Assessment Phase. The assessment phase includes internal and third party
review of potential risks associated with the availability, integrity and
reliability of operational systems necessary to conduct business. During the
assessment phase we have identified substantially all of our major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 Compliance Program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
that might be materially impacted by Year 2000 issues. Our observations from the
assessment phase during the third and fourth quarters of 1998 is that most of
our telecommunications equipment and software has been purchased within the last
three years and the majority is already compliant or can be made compliant with
minor upgrades. We completed the assessment phase of our Year 2000 readiness in
the fourth quarter of 1998.
Remediation, Prevention and Testing Phase. Based on those resources
identified in the assessment phase, we developed a detailed plan in the fourth
quarter of 1998, that was followed by an upgrade, a remediation, a prevention
and a testing phase in early 1999. All important upgrades were performed on our
systems by the end of the second quarter. The remaining actions, including some
upgrades on non-critical systems and the installation of the latest Year 2000
patches on certain systems, were completed by the end of the third quarter 1999.
Testing will continue through the fourth quarter of 1999.
Assessment of Third Party Compliance. As noted above, we have also
undertaken our Year 2000 Compliance Program to assess and monitor the progress
of third party vendors in resolving Year 2000 issues. To ensure the compliance
of vendors of hardware and software applications used by us, we are obtaining
confirmations from its primary telecommunications vendors, business partners and
hardware and software vendors as to what plans, if any, are being developed or
are already in place to address their ability to process transactions in the
Year 2000. We have received responses from approximately 84% of our vendors,
including all critical ones. We have not received any responses that indicate
material problems that would require our follow-up.
Worst Case Scenario for the Company. Our worst case scenario would be the
failure of our telecommunications equipment, power providers and/or interfaces
with other telecommunication vendors. These cases would create business
interruption of our operations and would adversely affect our revenues. However,
we have operations that are geographically diversified; therefore, it is not
anticipated that the worst case scenario would affect all operations at the same
time. Additionally, if power failures occur, we currently have diesel generators
at almost all of our sites and expect to install diesel generators in the
remaining sites in 1999. Based on our assessment during the third and fourth
quarters of 1998, we do not foresee a material loss due to these
40
<PAGE> 48
conditions and we are hopeful that our remediation and testing efforts will
ensure that we have addressed our Year 2000 readiness. However, there can be no
assurance that Year 2000 non-compliance by our systems or the systems of
vendors, customers, partners or others will not result in a material adverse
effect.
Contingency Plans. We have developed a contingency plan to address our
worst case scenario; however, certain of the initiatives are subject to
execution risk. This risk would include the ability to have access to diesel
fuel should power failures occur, the ability to quickly replace
telecommunications equipment and the ability to contract with alternative
telecommunications providers at reasonable terms.
Costs related to the Year 2000 Issue. We expect that we will incur
approximately $0.8 million to complete the assessment, detailed planning,
remediation prevention and testing phases, including costs to be incurred at our
Crisis Command Center, of which approximately $0.6 million has been incurred for
the nine months ended September 30, 1999. These costs will be funded from
operating cash flows and expensed as incurred. In addition, the preceding cost
estimate does not include amounts associated with the accelerated acquisition of
replacement systems as none were included in the initial assessment during the
third and fourth quarters of 1998. We do not expect that the costs of addressing
our Year 2000 readiness will have a material effect on our financial condition
or results of operations. However, there can be no assurance that Year 2000
non-compliance by our systems or the systems of vendors, customers, partners or
others will not result in a material adverse effect.
Crisis Command Center. We expect to operate a twenty-four hour Crisis
Command Center beginning December 30, 1999 to assist in the detection of
problems and to facilitate internal and external communication. It is
anticipated that the Crisis Command Center will remain open until at least
January 7, 2000.
Risks Related to the Year 2000 Issue. Although our efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
our business and operations, the actual effects of the issue will not be known
until 2000. Difficulties in implementing the remediation or prevention phases or
our failure to fully implement the planning or remediation phases or the failure
of our major vendors, third party network service providers, and other material
service providers and customers to adequately address their respective Year 2000
issues in a timely manner would have a material adverse effect on our business,
results of operations, and financial condition.
INTRODUCTION OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union, including Belgium, The Netherlands, Ireland, France, Germany, Italy and
Spain, where we have our headquarters and the majority of our subsidiaries and
operations, established fixed conversion rate between their existing sovereign
currencies and a new currency called the "Euro." These countries adopted the
Euro as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. Hereafter and until
January 1, 2002, the existing sovereign currencies will remain legal tender in
these countries. On January 1, 2002, the Euro is scheduled to replace the
sovereign legal currencies of these countries.
We have significant operations within the European Union including many of
the countries that have adopted the Euro. We continue to evaluate the impact the
Euro will have on our continuing business operations and no assurances can be
given that the Euro will not have material adverse affect on our business,
financial condition and results of operations. However, we do not expect the
Euro to have a material effect on our competitive position as a result of price
transparency within the European Union as we have always operated as a
pan-European business with transparent pricing in ECU for the majority of our
customers. Moreover, we have evaluated our ability to update our information
systems to accommodate the adoption of the Euro and we do not expect to incur
material costs in the updating of such systems. In addition, we cannot
accurately predict the impact the Euro will have on currency exchange rates or
on our currency exchange risk.
We adopted the Euro as our functional currency on January 1, 1999.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK AND TREASURY AND
CURRENCY EXPOSURE MANAGEMENT
Our treasury function manages our funding, liquidity, and exposure to
interest rate and foreign exchange rate risks. Our treasury operations are
conducted within a framework of policies and guidelines authorized by our Board
of Directors. In accordance with our policy, we do not enter into any
transactions of a speculative nature.
We are exposed to market risk from changes in interest rates on long-term
obligations and as a global company, we also face exposure to adverse movements
in foreign currency exchange rates. A portion of our debt obligations are
denominated in currencies which expose us to risks associated with changes in
foreign exchange rates. We have developed risk management policies that
establish guidelines for managing foreign exchange risk and periodically
evaluate the materiality of foreign exchange exposures and the financial
instruments available to mitigate this exposure.
We have entered into a foreign currency swap agreement in order to mitigate
our exposure on U.S. dollar denominated debt. We also attempt to mitigate this
and other exposures from debt obligations denominated in exposed currencies by
maintaining assets in the exposed currency wherever possible. We find it
impractical to hedge all foreign currency exposure and as a result will continue
to experience foreign currency gains and losses. The introduction of the Euro as
a common currency for members of the European Union occurred on January 1, 1999.
We have not determined what impact, if any, the Euro will have on our foreign
exchange exposure.
The following table provides information about our debt obligations that
are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
FAIR VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
---- ---- ---- ---- ---- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT, INCLUDING CURRENT PORTION:
Fixed rate...................................... -- --.. -- -- -- $265,000 $265,000 $285,538
Avg. interest rate.............................. -- -- -- -- -- 11.5% -- --
</TABLE>
The following tables provide information about our derivative financial
instruments and other financial instruments by functional currency and where
applicable, presents such information in U.S. dollar equivalents. The tables
summarize information on instruments that are sensitive to foreign currency
exchange rates, including a foreign currency swap agreement and foreign currency
denominated debt obligations.
<TABLE>
<CAPTION>
FAIR VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
------- ------- ------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT, INCLUDING CURRENT
PORTION:
U.S. Dollars
Fixed rate....................... -- -- -- -- -- $265,000 $265,000 $285,538
Avg. interest rate............... -- -- -- -- -- 11.5% -- --
CURRENCY SWAP AGREEMENTS RELATED TO
LONG-TERM DEBT:
Receipt of USD
Notional amount.................. -- $30,475 $30,475 $295,475 -- -- $356,425 $330,689
Avg. contract rate............... 1.82 1.82 1.82
Receipt of DEM
Notional amount.................. $22,000 -- -- -- -- -- $ 22,000 $ 23,882
Avg. contract rate............... 0.55
</TABLE>
The only significant change since December 31, 1998 is the issuance in
January 1999 of the Senior Notes due 2006 which exposes us to changes in
interest rates and the Senior Notes due 2009 which exposes us to changes in
interest and foreign exchange rates.
The Notes will also expose us to changes in interest and foreign exchange
rates.
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<PAGE> 50
OVERVIEW BUSINESS
We are one of the leading European providers of managed bandwidth and
related telecommunications services to telecommunications carriers, Internet
service providers and other bandwidth-intensive customers. We operate the
largest centrally managed fiber optic network in Europe over which we offer a
broad and sophisticated range of services. In addition, we operate a Tier-1
Internet backbone network that connects European Internet service providers to
the Internet. We believe our early entry into the market, supported by the reach
of our high capacity network, a low cost position and our focus on building
strategic relationships with our customers, has allowed us to create sustainable
advantages in a large and growing market.
For the three-month and nine-month periods ended September 30, 1999, we had
revenues of $90.1 million and $213.0 million, respectively, and EBITDA of $49.5
million and $112.2 million, respectively. At September 30, 1999, we had 156
customers under contract for service on our network, which represents an
increase from 133 and 137 customers at the end of the first two quarters of
1999, respectively. At September 30, 1999, our customers were contractually
obligated to pay us an aggregate of $548.2 million for future services, provided
we perform in accordance with contractual specifications. This amount increased
from $450.3 million and $498.7 million at March 30, 1999 and June 30, 1999,
respectively.
Our network, which covers approximately 17,000 kilometers connecting 29
cities in 12 European countries, reaches a substantial portion of our targeted
customer base. We expect our network to extend approximately 25,000 kilometers
with points of presence in approximately 20 European countries by the end of
2000. Thereafter, additional points of presence will be added to our network as
warranted by customer demand. We also provide services that connect Europe to
the United States in order to address a significant portion of the market growth
which is Internet and Internet protocol related. This service is currently
provided through capacity leased from third parties. We intend to purchase a
dedicated fiber pair on the FLAG Atlantic-1 transatlantic fiber optic link using
part of the proceeds of this offering. We expect to begin offering unprotected
services in the first quarter of 2001 and fully protected services in the second
quarter of 2001 over this fiber pair. By owning this fiber pair, we will acquire
capacity of 70 gigabits per second, upgradeable to a maximum capacity of 400
gigabits per second of fully protected capacity connecting the New York City
area to our European network. In order to meet and support the continuous
increase in bandwidth requirements of our current and future customers, we are
upgrading transmission equipment on our fiber optic network that uses dense
wavelength division multiplexing technology to substantially increase our
network's transmission capacity. In addition, we intend to develop an additional
ring on our network connecting the core cities of London, Paris, Amsterdam,
Frankfurt, Dusseldorf and Brussels with cable duct that will accommodate up to
144 fibers. We also plan to install transmission equipment on a second,
currently installed fiber pair on a number of routes in our network to expand
the transmission capacity of those routes.
Dense wavelength division multiplexing, or DWDM, is a technology that
allows transmission of multiple waves of light over a single fiber optic strand,
thereby increasing network capacity. By using current dense wavelength division
multiplexing technology, we are currently able to derive up to 40 wavelengths
per fiber optic pair, each wavelength with a capacity of 2.5 gigabits per
second, for a total capacity of 100 gigabits per second over a single fiber
optic strand. By year-end 2000, we expect to be able to derive up to 96
wavelengths per fiber optic pair, each wavelength with a capacity of 10 gigabits
per second, for a total capacity of 960 gigabits per second over a single fiber
optic strand, or nearly 1 terabit (or 1 trillion bits) per second.
We began providing services to our customers in November 1996. We believe
that our early entry into the European carriers' carrier market has provided us
with several competitive advantages over other providers of telecommunications
services to telecommunications carriers, Internet service providers and other
bandwidth-intensive customers. We believe we are a pioneer in Europe in fiber
optic network deployment and service development. We have established long-term
contracts with telecommunications carriers, Internet service providers and other
bandwidth-intensive customers in some instances capturing some of the new
customers in some of the most rapidly growing market segments. In many cases, by
providing mission-critical value-added solutions to our customers we seek to
establish ourselves as their strategic partner. This degree of integration in
our customers' operations has often provided us with the opportunity to
introduce and implement additional products and services with the customer,
thereby enabling us to further penetrate our customer base. As a
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<PAGE> 51
result of our strong position in the European telecommunications market, we have
been able to attract and retain a talented, multi-cultural, highly skilled
workforce specialized in our leading-edge technological industry.
Our customers include:
- European incumbent telecommunications
operators
- alternative carriers
- voice resellers
- international carriers
- national Internet service providers
- multinational Internet service providers
- value added network service providers
- Web-centric and media-centric companies
We believe that cross-border transmission capacity will increasingly be
used to transport data as the volume of data traffic will substantially exceed
voice traffic. This trend is being driven by the rapid growth of the Internet
and other data-intensive applications, such as electronic commerce, application
hosting, video-conferencing and multimedia applications, that require
high-quality and cost-effective transmission capacity.
We intend to continue to participate in this rapidly growing market by
providing comprehensive telecommunications transport services to established and
emerging telecommunications carriers, Internet service providers and other
bandwidth-intensive customers. Since we are providing for a significant amount
of redundancy in the construction of our network, we expect to be able to
satisfy increasing capacity demands from our customers by placing into service
additional fiber pairs as well as implementing dense wavelength division
multiplexing upgrades on our network. We believe that our customers will
increasingly demand Internet or Internet protocol based services such as
Internet access, Web-hosting and data management services in order to
participate in the expected growth of data communication and the Internet. In
order to reinforce our leadership position, we will continue to add new services
on our network and sell our services in additional markets throughout Europe. We
also intend to invest in additional infrastructure that can further lower our
costs.
OUR STRATEGY
Our goals are to reinforce our position as Europe's leading independent
provider of managed bandwidth and related telecommunications services to
telecommunications carriers, Internet service providers and other
bandwidth-intensive customers and, taking advantage of our leadership position,
capture additional revenues by extending our network closer to our customers and
providing new and enhanced services. The key elements of our strategy for
achieving these goals are to:
- Maintain our leadership position by delivering services which leverage
our low cost position. We intend to continue to leverage our position as
a low-cost provider of flexible and high capacity products and services.
We have planned and implemented our network development to ensure that we
have a supply of capacity adequate to meet our customers' demands and
have reduced our cost basis by investing in new technologies. We have
priced our capacity to capture market share and to fulfill an increasing
demand for bandwidth. We believe that by making available increased
supplies of capacity at appropriate prices, we can sustain attractive
margins over an expanding capacity base even as more competitors enter
the market.
- Build on our experience as a first mover in the European carriers'
carrier market to further penetrate our existing customer base and expand
our service portfolio. We are the first European company to operate a
centrally managed pan-European fiber optic network. In the 36 months
since we began offering service on our network, we have developed a
significant customer base encompassing over 150 telecommunications
carriers, Internet service providers and other bandwidth-intensive
customers. As a result of being first in the market, we have gained
significant experience in how to tailor our service offering to meet our
customers' rapidly evolving needs and have developed service innovations.
By providing mission-critical value added solutions to our customers, we
seek to establish ourselves as
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<PAGE> 52
their strategic partner. We will seek to further penetrate our customer
base and strengthen our customer relationships by continuing to develop
service innovations that enable us to deliver the lowest cost and highest
quality transport service for our customers. Our managed gigabit network
is a service that we recently introduced that we believe shows our
commitment to being at the forefront of innovations among European
providers of bandwidth services.
- Capitalizing on the experience of our management and workforce. We have
assembled and will continue to build a management team and highly skilled
workforce with significant expertise in the design, engineering,
construction, operation, maintenance and enhancement of fiber optic
network. Due to our early entry in the European bandwidth services
market, our workforce has gained extensive experience in marketing,
selling, configuring and providing customer support for the tailored
solutions that we offer our customers. We intend to build on this
experience and expertise in order to develop new and enhanced products
and services that enable us to strengthen our customer relationships and
generate additional revenues.
- Focus on bandwidth-intensive customers. We intend to continue to focus on
providing high-quality telecommunications services to carriers, Internet
service providers and other bandwidth-intensive customers to enable these
operators to more successfully meet the needs of their own end-user
customers. We believe this should enable us to provide superior customer
service while avoiding investments in billing and related systems and
general administrative costs associated with retail operations. In
addition, we intend to continue to focus on emerging data-centric
companies that require large amounts of bandwidth to service their
end-user customers. These types of customers include broadband multimedia
providers such as UPC's chello broadband, content providers such as
motion picture studios and broadcasters, Internet applications providers
such as portals and electronic commerce companies, and emerging data
transmission providers such as wireless operators. The Internet and the
general acceptance of Internet protocol as a worldwide transmission
standard are fostering the emergence of these new market segments.
- Continue to invest in the reach and capacity of our network. We will
continue to invest in our network to expand its geographic reach and
capacity in order to ensure that we can accommodate our customers' future
capacity requirements. We are continuing to build our network by
extending its coverage to include approximately 25,000 kilometers across
Europe by the end of 2000. We are continuing to deploy dense wavelength
division multiplexing technology that will permit significant enhancement
of our network's transmission capacity and will allow us to upgrade the
capacity, reliability and efficiency of the network in the future. The
capacity of our network is currently 40 wavelengths per fiber optic pair,
each wavelength with a capacity of 2.5 gigabits per second, or a total
capacity of 100 gigabits per second on the majority of our routes. We
intend to install additional upgrades to further increase our network's
capacity in 2000. When introduced, these upgrades are expected to
increase the capacity of a single fiber pair to 96 wavelengths per fiber
optic pair, each wavelength with a capacity of 10 gigabits per second, or
a total capacity of 960 gigabits per second. In addition, we intend to
develop an additional ring on our network connecting the core cities of
London, Paris, Amsterdam, Frankfurt, Dusseldorf and Brussels with cable
duct that will accommodate up to 144 fibers. We also plan to install
transmission equipment on a second, currently installed fiber pair on a
number of routes in our network to expand the transmission capacity of
those routes.
- Extend our network closer to our customers and offer new and enhanced
services.
- Develop City Enterprise Networks. In order to offer true end-to-end
transmission services to our carrier and other bandwidth intensive
customers, we intend to build intracity fiber networks, called City
Enterprise Networks, in major European cities. Through us and other
subsidiaries, our parent GTS currently operates five such networks,
in Paris, Budapest, Prague, Berlin and Geneva. We expect to have
deployed intracity fiber networks in six additional cities by
mid-year 2000. Each City Enterprise Network will be designed to
connect, within a city, the major telecommunications transmission
centers, including points of presence on our network, points of
presence of our affiliates in such city, telehouses, Internet
protocol exchange points and, where economically
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<PAGE> 53
feasible our existing customers' points of presence in that city. This
will allow us to reach our customers without relying on third-party
local access providers. We expect an increase in service quality and
higher margins as traffic will be managed on-net end-to-end, leading to
an enhanced competitiveness of our service portfolio.
- Expand and enhance the transatlantic capacity of our network. We
believe that a large portion of our market growth will come in the
form of Internet protocol-based data and voice services. We currently
lease transatlantic capacity from third parties. Because a majority of
Internet protocol traffic originates in the United States, we are
investing in our own transatlantic capacity infrastructure through the
acquisition of a dedicated fiber pair on the FLAG Atlantic-1
transatlantic fiber optic link. By owning this fiber pair, we will
acquire capacity of 70 gigabits per second upgradeable up to a maximum
of 400 gigabits per second of fully protected capacity from the New
York City area directly to our European network. We believe that
owning a large volume of transatlantic capacity to and from the United
States will enhance our competitive low cost position in Europe while
extending our network to the United States at favorable prices. In
addition, in order to maintain and reinforce our strong market
position in the increasingly global carriers' carrier market and
data-centric market, we are planning to enter into arrangements to
obtain network capacity connecting several key U.S. markets by the end
of 2000.
- Capitalize on demand for Web-based services and products. We intend to
capitalize on the trend of companies seeking to outsource their
critical business applications and integrate Web-based services and
products into their marketing efforts by aggressively developing data-
and Web-hosting centers in key cities in Europe. We intend to open
data- and Web-hosting centers in 13 major European cities by year-end
2001. By mid-2000, we expect to establish data- and Web-hosting
capability in London, Amsterdam, Frankfurt and Paris. These centers
are a natural extension of our strategy to meet the end-to-end needs
of the Web- and media-centric content and application providers who
are leading the rapid growth of the Internet- and multimedia-related
segments of our target markets in Europe. In addition to carrying
these customers' international traffic on our network, we will be able
to host and distribute their applications, support their electronic
commerce activities and provide peering arrangements.
OUR SERVICES
We offer our customers high-quality transmission services and extended
network capabilities at competitive prices. The diverse services we offer
reflect the complex and dynamic nature of the carrier market and the rapidly
evolving Web-centric market. We have developed a broad range of services that
vary in technology (synchronous digital hierarchy, dense wavelength division
multiplexing, Internet protocol), configuration (point-to-point, ring, virtual
network services), quality requirements and geographical reach (domestic, pan-
European, transatlantic services). Service innovation and the ability to package
and price services flexibly have allowed us to serve the needs of our customers
effectively.
Our service offering has the following competitive advantages:
- Tailored solutions. We have significant experience in tailoring highly
customized contract terms and volume discounts that allow our customers
to select varying capacity, access, guaranteed availability and contract
terms.
- High capacity cross-border network facilities. Our dense wavelength
division multiplexing network provides high capacity cross-border network
facilities without requiring customers to invest in network
infrastructure or to be constrained by a narrow range of capacity
offerings.
- Diverse routing. The fiber optic network's diverse, redundant routes are
designed to allow us to provide strong performance commitments. On most
routes the fiber optic network performed at over 99.9% availability.
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- Cost reduction through advanced technology. We have substantially reduced
our unit cost by increasing the available capacity on a fiber pair and
deploying advanced dense wavelength division multiplexing technology on
the majority of our routes.
- Uniform network architecture. The uniform technology of our international
managed transmission network allows us to provide a better quality and
reliability of service as well as uniformity of features throughout our
fiber optic network.
In addition to providing sophisticated and flexible value-added services,
we intend to quickly and efficiently deploy our network presence wherever our
current and future customers need to originate and/or terminate traffic. This
has led to the rapid expansion of our network throughout Europe, as well as to
our purchase of transatlantic transmission capacity.
We continue to focus on maintaining a low-cost position for our evolving
services in our network deployment efforts. Through the increase in available
capacity on a fiber pair and through advances in dense wavelength division
multiplexing technology, we have substantially reduced our unit cost since we
began operations.
MANAGED BANDWIDTH SERVICES
We primarily provide large capacity cross-border European and transatlantic
services over an integrated, managed network. Our network, based on dense
wavelength division multiplexing and synchronous digital hierarchy technology,
provides digital transmission capability upon which a broad range of advanced
applications may be built. Our network offers network availability, flexibility,
reliability and bandwidth speeds not widely available for transport of
telecommunications traffic across national borders in Western Europe. Our
network is designed to provide customers with a wide variety of bandwidth
speeds, ranging from a data transmission rate of 2 megabits per second to a data
transmission rate of 2.5 gigabits per second. Access to our network allows our
customers to rapidly enter the markets they are targeting while benefitting from
the low unit cost that our network provides.
Tailored to meet the diverse requirements of several customer segments, our
services include two classes of outsourcing levels. First, our unprotected ring
services provide diversely routed paths on which customers deploy their own
termination equipment and perform protection schemes themselves. Second, our
protected services provide self-healing point-to-point links managed end-to-end
by us. Depending on the customer's bandwidth and application requirements, these
two classes of bandwidth services run on two underlying technologies: either
synchronous digital hierarchy technology over dense wavelength division
multiplexing (for speeds ranging from 2 megabits per second to 155 megabits per
second) or directly on dense wavelength division multiplexing (for speeds
ranging from 155 megabits per second to 2.5 gigabits per second).
Services using synchronous digital hierarchy technology may include local
access capacity between our network point of presence and the customer's point
of presence, depending on customer requirements, due to our numerous agreements
with local access providers.
Services using dense wavelength division multiplexing technology are
delivered on a standard basis at our point of presence. On a special project
basis and shortly through our City Enterprise Network, dense wavelength division
multiplexing services may be expanded to the customer's point of presence.
- DIVERSELY ROUTED RING SERVICES
Many medium to large carriers and operators purchase network capacity in
excess of actual requirements and prefer to have control over the physical
configuration of their networks. This service connects multiple customer
locations with diverse routed paths in a ring configuration. Through its own
termination equipment, the customer has full control of its different traffic
flows. Configuration changes can be made directly by the customer at any time
without our involvement. This gives the customer the opportunity to optimize its
usage of the available ring bandwidth based on the volume requirements of its
individual applications.
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These services are available at speeds of 45 and 155 megabits per second
using synchronous digital hierarchy over dense wavelength division multiplexing
technology as well as directly on dense wavelength division multiplexing
technology at speeds of 2.5 gigabits per second which is expected to be upgraded
to 10 gigabits per second in 2000.
- PROTECTED SERVICES
Our protected services offer domestic and international point-to-point
transmission capacity across our pan-European network. Our services are designed
with a stand-by capacity on our network, fully-dedicated to protecting the
working bandwidth. As a result, the customer avoids having to provide for the
redundancy of its traffic, as it would for unprotected services. We therefore
manage the end-to-end bandwidth reliability of the customer's circuit. We offer
customers service level agreements with service guarantees appropriate for
mission-critical applications These guarantees cover on-time service delivery
and service availability.
Due to the availability of a broad range of bandwidths, its attractive
pricing structure and the quality of service guarantees it offers, we believe
this service is a significant improvement to international private leased
circuits. These services are available in bandwidths from 2 megabits per second
to multiples of 140 megabits per second or 155 megabits per second using
synchronous digital hierarchy over dense wavelength division multiplexing
technology. A similar service running directly on dense wavelength division
multiplexing technology is currently under development.
Our existing transatlantic capacity allows us to provide, manage and
maintain end-to-end bandwidth requirements of our customers between the New York
City area and any points of presence on our network in Europe at data
transmission rates of 34 megabits per second, 45 megabits per second and 155
megabits per second.
INTERNET PROTOCOL TRANSIT SERVICES
The current and future growth in the Internet has a significant impact on
the carrier business. In addition to increasing the amount of data that is being
transported across borders, the Internet influences the transport technologies,
the traffic patterns and the segments that require carrier-like services.
Through our GTS Ebone brand name, we offer to Internet service providers,
value added network service providers, multimedia providers and Web-hosting
companies a carriers'-grade Internet access service with the following
significant features:
- Reliable access to Internet service throughout Europe and the United
States, which is made possible by maintaining multiple relationships with
different Tier-1 Internet backbone providers, both in the United States
as well as in Europe;
- A network consisting of interconnecting rings and based on dense
wavelength division multiplexing technology, which ensures an ample
supply of bandwidth;
- Access to one of the largest installed bases of Internet service
providers in Europe;
- Access to other Internet networks through peering arrangements with
Tier-1 Internet backbones in Europe and in the United States; and
- Access speeds ranging from 2 megabits per second to 2.5 gigabits per
second.
We offer two types of GTS Ebone services:
- Ebone Global Carrier Services, which provides general purpose, congestion
free access to the worldwide Internet; and
- Ebone Europe Carrier Services, which is focused on low delay, high
performance access to the European domain of the worldwide Internet.
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In addition, we are using optical Internet protocol technology to offer in
Europe real-time Internet protocol performance that is needed by Internet
protocol operators and by providers of voice, fax and video-
over-Internet-protocol services. GTS Ebone Europe Services is the first of a
series of future services to fully benefit from the performance offered by
optical Internet technology.
PLANNED INITIATIVES
TRANSATLANTIC EXPANSION OF OUR NETWORK
We currently provide connectivity between Europe to the United States
through capacity leased from third parties. In January 1999, a subsidiary of
GTS, our parent, entered into an agreement with FLAG Telecom, to establish a
50/50 joint venture to build and operate the world's first transatlantic dual
cable system designed to carry voice, high-speed data and video traffic at data
transmission rates of up to 2.4 terabits per second. The joint venture has
announced that this high-capacity fiber optic link between Europe and the United
States, which is called FLAG Atlantic-1, is expected to begin offering
unprotected services in the first quarter of 2001 and fully protected services
in the second quarter of 2001. The joint venture plans to offer a direct link
between the New York City area, London and Paris.
On October 13, 1999, GTS announced that it has committed to purchase one
dedicated fiber pair on FLAG Atlantic-1. We purchased this fiber pair from GTS
in December 1999. By owning this fiber pair, we will acquire capacity of 70
gigabits per second upgradeable to a maximum capacity of 400 gigabits per second
of fully protected capacity (or 800 gigabits per second of unprotected capacity)
from the New York City area directly to our network in Europe. This supply of
capacity will allow us to accommodate the growing volume of transatlantic
traffic at a competitive low cost base. We expect to commence service on our
fiber pair at the same time that FLAG Atlantic-1 begins offering services.
Finally, we have identified the need to be able to offer services beyond
the New York City area, our current point of presence in the United States. We
therefore expect to lease substantial network capacity connecting several key
U.S. markets by the end of 2000.
CITY ENTERPRISE NETWORKS
In order to originate and/or terminate our transmission services closer to
our customers, we intend to build intracity fiber networks, called City
Enterprise Networks, in major European cities. Each City Enterprise Network
will, subject to regulatory constraints and market conditions, consist of up to
144 fiber pairs in underground ducts that we will buy, lease or lay. We believe
this high number of fiber pairs is justified by the economies of the
short-distance environment of city centers and the higher numbers of connection
points to link customers to the network. We also expect to install dense
wavelength division multiplexing equipment to enhance the efficiency of the City
Enterprise Networks.
Each City Enterprise Network will typically connect, within a city, the
major telecommunications transmission centers, including, points of presence of
our network in such city, points of presence of our affiliates in such city,
telehouses, Internet protocol exchange points and, where economically feasible,
points of presence of our existing customers in such city.
Relying on our own local infrastructure in key cities through our City
Enterprise Networks will allow us to reduce operating expenses (by avoiding or
reducing our payments to local access providers) and to enhance the robustness
of our network (through end-to-end network management and compatibility of the
City Enterprise Networks with our existing network). Such fully integrated
network of intracity and intercity connectivity will, we believe, appeal to our
customers in need of managed bandwidth services. We also plan to introduce
wavelength services, also known as optical sub-networks during the build-out of
our City Enterprise Networks. In addition, we plan to add fiber "sub-rings" to
the core of our City Enterprise Networks to extend our geographic reach. We will
also connect our data- and Web-hosting centers to the initial core rings. By
offering co-location and data- and Web-hosting capabilities as a bundled product
with our broadband network capabilities, we intend to attract Web-centric and
media-centric companies to our network without procuring expensive services from
local access providers.
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Through us and other subsidiaries, our parent GTS currently operates City
Enterprise Networks in Berlin, Paris, Budapest, Prague and Geneva. We do not
currently expect to own or operate the City Enterprise Networks in Paris,
Berlin, Prague or Budapest. Therefore, we may in the future purchase local
connectivity on those City Enterprise Networks for resale to our customers. We
have accelerated our rollout plans and we expect to have City Enterprise
Networks operational in the following six additional cities by mid-year 2000:
- - Stockholm
- - Frankfurt
- - London
- - Amsterdam
- - Madrid
- - Vienna
We are also evaluating construction of City Enterprise Networks in the
following additional cities:
- - Milan
- - Brussels
- - Zurich
- - Munich
- - Barcelona
- - Stuttgart
- - Dusseldorf
Our intracity network rings in Western Europe will eventually connect
customers at data transmission rates of up to 2.5 gigabits per second.
DATA AND WEB-HOSTING CENTERS
Our strategy is to strengthen our offering of Internet protocol transit
services by deploying, or arranging for capacity at, data- and Web-hosting
centers near key public Internet exchange points. This will establish the
necessary capability to undertake data- and Web-hosting services and facilitate
electronic commerce solutions. This capability will allow us to meet the
end-to-end needs of the providers of Web and media-centric content and
applications that are leading the rapid growth of the Internet and multimedia
related segments of our target markets in Europe. Thus, in addition to carrying
these customers' international traffic on our network, we will be able to host
and distribute their applications, support their e-business activities and
provide peering arrangements.
By mid-2000, we expect to establish data- and Web-hosting capacity in
London, Frankfurt, Paris and Amsterdam. We intend to construct, or arrange for
capacity at, nine additional data- and Web-hosting centers during the next two
years. These facilities will be specifically designed or selected to offer
high-speed access to our network and provide co-location, dedicated and shared
data- and Web-hosting services.
Additional benefits of the data- and Web-hosting centers include:
- providing Internet service providers with telehousing and managed
services for their Internet protocol routers and servers;
- providing a NT or UNIX based server, allowing Internet service providers
and Web-centric companies to take full advantage of our expertise in
traffic and server management; and
- providing a shared server and management, offering an entry solution to
emerging Internet service providers and Web-centric companies at a
reasonable cost.
Increasing Internet demand is driving Internet service providers to
co-locate their servers and Internet protocol routers closer to their customers,
thereby improving their network reach and performance. Data- and Web-hosting
centers directly connecting Web servers to an Internet protocol backbone remove
the bottlenecks associated with traditional hosting facilities. In addition,
increasing demand for Web content is driving Web-centric companies to locate
servers at those facilities to ensure superior Internet connectivity. Our data-
and Web-hosting capability will offer seamless and scalable Internet
pan-European for emerging Internet service providers and Web-centric companies,
offering direct connection to our large seamless network at bandwidths of
initially 2.5 gigabits per second, with upgrades up to 10 gigabits per second.
We believe that offering data-and Web-hosting services will provide
opportunities to cross-sell services on our fiber optic network, thereby
improving customer retention and enabling us to address new target segments.
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We will offer high performance distribution of bandwidth intensive,
multimedia applications and regional content through our extensive peering
arrangements. Our networked data- and Web-hosting centers are a key component of
the infrastructure required to serve the future needs of our customer segments.
We plan to extend data- and Web-hosting and co-location services to enable
application service providers to distribute applications from their data- and
Web-hosting centers. We also intend to offer Internet service providers
network-based application services such as unified messaging and facilitate
electronic commerce solutions through our data- and Web-hosting centers.
PRICING AND DISTRIBUTION
Sales of our services are currently conducted through our subsidiary GTS
Carrier Services (Ireland) Limited.
Currently, the price of cross-border pan-European calls are often
significantly higher than the underlying cost of transmission and terminating
such calls and higher than the price of intra-country calls or transborder calls
to and from liberalized markets. The low cost of operating the network enables
us to attractively and competitively price our services in the face of declining
overall prices for telecommunication services. Our low-cost basis is due to,
among other things, our network's use of advanced fiber optic cable and
electronic equipment permitting high capacity transmission over longer distances
between regeneration/amplifier facilities than legacy networks.
The term of a typical customer agreement currently ranges from one to three
years in length. In addition, we offer ten year leases which require an up-front
payment and produce recurring operation and maintenance charges. Our customer
agrees to purchase, and we agree to provide, transmission services. In general
our customer agrees to pay certain non-recurring charges upfront and recurring
charges on an annual basis, payable in twelve monthly installments. If a
customer terminates a service order prior to the end of the contract term, the
customer is generally required to pay us a cancellation charge equal to three
months of service for each of the twelve months remaining in the contract term.
We typically guarantee transmission services to a specified service level. If
such levels are not met or we fail to deliver service by the committed delivery
date, the customer is eligible for a credit against charges otherwise payable in
respect of the relevant link.
CUSTOMERS
Our high capacity, dense wavelength division multiplexing and synchronous
digital hierarchy based fiber optic network is designed to enable incumbent
telecommunications operators, Internet service providers and other
bandwidth-intensive customers to integrate high quality, cross-border capacity
into their end user offerings. At September 30, 1999, 156 customers were under
contract for service on our network. These customers included incumbent
telecommunications operators, alternative carriers, voice resellers,
international carriers, national Internet service providers, multinational
Internet service providers, value added network service providers and
Web-centric and media-centric companies. As of September 30, 1999, our customers
were contractually obligated to pay us an aggregate of $548.2 million for future
services, provided our network performs in accordance with contractual
specifications.
We target eight major market segments or customer groups, which can be
characterized as follows:
- European Incumbent Telecommunications Operators. This customer group
consists of the traditional European incumbent telecommunications
operators that generally participate in the standard bilateral agreements
for cross-border connections. We lower the cost of delivering their
international service and provide a vehicle for them to compete in
non-domestic markets.
- Alternative Carriers. This group consists of second carriers, mobile
carriers and competitive access providers. These new carriers have chosen
to compete with the incumbent telecommunications operators in their
respective countries. We provide these companies with the capacity to
enter markets quickly and competitive costs for their international
services and/or national infrastructure.
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- Voice Resellers. Voice resellers are voice carriers that do not own
transmission facilities, but obtain communications services from other
carriers for resale to the public. Voice resellers are also a growing
segment of the market and are expected to increase their market share in
conjunction with the liberalization of the European telecommunications
market. In the United States, for example, voice resellers were a
significant factor in the expansion of competition.
- International Carriers. This customer group consists of multinational
carriers with traffic between European and other international gateways.
We can provide these customers a pan-European distribution network to
gather and deliver traffic to and from their own and other networks.
- National Internet Services Providers. Internet service providers are a
fast growing segment generating significant bandwidth requirements. These
customers provide Internet access, web-hosting and related value added
services to a national customer base. They can be independent, owned by
cable TV companies, incumbent or alternative operators. They originate
and terminate large amounts of international Internet traffic, for which
they typically require congestion-free Internet access. Alternatively,
these customers require large managed bandwidth capacity to U.S. Internet
providers. Our GTS Ebone Europe services, based on our large pan-European
optical Internet protocol network with multiple connections to key U.S.
backbones, position us well to serve this segment.
- Multinational Internet Service Providers. These customers provide
Internet access, web-hosting and related value added services to multiple
national customer bases and to international business customers. In
addition to the traffic generated between their national networks, they
originate and terminate large amounts of international Internet traffic.
They typically require large managed bandwidth capacity to their core
Internet protocol backbone in the United States, completed by
congestion-free Internet access to the European domains of the worldwide
Internet. Alternatively, these customers require bandwidth between
Internet exchanges (point of interconnection between local Internet
service providers) in different European countries. Our extensive
pan-European and transatlantic bandwidth services, combined with our GTS
Ebone Europe services, allow us to serve this segment effectively.
- Value Added Network Service Providers. Value added networks are data
communications systems in which special service features enhance the
basic data transmission facilities offered to customers. Value added
networks currently purchase their own international circuits and build
the required amount of resiliency into their network infrastructure. Such
value added network service providers are often offered by global
consortia of telecommunications operators, which have pooled their
resources in order to compete more effectively in important
telecommunications markets, such as those in Western Europe, particularly
outside their home market. We allow such customers to meet their needs
cost-effectively and to extend their services to new markets or customers
without substantial capital investment. These providers build data
communications systems in which added value services (e.g. Frame Relay,
ATM, LAN-Interconnect) enhance the basic data transmission facilities
offered to customers. Many of these networks are targeted to the data
transfer requirements of specific international customer segments such as
airlines and financial institutions.
- Web-centric and Media-centric Companies. The emergence of the Internet is
causing many companies of all sizes and sectors to rely on Web presence
to expand their businesses. These companies need congestion-free highly
reliable Internet access and presence which makes them our natural target
given our Internet protocol network and installed user base in Europe.
Their requirements in terms of Web-hosting and European-focused Internet
access lead them to demand the carrier-quality Internet solutions. We
expect that the performance made possible by our implementation of
optical Internet protocol technology will trigger the emergence of new
broadband applications, such as streaming audio or cable TV programming
distribution to the end-user via the Internet.
We expect that additional demand for services will be derived from
increased Internet usage caused by the subscription-free Internet phenomenon and
usage of dedicated circuits, as well as the exponential increase
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in volume caused by new Internet applications, such as voice-over Internet
protocol, broadband applications, electronic commerce applications and
Web-hosting, and the wider deployment of corporate data solutions.
NETWORK DESIGN
The design of our network is based on a layered architecture which
separates the physical layer, the optical layer, the transmission layers and the
data (Internet protocol) layer of our network with standard interfaces and
protocols in order to optimize design and operation and provide flexibility for
introducing new technologies, new applications and new services.
The physical layer of our network is based on a mesh of dark fiber routes
interconnecting cities on our network via at least two or three physically
diverse paths for maximum resilience against fiber or facilities failures. In
each major city there will be two additional customer access sites for
reliability.
The optical layer of our network represents the core of our network and is
based on dense wavelength division multiplexing. This layer supports the
provision of optical services direct to customers at 2.5 gigabits per second and
provides for the operation of multiple synchronous digital hierarchy and/or
Internet protocol systems to run concurrently on a single fiber pair in a highly
cost efficient manner. The optical layer of our network is based on Ciena 40
wavelength systems with a capacity of 100 gigabits per second on a fiber pair.
We are using synchronous digital hierarchy (SDH) time division multiplexing
equipment to consolidate, groom and add or drop low and high order traffic
coming from our various network components and to support the provision of
synchronous digital hierarchy leased lines services to customers at data
transmission rates ranging from 2 megabits per second to 155 megabits per
second.
The synchronous digital hierarchy layer of the network runs via dense
wavelength division multiplexing channels in our network with a multilayered
architecture consisting of multiple synchronous digital hierarchy rings
optimized for different traffic characteristics. Each synchronous digital
hierarchy ring supports full automatic re-routing of traffic in the case of a
break in the ring. This layer is based on Alcatel STM-16 (2.5 gigabits per
second) systems, which are installed throughout the operational network.
A gigabit Internet protocol layer is implemented using the latest
generation of Internet protocol routing equipment, the Cisco GSR 12000. Backbone
links interconnect core network nodes at data transmission rates of 2.5 gigabits
per second, providing high quality, seamless Internet protocol connections
throughout Europe. The Internet protocol connections gigabit routers are coupled
directly to the optical wavelength division multiplexing infrastructure without
any additional intermediate equipment, reducing network complexity and costs and
increasing efficiency. Core network routers are deployed in a redundant
configuration to ensure maximum reliability. Since we design and operate
directly both the optical network layer and the Internet protocol layer, a
further optimization of the resulting network architecture is achieved. The
Internet application implemented on top of the gigabit Internet protocol
platform configures us among the prominent Tier-1 Internet service providers in
Europe, with direct connections to the other major European Internet backbone
providers. For a direct interconnection with major U.S. Internet backbones, two
network nodes are deployed in the United States, with high-speed connections to
the European gigabit backbone. The high-performance core Internet protocol
network is designed to support a flexible introduction of Internet protocol
based added-value services at the edge of our network.
A main network management center, located in Brussels, controls our
network. The network operations centers can pinpoint potential service problems
and can deal with service re-routing if required much more effectively than in
networks controlled by multiple operators in different countries. Our advanced
operational support systems also allows us to manage the large number of network
components and local repair organizations required in an extensive international
network of this size, as well as for advanced customer care in managing customer
operational activities.
Overall, our combination of backup paths and management components enable
us to recover from individual failures at the optical, synchronous digital
hierarchy and Internet protocol layers. Our resilient approach provides for a
high level of network performance and reliability. As a result, we are able to
enter into
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strong performance commitments with our customers, and services on most routes
of our network have performed at or above 99.9% availability.
We own substantially all of our network equipment as well as some segments
of the fiber optic cable. A substantial part of the fiber is leased on a
long-term basis. Long-term leases for fiber are advantageous to us because they
reduce the burden of building large quantities of capacity before they can be
used. When we lease dark fiber, the infrastructure provider will generally be
responsible for maintaining such fiber optic cable. We have entered into
agreements with equipment vendors, infrastructure providers and other third
parties to supply and/or maintain the equipment for our network.
NETWORK CAPACITY
Our network includes Ciena 40 dense wavelength division multiplexing
systems on a substantial majority of our routes and by mid-2000 all our routes
will be dense wavelength division multiplexing based with a data transmission
rate of at least 100 gigabits per second per fiber pair. This 100 gigabits per
second allows for synchronous digital hierarchy and Internet protocol systems of
2.5 gigabits per second to be installed only when required, thus providing for
efficient management of capital investment.
We will deploy on our core pan-European fiber optic network routes, during
2000 and according to traffic demand, per core route a new generation of
wavelength division multiplexing systems scalable up to a minimum of 960
gigabits per second. These systems will be able to handle wavelengths at 2.5 and
10 gigabits per second allowing us to increase the amount of bandwidth carried
per fiber pair as well as to reduce interface prices in both wavelength division
multiplexing and client layer equipments. We plan to extend capacity in the core
portion of our network by developing an additional ring connecting London,
Paris, Amsterdam, Frankfurt, Dusseldorf and Brussels with cable duct
accommodating up to 144 fibers. We also plan to install transmission equipment
on a second, currently installed fiber pair on a number of routes in our network
to expand the transmission capacity of those routes by adding fiber pairs and
dense wavelength division multiplexing upgrades on selected existing routes
whenever demand for capacity will justify it. This approach to fiber utilization
again provides for an optimal management of fiber investment.
NETWORK AGREEMENTS
We have entered into agreements and letters of intent with various
infrastructure providers for construction and/or leasing of dark fiber for
portions of our network. Our agreements for leases of portions of our network
typically require the infrastructure provider to provide a certain number of
pairs of dark fiber and in some cases facilities along the network route
commencing on dates we provide. The term of a lease agreement generally ranges
from 10 to 18 years. An agreement typically contains optical specification
standards for the fiber and methods of testing. We are allowed to use the cable
for the transmission of messages and other purposes, including increasing
capacity. The infrastructure provider is responsible for maintenance of the
cable facilities. The infrastructure provider may also provide space for the
location of our equipment and related maintenance. The agreements typically
provide for termination by the parties only for material breach, but allow the
breaching party 90 days to cure the breach. The agreements typically contain a
transition period after termination of the agreement to allow us to continue to
serve our customers until we can reach agreement with an alternative
infrastructure provider. In certain areas of our network where it is not
possible to lease dark fiber (which we do not expect to exceed more than 10
percent of our network), we have signed agreements or letters of intent for the
right to use managed bandwidth. The terms of these agreements typically range
from 10 to 25 years.
We are also deploying our network along the rights-of-way of a variety of
alternative sources, including railways, motorways, waterways, pipelines and
utilities. We constantly evaluate multiple alternative infrastructure suppliers
in order to maximise our flexibility. Many portions of our network utilise
long-term right-of-way agreements with landowners. As a result of our network
development activities to date, we have gained access to infrastructure for our
network routes, which we believe, will be difficult for competitors to
duplicate.
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COMPETITION
We compete with various telecommunications companies, including MCI
WorldCom, Inc., Viatel, Inc., KPN Qwest B.V., COLT Telecom Group plc, Level 3
Communications, Inc., Carrier1 International S.A., Deutsche Telekom AG, France
Telecom S.A., Global Crossing Ltd. and British Telecommunications plc. Some of
these entities have announced plans to construct, have begun to construct or are
operating high bandwidth fiber optic networks across various European countries
and in several European metropolitan markets and in some cases, providing
transatlantic connectivity, which do or will compete with our network and our
planned City Enterprise Networks. In addition, a number of telecommunications
companies and Internet service providers have begun offering or announced their
intentions to offer data- and Web hosting services in key European cities.
We compete primarily on the basis of the range and quality of services
offered, customer service and price. Competitors may force us to lower our
prices or modify our service offerings to remain competitive. Many competitors
have established customer bases and extensive brand name recognition and have
greater financial, management and other resources.
The ongoing liberalization of the European telecommunications market has
coincided with technological innovation to create an increasingly competitive
market, characterized by still-dominant incumbent telecommunications operators
as well as an increasing number of new market entrants. In addition, these
carriers own and operate fully built networks and infrastructure which provide
them with significant cost advantages.
PROPERTIES
We own substantially all of the telecommunications equipment required for
our business; however, a substantial part of the fiber is leased on a long-term
basis. Our installed fiber optic cable is laid under the various rights-of-way
held by us. Other fixed assets are located at various leased locations in
geographic areas served by us. Other fixed assets are located at various leased
locations in geographic areas that we serve.
Our principal administrative offices and our network operations center are
located in two adjacent buildings in Hoeilaart, Belgium, just outside Brussels.
The leases on both the buildings expire on June 30, 2005. One of the buildings
has an option to cancel on January 1, 2002 with a penalty of six months rent. In
addition, we have short-term leases expiring on February 28, 2000 in Rixensart,
Belgium and on September 1, 2000 in Kraainem, Belgium. We have negotiated leases
for two additional buildings in the same complex as our principal offices. The
buildings are currently under construction and are expected to be ready for
occupancy in the first quarter of 2000. The leases run through January 2009 but
may be terminated after six years with six months notice plus six months rental
penalty.
In addition to the offices in Belgium, we have a leased office space in
Dublin, Ireland, which expires on October 2, 2022, in London, United Kingdom,
which expires in August 2002, in Frankfurt, Germany, which expires in March 2004
and Madrid, Spain, which expires in January 2004. We lease various offices on a
short-term basis for regional sales and service personnel.
EMPLOYEES
As of September 30, 1999, we employed 380 employees. We believe our future
success will depend on our continued ability to attract and retain highly
skilled and qualified employees. We believe that our relations with our
employees are good.
LEGAL PROCEEDINGS
We are subject to various claims and proceedings in the ordinary course of
our business. In addition, we are party to the following claims and proceedings:
Interactive Communications Services (ICS) has brought a claim against our
wholly owned subsidiary GTS Carrier Services (Ireland) Limited for damages
alleged to exceed E2.9 million. Proceedings were issued on October 11, 1999 and
a detailed claim has not yet been served. ICS has obtained an injunction
preventing
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GTS Carrier Services (Ireland) Limited from suspending or terminating certain
telecommunications services provided to ICS. However, the injunction was
discharged on October 26, 1999 because ICS failed to pay L267,000 to GTS Carrier
Services (Ireland) Limited, which was a condition for the injunction to remain
in place. From evidence before the court in connection with that injunction it
appears that ICS's damages claim relates to an alleged breach of contract in GTS
Carrier Services (Ireland) Limited not commissioning or connecting
telecommunications circuits as quickly as ICS claims GTS contracted to do. We
believe that ICS's claim is without merit.
On March 26, 1999, we opposed the license fee imposed by the French
regulator as, among other things, contrary to Article 11 of EC Directive 97/13
which requires license fees to cover only the administrative cost of managing
the license. On September 23, 1999, the French regulator informed us that they
rejected our position. On November 24, 1999 we filed a complaint before the
French administrative tribunal opposing the license fee. Under French law, we
are not be required to pay the license fee and the French regulator does not
have the right to terminate our license until such time as a ruling by the
French administrative tribunal is issued. If our claim is rejected in a final
non-appealable judgment, we will be required to pay our license fee in France.
Based on information currently available, we believe that none of such
current claims or proceedings, individually or in the aggregate, will have a
material adverse effect on our financial condition or results of operations,
although there can be no assurance that this will remain the case.
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LICENSES AND REGULATORY ISSUES
OVERVIEW
The EU has progressively liberalized its telecommunications markets over
the past decade. In 1987, a policy document, the EC Green Paper on
Telecommunications, charted the course for the current changes in the EU
telecommunications industry by advancing principles such as separation of
operators from regulators, transparency of procedures and information, cost
orientation of tariffs, access to monopoly public telephone operator networks
and the liberalization of services. In 1990, the EU adopted two measures based
on these principles: the Open Network Provision Framework Directive and the
Services Directive. These two directives set forth basic rules for access to
public telephone networks and required the liberalization of the provision of
all telecommunications services within the EU except for certain "reserved
services", including voice telephony.
In 1992, the EU adopted the Open Network Provision Leased Line Directive,
which requires the incumbent operators to lease lines to competitors and
end-users at cost-oriented prices, and to establish cost accounting systems for
these products by the end of 1993. Even though most EU member states have
established regulatory frameworks requiring incumbent telecommunications
operators to lease lines to competitors and end-users, we believe that, in some
EU member states, such lines are not yet being offered at cost-orientated
prices.
In October 1999, the EU Commission opened an investigation into the
condition of the provisioning and pricing of leased lines. The aim of the
investigation is to establish whether current telephone company practices
infringe EU competition rules.
In 1996, the EU adopted the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the date by which all EU member states must remove all remaining restrictions on
the provision of telecommunications services, including voice telephony. A
number of EU member states were granted a delay in implementing the Full
Competition Directive. The EU member states that are still subject to the
derogation are as follows:
(1) Greece, through December 31, 2000;
(2) Ireland, through January 1, 2000; and
(3) Portugal, through January 1, 2000.
Ireland, however, implemented the Full Competition Directive in December
1998.
Subject to the foregoing, each EU member state is obliged, under EU law, to
enforce the terms of the Full Competition Directive in such a manner so as to
ensure that its aim and purpose is carried out. Enforceability of the Full
Competition Directive may be challenged at the EU level or at the EU member
state level. In practice, implementation and enforcement of the directive has
been and may also continue to be delayed on a country by country basis.
In June 1997, the EU adopted a directive that governs the manner in which
public network operators and service providers interconnect with the incumbent
telecommunications operators' public networks. Among other things, this
directive requires EU member states to ensure that incumbent telecommunications
operators with significant market power should provide interconnection on the
basis of cost-oriented charges.
In April 1997, the EU adopted a directive on a common framework for general
authorizations and individual licenses in the field of telecommunications
services, including networks. Licenses must be awarded through open,
non-discriminatory and transparent procedures and applications are be required
to be dealt with
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in a timely fashion. The number of licenses may be restricted only to the extent
required to ensure the efficient use of scarce resources, such as radio
frequencies or numbers.
In February 1998, the EU adopted a directive on the application of the Open
Network Provision to voice telephony and on universal service.
We believe that the adoption of the Full Competition Directive and the
various related directives adopted by the EU have resulted in the removal of
most regulatory barriers to the establishment and operation of
telecommunications infrastructure in the countries of the EU where we currently
operate.
However, some EU member states are still in the initial stages of
liberalizing their telecommunications markets and establishing competitive
regulatory structures suitable for a competitive environment. For example, some
EU member states have only recently established a national regulatory authority.
In addition, the implementation, interpretation and enforcement of EU directives
differs significantly among the EU member states. While some EU member states
have embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintained
various restrictions on full competition.
Member states of the EU are bound as a matter of international law to
comply with certain multilateral trade rules and regulations. On February 15,
1997, over 60 members of the World Trade Organization committed to open their
telecommunications markets for basic telecommunications services to foreign
competition and ownership and to adopt regulatory measures designed to protect
foreign telecommunications providers against anticompetitive behavior by
domestic incumbent telecommunications operators. For most parties, these
commitments took effect on February 5, 1998 (including the EU member states). We
believe that this Agreement will contribute to the creation of a more
competitive environment internationally. Specifically, it will result in
downward pressure on call termination charges outside the EU. For a discussion
of the regulatory risks involved, see "Risk Factors -- Delays in regulatory
liberalization in EU member states could adversely affect our service offerings
in those countries."
As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services and deploy our network. Local laws and regulations and the
interpretation of such laws and regulations differ significantly among the
jurisdictions in which we operate. For a discussion of the regulatory risks we
face, see "Risk Factors -- Delays in regulatory liberalizations in EU member
states could adversely affect our service offerings in those countries."
GTS EUROPE NETWORK
We require licenses, authorizations or registrations in almost all
countries to operate our network and provide our service. Licenses,
authorizations or registrations have been obtained in Austria, Belgium, Czech
Republic, Finland, France, Germany, Italy, Luxembourg, The Netherlands, Spain,
Sweden, Switzerland, the United Kingdom and the United States. No license or
authorization is required to operate our network in Denmark. We intend to file
applications in other countries in anticipation of service launch in accordance
with our network roll-out plan.
A summary discussion of the regulatory framework in certain countries where
we have developed and are developing our network is set forth below. This
discussion is intended to provide a general outline, rather than a comprehensive
discussion, of the more relevant regulations and current regulatory posture of
the various jurisdictions.
Austria. A new Telecommunications Act entered into force in Austria in
1997. On May 3, 1999, we were granted a concession to build and operate our
network, including our City Enterprise Networks, throughout Austria.
Belgium. The implementing legislation regarding the licensing regimes for
the provision of voice telephony services and the establishment of public
network infrastructure entered into force in July 1998. Until such entry into
force, the Belgian Telecommunication Authority worked with a system of
provisional licenses. Through a wholly owned subsidiary, we obtained a
provisional license in February 1997 from the
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Belgian regulatory authority to build infrastructure between major Belgian
population centers and the relevant border crossings. We also had an
authorization to provide liberalized services using alternative infrastructure.
We were granted a permanent license to build and operate our network on January
26, 1999. In December, 1999, we obtained an extension to our license in order to
operate routes linking a planned point of presence in Diegem. We will be
required to notify the Belgium regulator in the event that we deploy City
Enterprise Networks in Belgium.
Czech Republic. Through a wholly owned subsidiary, we were granted a
license for the provision of our international services on October 6, 1999. The
license is valid for 10 years.
Denmark. In July 1997, Denmark fully liberalized its telecommunications
markets in accordance with the requirements of the relevant EU Directives.
According to the Danish rules, we do not require any regulatory approval in
order to install or operate our network in Denmark.
Finland. In 1997, Finland enacted the Telecommunications Market Act, which
brought its laws into conformity with the Full Competition Directive. The Act
requires persons intending to provide telecommunications services to notify the
responsible Ministry in advance. On July 7, 1999, the Ministry notified us that
we could provide international telecommunications services.
France. In 1996, France approved legislation to implement the Full
Competition Directive and to remove all remaining restrictions on competition
from January 1998. On November 19, 1997, we obtained authorization to build and
operate our network in specific regions of France. In September 1998, we were
granted an extension of our authorization in order to extend our network in
France to reach Italy and Spain. Our authorization requires prior notification
to and approval by the French regulator of any substantial changes in our
capital or our controlling shareholder. The authorization is valid for 15 years.
Germany. Germany adopted legislation implementing the Full Competition
Directive and removing all remaining restrictions on competition from August
1996. We were granted a license by the German regulatory authorities on July 18,
1997. The license permits us to build and operate the portions of our network in
Germany connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to the Dutch
border; and Stuttgart to the French border. In August 1998, we were granted
extensions to our license to build and operate routes linking Hamburg, Hanover,
Munich and Berlin and of routes to Denmark. On November 12, 1999, we obtained an
infrastructure nationwide license to cover all of Germany. This nationwide
license will allow us to deploy planned City Enterprise Networks in Germany.
Italy. Although in the past Italy has been dilatory in implementing EC
liberalization measures, Italy adopted legislation in July 1997 creating an
independent national regulatory authority for the telecommunications and
audiovisual sectors. In September 1997, Italy adopted a regulation implementing
all EC directives in the telecommunications sector and since then specific laws
relating to licensing and interconnection and universal service have been
adopted. The Italian authorities granted a license to us in August 1998,
enabling the development of our network in the northwest region of Italy and the
offering of services in Milan. We expect to apply for an extension of our
license in order to offer services in other cities, and continue to expand our
network, including our planned City Enterprise Network, in Milan. The Italian
license is valid for 15 years.
Luxembourg. A new Telecommunication Act entered into force in April 1997,
and a Royal Decree on licensing conditions entered into force in July 1998. On
February 11, 1999, we were granted a license to build and operate a public
telecommunications network, which is valid for 30 years.
The Netherlands. In July 1997, the Dutch government abolished the
prohibition on the use of fixed infrastructure for the provision of competitive
public voice telephony, thereby complying with the requirements of the Full
Competition Directive six months ahead of schedule.
A new Telecommunications Act came partly into force on December 15, 1998.
The new Act confirms the full liberalization of the telecommunications market in
accordance with EU law. The Dutch regulator granted a registration to us as a
public telecommunications network operator on March 3, 1999. This registration
supersedes a registration which was granted to us on August 1, 1996.
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Spain. Spain was granted the right to a delay in liberalizing its
telecommunications market until November 30, 1998. In April 1998, Spain adopted
the LGT, its new telecommunications law. The LGT was implemented through the use
of secondary legislation. The LGT and the secondary legislation resulted in the
full liberalization of the Spanish telecommunications market on December 1,
1998. We were granted a license to install and operate a telecommunications
network in Spain on January 14, 1999. The license is valid for 20 years.
Sweden. Full liberalization of the Swedish telecommunications market
occurred in 1993. A new Telecommunications Act was passed in 1997 to reinforce
the powers of the national regulatory authority, to ensure conformity with EU
Directives and to supplement the pre-existing licensing regime with a general
authorization regime for certain services. We registered with Swedish
authorities and have been able to provide service in Sweden since July 1998.
Switzerland. A new Swiss Telecommunications Law entered into force in
January 1998. Although Switzerland is not a member state of the EU, the effect
of the law is largely to mirror the EU telecommunications liberalization
directives. From that date, the existing voice telephony monopoly was abolished
and the provision of competing services fully liberalized. On September 18,
1998, the Swiss regulatory authority granted a definitive concession to us
(replacing an earlier provisional concession) to build and operate our network
in Switzerland. We are expecting to apply for an extension to our concession in
the event that we deploy City Enterprise Networks in Switzerland.
United Kingdom. Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of the UK regulator to create a competitive marketplace from which
detailed regulation could eventually be withdrawn. The United Kingdom has
already liberalized its market beyond the requirements of the Full Competition
Directive, and most restrictions on competition have been removed in practice as
well as in law. We have received a license from the Secretary of State for Trade
and Industry dated December 18, 1996 which grants the right to run a
telecommunications system or systems in the United Kingdom connected to overseas
telecommunications systems and to provide international services over such
systems. The license was modified on September 27, 1999, and now, in addition to
international services, the license permits us to provide domestic services over
our own system. At the same time, the term of the license was extended to 25
years.
United States. The Federal Communications Commission ("FCC") granted a
license to us pursuant to Section 214 of the Communications Act of 1934
authorizing us to provide limited global facilities-based and global resale
services, (subject to the terms and conditions imposed by the law and
authorization), effective October 23, 1998. The Section 214 authorization does
not allow us to offer U.S. services between the United States and Hungary,
Poland, the Czech Republic, Romania, Monaco, Russia, Ukraine, Kazakhstan,
Uzbekistan, Azerbaijan, China and India. On August 16, 1999, we filed an
application with the FCC for a Section 214 authorization to provide
international facilities-based and resale service between the United States and
the latter countries. The FCC issued a public notice stating that the portion of
the application relating to service between the United States and Russia was
removed from stream line processing, and that the remainder of the application
was granted on October 13, 1999. We do not require any authorization to provide
state-to-state services within the United States. We expect to be able to obtain
any license that may be required to be issued by a state regulatory commission
to provide services between points within a single state.
We intend to file applications in other countries including Croatia,
Hungary, Ireland, Poland, Portugal, Slovakia and Russia in anticipation of
service launch in accordance with our network roll-out plan. With the exception
of Ireland and Portugal, which are members of the EU and whose laws must comply
with EU Directives, these countries have not generally liberalized their
telecommunications sector. We cannot assure you that they will do so in a timely
manner or at all. In addition, the terms and conditions of our licenses,
authorizations or registrations may limit or otherwise affect our scope of
operations. We cannot assure you that (1) we will be able to obtain, maintain or
renew licenses, authorizations or registrations to provide the services we
currently provide and plan to provide, (2) such licenses, authorizations or
registrations will be issued or renewed on terms or with fees that are
commercially viable, or (3) the licenses, authorizations or registrations
required in the future can be obtained by us. The loss of, or failure to obtain,
these licenses, authorizations or
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<PAGE> 68
registrations or a substantial limitation upon the terms of these licenses,
authorizations or registrations could have a material adverse effect on us.
INTERNET PROTOCOL TRANSPORT SERVICES
At present there is no general consensus on the regulatory position of
Internet protocol transport services in Europe and the United States. Currently,
Internet protocol transport services are generally treated as unregulated or, in
some European countries, as a telecommunications service subject to minimal
regulatory requirements. We cannot assure you that Internet protocol transport
services will not be regulated in the future in Europe or the United States. We
will continue to monitor regulatory developments that may affect Internet
protocol transport services' operations.
DATA- AND WEB-HOSTING
The laws relating to the regulation and liability of companies providing
Web-hosting services in relation to the information carried or disseminated
through their services are in the process of development in Europe. In England,
for example, a recent court decision held an Internet service provider liable
for certain allegedly defamatory content carried through its network under
factual circumstance in which the Internet service provider had been notified by
the complainant about the message which the Internet service provider had failed
to delete when asked to do so by the complainant. Decisions, laws regulation and
content liability may significantly affect the services we intend to offer. We
will continue to monitor the developments that may affect these services.
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<PAGE> 69
MANAGEMENT
MEMBERS OF THE BOARD OF SUPERVISORY DIRECTORS AND THE BOARD OF MANAGING
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Members of the Board of Supervisory Directors and the Board of Managing
Directors and executive officers and their respective ages as of December 31,
1999 and positions are set forth below.
BOARD OF SUPERVISORY DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert J. Amman........................ 61 President and Chief Operating Officer of Global TeleSystems
Group, Inc.
Mikel H. Williams...................... 41 Vice-President -- Finance Operations of Global TeleSystems Group,
Inc.
</TABLE>
BOARD OF MANAGING DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jim Reynolds........................... 47 Managing Director
Gerard J. Caccappolo................... 56 Managing Director
</TABLE>
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jim Reynolds........................... 47 President and Managing Director (Principal Executive Officer)
Gerard J. Caccappolo................... 56 President of Marketing and Sales and Managing Director
Philip J. Blanchette................... 49 Vice President of Operations
Bruce C. Rudy.......................... 43 Vice President of Fiber and Facilities Purchasing
John Allan Shearing.................... 49 Vice President of Engineering
Jan De Wispelaere...................... 39 Vice President and General Counsel
Mikel Williams......................... 41 Acting Vice President -- Chief Financial Officer (Principal
Financial and Accounting Officer)
</TABLE>
BOARD OF SUPERVISORY DIRECTORS
Our general affairs and business and the executive board which manages the
company (the "Board of Managing Directors") (Directie) are supervised by a board
appointed by the general meeting of shareholders (the "Board of Supervisory
Directors") (Raad van Commissarissen).
Our Articles of Association (the "Articles of Association") provide for at
least two supervisory directors who must be natural persons ("Supervisory
Directors") to serve on the Board of Supervisory Directors. Under the law of the
Netherlands, a member of the Board of Supervisory Directors of a company cannot
be a member of the Board of Managing Directors of the same company. The members
of the Board of Supervisory Directors are appointed by the general meeting of
shareholders. The Board of Supervisory Directors elects a chairman from among
its members. See "Certain Relationships and Related Transactions." The Board of
Supervisory Directors meets four times a year and also upon the request of its
chairman or the Board of Managing Directors. Pursuant to the Articles of
Association, Supervisory Directors may be suspended or dismissed by the general
meeting of shareholders. The remuneration or compensation of the Supervisory
Directors is determined by the general meeting of shareholders.
While the Board of Managing Directors is the executive body of the company
and is responsible for managing its affairs and representing the company in its
dealings with third parties, the primary responsibility of the Board of
Supervisory Directors is to supervise the policies enacted by the Board of
Managing Directors
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<PAGE> 70
and the general course of our affairs. The Board of Supervisory Directors
advises the Board of Managing Directors. In the fulfilment of their duties,
members of the Board of Supervisory Directors are required to act in our best
interests.
The members of the Board of Supervisory Directors are as follows:
Robert J. Amman. Mr. Amman was elected to GTS's Board of Directors in May
1998 and was appointed President of GTS in March 1999. Mr. Amman was Chairman,
President and Chief Executive Officer of John H. Harland Company, a printing
firm, from 1995 to 1998. Previously, from 1994 to 1995, he served as Vice
Chairman of First Financial Management Corporation, where he was responsible for
the merchant services businesses consisting of Western Union, NaBanco,
Telecheck, Nationwide Credit and International Banking Technologies. From 1988
to 1994, Mr. Amman served as President and Chief Executive Officer of Western
Union Corporation, where he oversaw the transformation of the firm from a
telecommunications to a financial services company.
Mikel H. Williams. Mr. Williams has served as Vice President -- Finance
Operations of Global TeleSystems Group, Inc. since November 1996. From 1990 to
1996, he was Managing Director -- Finance and Administration of
Burson-Marsteller, Washington Region. Mr. Williams served as Chief Financial
Officer of Black, Manafort, Stone & Kelly from 1985 to 1990. Previously, he was
a Manager with Price Waterhouse. Mr. Williams is also Acting Vice President,
Finance of GTS's Carrier Services division.
BOARD OF MANAGING DIRECTORS
The Board of Managing Directors, consisting of two members, is charged with
the management of the Company in accordance with our business plan under the
supervision of the Board of Supervisory Directors. Jim Reynolds acts as Managing
Director. Under the Articles of Association, the Board of Managing Directors
must obtain the approval of the Board of Supervisory Directors in order to take
the following actions: (a) to adopt and amend our business plan and annual
budget; (b) to incur expenses in excess of the adopted or amended annual budget;
(c) to incur loans outside of our ordinary business, except draw-downs of
amounts previously approved on our account with a bank designated by the Board
of Supervisory Directors; (d) to lend sums which exceed the amounts previously
approved by the Board of Supervisory Directors outside our ordinary business;
(e) to commit us to guarantee debts of third parties outside our ordinary
business; (f) to extend our business into a new line of business and to
discontinue our business; and (g) to alienate a considerable part of our assets.
The Articles of Association provide that the Board of Managing Directors
shall consist of at least one member. The members of the Board of Managing
Directors are appointed by the general meeting of shareholders. The general
meeting of shareholders may suspend or dismiss a member of the Management Board
by a vote of a majority of votes cast in a meeting in which at least four-fifths
of the issued capital is present or represented. The compensation and other
terms and conditions of employment of the members of the Board of Managing
Directors is determined by the general meeting of shareholders.
The members of the Board of Managing Directors are as follows:
Jim Reynolds, President and Managing Director. Mr. Reynolds joined GTS in
March 1999, and assumed his current positions at GTS Europe in June and
September 1999. Mr. Reynolds was formerly chief operating officer of Esprit
Telecom Group plc. His experience and track record extends over 26 years in the
information technology and telecommunications field. Previously Director of
Products and Services at Mercury Communications, Mr. Reynolds was responsible
for the rationalization and development of the Mercury service portfolio during
the period when Mercury was focusing on making major improvements to service
delivery and profit. As part of this role he managed the Mercury Enterprise
businesses disposing of a number of these and integrating others into the main
company. Before joining Mercury in 1992 he led the first Digital Equipment
product group outside the United States and spent 15 years with ITT Corporation.
Mr. Reynolds is also President of GTS's Network Services division.
Gerard J. Caccappolo, President of Marketing and Sales and Managing
Director. Mr. Caccappolo joined GTS Europe in January 1995 as Director of
Marketing and Sales, responsible for market and customer
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<PAGE> 71
segmentation, services development, and pricing and sales strategies. Mr.
Caccappolo also serves as President of GTS's Carrier Services division. Prior to
joining GTS Europe, from September 1988 to December 1994, he was Vice President
of Marketing and Sales -- International Carriers at Ascom Timeplex Equipment
(Telecommunications) Manufacturer.
EXECUTIVE OFFICERS OF THE COMPANY
Philip J. Blanchette, Vice President of Operations. Mr. Blanchette jointed
GTS in October 1998 as Vice President, network operations and engineering of its
Access Services division. In June 1999, he assumed his current position at GTS
Europe and also became President, GTS Network Operations at GTS's Network
Services division. Before joining GTS, Mr. Blanchette served as senior executive
consultant for Bayan Telecommunications Holding Co. For Bayan, he consulted with
the company in its start up of a 350,000-line competitive local exchange carrier
in the Philippines, as well as the establishment of operational procedures.
Prior to that, from 1969 to 1996, he held a variety of progressively responsible
positions with NYNEX Corporation and its predecessor company. In his last
position at NYNEX, Mr. Blanchette headed operations for a start-up cable
television venture in Bangkok, Thailand.
Mr. Caccappolo's background is described above under "Board of Managing
Directors."
Mr. Reynolds' background is described above under "Board of Managing
Directors."
Bruce C. Rudy, Vice President of Fiber and Facilities Purchasing. Mr. Rudy
joined GTS Europe in 1996 and was Director of Business Development, Planning and
Regulatory Affairs, responsible for business planning, financial modeling,
shareholder relations and development. Mr. Rudy previously worked for Lochridge
& Company, Inc. Management Consultants in Boston, where he was a senior
consultant from September 1989 to December 1995.
John Allan Shearing, Vice President of Engineering. Mr. Shearing joined GTS
Europe in November 1995 as Director of Operations, with responsibility for
network operations, customer service and information systems. Before joining GTS
Europe, Mr. Shearing spent eight years at S.W.I.F.T. as Network Operations
Director and also managing the acceptance and implementation of a new generation
of network systems and applications.
Jan De Wispelaere, Vice President and General Counsel. Mr. De Wispelaere
joined GTS Europe as a consulting attorney in 1995 and has since been promoted
to the position of Vice President -- Corporate Secretary and General Counsel.
Prior to joining GTS Europe, from January 1994 to November 1995, Mr. De
Wispelaere had been with Stanbrook & Hooper -- European Community Lawyers. Prior
to that, he was with Scott Paper Company and SD Warren Group as Senior Counsel
for five years. He has held since 1993 positions as a member of the Board of
Directors and Management Board of the German Scott -- Feldmuhle HQ Company, as
well as several Scott Paper operating entities in Europe.
Mr. Williams' background is described above under "Board of Supervisory
Directors."
COMPENSATION OF DIRECTORS
The directors on the Board of Supervising Directors and the Board of
Managing Directors receive no fees from the Company for serving as directors.
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<PAGE> 72
EXECUTIVE COMPENSATION
The following table sets forth each component of compensation paid or
awarded to, or earned by, the chief executive officer (who is the Managing
Director of GTS Europe) and the four most highly compensated executive officers
other than the chief executive officer during the fiscal year ended December 31,
1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION AWARDS
COMPENSATION -------------------------------------
------------------- OTHER ANNUAL RESTRICTED STOCK SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) UNDERLYING OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR $ ($) ($) ($) (#) ($)
- ------------------ ---- -------- -------- ------------ ---------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jan Loeber(1)........... 1998 $310,000 $119,400 $101,840(2) -0- 150,000(12) $178,565(11)
Managing Director 1997 235,000 78,608 46,598(2) -0- 4,812(4) 179,450(11)
1996 235,000 78,608 42,806(2) (3) 3.5(4) 12,986(11)
Gerard J. Caccappolo(1). 1998 191,042 52,500 83,125(6) -0- 61,000(12) 4,000(5)
Corporate Director of 1997 173,750 80,000 32,043(6) -0- 1,714(4) 4,000(5)
Marketing and Sales... 1996 160,000 40,000 42,108(6) -0- 1.5(4) 3,750(5)
Bruce Rudy(1)........... 1998 158,417 55,800 73,017(9) -0- 55,000(12) 4,000(5)
Corporate Director of 1997 140,500 13,500 15,096(9) -0- 476(4) 3,850(5)
Business Development 1996 135,000 13,509 18,416(9) -0- 0.5(4) 2,532(5)
and Regulatory
John Shearing........... 1998 147,051(7) 44,260(7) --(8) -0- 34,000(12) -0-
Corporate Operations 1997 186,678(7) 31,491(7) (8) -0- 476(4) -0-
Director 1996 173,594(7) 35,163(7) (8) -0- -- -0-
Steven Andrews(1)....... 1998 187,000 18,700 67,794(10) -0- -- 2,337(5)
Corporate 1997 62,333 -- 9,200(10) -0- 952(4) --
Administration 1996 -- -- -- -- -- --
Director
</TABLE>
- ---------------
(1) The terms of the named executive officer's employment are included in an
agreement between the named executive officer and an affiliate of GTS. Such
named executive officer is seconded to GTS Europe for a fee. In June 1999,
Mr. Loeber became Executive Vice President of Strategic Planning of GTS and
Mr. Reynolds became President of GTS Europe. In September 1999, Mr.
Reynolds replaced Mr. Loeber as Managing Director of GTS Europe. In June
1999, Messrs. Caccappolo, Rudy and Shearing assumed the positions set forth
under "-- Executive Officers of the Company" and Mr. Andrews left GTS
Europe and became President of another GTS affiliate.
(2) For 1998, the amount listed represents the sum of a cost of living
allowance of $21,700, a tax equalizing payment of $58,613 that compensates
Mr. Loeber for the higher taxes he pays because he resides in Belgium
instead of the United States, use of a company car and gross-up payment for
certain tax liabilities in the amount of $21,527. For 1997, the amount
listed represents the sum of a cost of living allowance of $16,450, a tax
equalization payment of $13,953 that compensates Mr. Loeber for the higher
taxes he pays because he resides in Belgium instead of the United States,
use of a company car and a gross-up payment for certain tax liabilities in
the amount of $11,648. For 1996, the amount listed represents the sum of a
cost of living allowance of $16,450, paid home leave of 9,031, use of a
company car and a gross-up payment of $12,778 for certain tax liabilities.
(3) Mr. Loeber has been granted a restricted stock award of 30,000 shares of
Global TeleSystems Group, Inc. common stock which vests in equal thirds,
beginning in January 2, 1997.
(4) For 1997, represents stock options awarded under The Key Employee Stock
Option Plan of Hermes Europe Railtel B.V. (the "GTS Europe Stock Option
Plan") For 1996, represents stock options granted under the GTS-Hermes,
Inc. 1994 Stock Option Plan (the "GTS-Hermes Plan"). The stock options
granted in 1997 are in substitution for the stock options granted in 1996,
which have been cancelled. No stock options were granted in 1998.
(5) These named executive officers participate in the GTS 401(k) plan to which
GTS contributed the amounts indicated for 1998, 1997 and 1996.
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(6) Mr. Caccappolo received a cost of living allowance of $13,373, $12,163 and
$11,200 in 1998, 1997 and 1996, respectively, and resides in a company
apartment which the company paid the equivalent of $16,595, $16,109 and
$17,928 per year in rent in 1998, 1997 and 1996, respectively. In 1998, Mr.
Caccappolo also received a tax equalization payment of $42,278, paid home
leave of $3,660 and a gross-up payment for certain tax liabilities of
$1,011. In addition, we provided Mr. Caccappolo with the use of a company
car in 1998, 1997 and 1996.
(7) Converted from Belgian Francs to U.S. Dollars at an exchange rate of
BF34.57=$1.00, BF35.77=$1.00 and BF32.04=$1.00 in 1998, 1997 and 1996,
respectively.
(8) Perquisites and other personal benefits paid to Mr. Shearing during 1998,
1997 and 1996 were less than the lesser of $50,000 and 10 percent of the
total of annual salary and bonus reported for the named executive officer.
(9) Mr. Rudy received a housing allowance of $14,904, $15,096 and $16,855
during 1998, 1997 and 1996, respectively. In 1998, Mr. Rudy also received a
tax equalization payment of $32,501, paid home leave of $16,822, tuition
reimbursement of $1,932 and a gross-up for certain tax liabilities of
1,059. In addition, we provided Mr. Rudy with the use of a company car in
1998,1997 and 1996.
(10) Mr. Andrews received a cost of living allowance of $13,090 and $4,363 and a
housing allowance $16,548 and $4,124 during 1998 and 1997, respectively. In
1998, Mr. Andrews also received a tax equalization payment of $21,583 and
paid home leave of $5,427. In addition, we provided Mr. Andrew with the use
of a company car in 1998 and 1997.
(11) This amount represents premiums paid by Global TeleSystems Group for
$1,000,000 in term life insurance for Mr. Loeber and contributions to Mr.
Loeber's account by Global TeleSystems Group under the 401(k) Plan. For
1998 and 1997, the amount also includes $156,700 which represents the value
as of December 31, 1998 and 1997 of 10,000 shares of Global TeleSystems
Group restricted common stock which vested in each of 1998 and 1997.
(12) For 1998, represents stock option for Global TeleSystems Group common stock
awarded under the Global TeleSystems Group Stock Option Plan.
OPTION GRANTS IN THE LAST FISCAL YEAR --
GLOBAL TELESYSTEMS GROUP STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OR
UNDERLYING GRANTED TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME OPTIONS GRANTED(#) IN FISCAL YEAR ($/SHARE) DATE PRESENT VALUE($)(3)
---- -------------------- -------------------- ----------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
Jan Loeber........... 150,000(1) 4.0 $25.75 10-14-08 $2,476,905
Gerard J.
Caccappolo......... 25,000(2) 0.6 46.75 03-31-08 763,660
36,000(1) 0.9 25.75 10-14-08 594,457
------- --- ----------
Total...... 61,000 1.5 1,358,117
Bruce Rudy........... 25,000(2) 0.6 46.75 03-31-08 763,660
30,000(1) 0.8 25.75 10-14-08 495,381
------- --- ----------
Total...... 55,000 1.4 1,259,041
John Shearing........ 10,000(2) 0.3 46.75 03-31-08 305,464
24,000(1) 0.6 25.75 10-14-08 396,305
------- --- ----------
Total...... 34,000 0.9 701,769
Steven Andrews....... -- -- -- -- --
</TABLE>
- ---------------
(1) All these options in Global TeleSystems Group common stock would vest in
February 2005, when financial results for 2004 are expected to be publicly
announced. If certain performance targets are met or exceeded, these options
could be fully exercisable in February 2002, when financial results for 2001
are expected to be publicly announced.
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<PAGE> 74
(2) The options in Global TeleSystems Group common stock vest one-fourth on each
of the first four anniversaries of the date of grant.
(3) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield 0%, expected volatility of 0.75, risk-free
interest rate of 4.23% and expected life of five years.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-ENDED OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ON REALIZED OPTIONS AT FY-END(#) AT FY-END($)(2)
NAME EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jan Loeber................. 3,209 $2,129,793 1,603/-0- 1,292,928/-0-
Gerard J. Caccappolo....... 1,143 739,389 571/-0- 460,673/-0-
Bruce Rudy................. 318 179,754 158/-0- 112,042/-0-
John Shearing.............. 159 99,359 159/158 84,448/84,237
Steven Andrews............. -- -- 317/635 255,987/512,063
</TABLE>
- ---------------
(1) Based on the difference between fair value price on the date of exercise and
the option exercise price.
(2) Based on a valuation price of $889.61 per share of GTS Europe common stock
at December 31, 1998. This valuation was determined by the valuation per
common share that GTS Carrier Services paid to AB Swed Carrier for acquiring
all of its minority interest in GTS Europe on October 31, 1998.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-ENDED OPTION VALUES -- GLOBAL TELESYSTEMS GROUP
STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(2)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
---- ---------------------------- -------------------------
<S> <C> <C>
Jan Loeber...................................... 0/150,000 $0/$4,500,000
Gerard J. Caccappolo............................ 0/61,000 0/ 1,305,000
Bruce Rudy...................................... 0/55,000 0/ 1,125,000
John Shearing................................... 0/34,000 0/ 810,000
</TABLE>
- ---------------
(1) No options were exercised during the year ended December 31, 1998.
(2) Based on the closing price of $55.75 on the Nasdaq Stock Market of the
Global TeleSystems Group Common Stock on December 31, 1998.
KEY EMPLOYEE STOCK OPTION PLAN OF GTS EUROPE
We have adopted the Key Employee Stock Option Plan of GTS Europe. (the "New
Plan"). Under the New Plan certain employees of GTS Europe will be granted stock
options to purchase its common stock. Subject to adjustment in the event of
certain changes in capitalization, a maximum of 24,760 shares of GTS Europe
common stock are authorized for grant under the New Plan.
The New Plan is administered by the Board of Supervising Directors which
will have broad discretion to determine who shall receive awards under the New
Plan, the terms of such awards and interpret the New Plan. The New Plan will
continue in effect until 2004, unless terminated earlier by the Board of
Supervising Directors.
Each stock option granted under the New Plan shall have a term of ten
years, except those granted in 1997 reflected in the table above. The exercise
price of each such stock option will be determined at the time
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<PAGE> 75
of grant. In addition the stock options granted under the New Plan will become
exercisable at such times and under such conditions as determined by the
committee.
The Board of Supervising Directors may amend or terminate the New Plan at
any time, provided that the rights of participants are not impaired.
PENSION PLAN
In 1995, we established a defined benefit pension plan (the "Pension Plan")
that covers substantially all of its employees that are at least twenty-five
years of age and have at least one year of service. The benefits are based on
years of service and the employee's compensation at retirement. Mr. Shearing
participates in the Pension Plan. Each participant in the Pension Plan will
receive a lump sum at retirement equal to 450% of final annual salary up to a
specified ceiling which changes every year (in 1997 the ceiling was BF1,352,000)
plus 910% of the excess multiplied by the years of service divided by 35. The
maximum years of service taken into account under the formula is 35. The normal
retirement age is 60. We have entered into an agreement with an insurance
company for the provision of a group insurance policy (the "Policy"). Premium
payments for the Policy are partly paid by the employee based on specified terms
that consider the employee's annual salary, with the remaining premium paid by
us. Premiums are intended to provide not only for benefits attributed to service
to date but also for those expected to be earned in the future. (See Note 5 to
the Notes to Consolidated Financial Statements). Upon termination of employment
prior to retirement age, employer contributions cease and the participant may
decide to receive the cash surrender value of the policy, to continue paying
premiums or cease paying premiums but in either case maintaining the policy
which is paid out according to its terms.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
--------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$125,000......................... $ 370,313 $ 493,750 $ 617,188 $ 740,625 $ 863,200
$150,000......................... 467,870 623,829 779,786 935,744 1,090,610
$175,000......................... 565,508 754,011 942,513 1,131,056 1,318,200
$200,000......................... 663,100 884,140 1,105,170 1,326,210 1,545,700
$225,000......................... 760,703 1,014,271 1,267,838 1,521,405 1,773,200
$250,000......................... 858,300 1,144,400 1,430,500 1,716,600 2,000,000
$300,000......................... 1,053,490 1,404,660 1,755,820 2,106,990 2,455,700
$400,000......................... 1,443,880 1,925,181 2,406,476 2,887,771 3,365,700
$450,000......................... 1,639,080 2,185,440 2,731,800 3,278,160 3,820,700
$500,000......................... 1,834,270 2,445,700 3,057,120 3,668,550 4,275,700
</TABLE>
The above pension benefits are based on the following formula:
(260% S1 + 910% S2) X N/35
<TABLE>
<S> <C> <C>
S = annual salary
S1 = S up to the "ceiling"
S2 = S above the "ceiling"
N = years of service up to a maximum of 35
</TABLE>
For purposes of this calculation the "ceiling" is U.S. $42,200.
EMPLOYMENT AGREEMENTS
All the named executive officers have employment agreements with either GTS
Europe (the "Company Employment Agreements") or an affiliate of Global
TeleSystems Group (the "GTS Employment Agreements"). We reimburse Global
TeleSystems Group for payments made to named executive officers under contracts
with Global TeleSystems Group. The Employment Agreements generally are each for
a term of two to three years and include an automatic renewal provision unless
either party provides notice of termination on or prior to 90 days thereof.
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<PAGE> 76
Mr. Shearing has an employment agreement. Mr. Shearing's employment
agreement was entered into by the parties of November 1, 1995 for an
undetermined period of time. Mr. Shearing's initial annual salary was
BF2,800,000, which is net of all tax and social security contributions. Mr.
Shearing's gross salary for fiscal year 1998 was BF5,083,553. He may also
receive a yearly performance-based bonus of up to 20% of his base salary at our
discretion. Mr. Shearing participates in our pension plan and is provided with a
company car.
See "Certain Relationships and Related Transactions" for a description of
the GTS Employment Agreements.
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<PAGE> 77
SECURITY OWNERSHIP OF PRINCIPAL
SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the common shares of GTS Europe, as of September 30, 1999 and after
giving effect to the exchange of GTS shares for GTS Europe shares described in
footnote 2 below, by each beneficial owner of 5% or more of the common shares
and by directors and officers of GTS Europe. The following table assumes that
the registration of the relevant deeds of transfer in respect of such exchange
and other transfers had occurred as of September 30, 1999. For the purpose of
this table, a person or group of persons is deemed to have "beneficial
ownership" of any shares which such person or group has the right to acquire
within 60 days after such date, but such shares are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES OF STOCK SHARES OF STOCK TO BE
BENEFICIALLY OWNED BENEFICIALLY OWNED
IMMEDIATELY BEFORE THE IMMEDIATELY AFTER THE
COMPLETION OF THE COMPLETION OF THE
GTS EUROPE SHARE GTS EUROPE SHARE
EXCHANGE OFFER(2) EXCHANGE OFFER(2)
---------------------- ----------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES PERCENTAGE
------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
GTS Carrier Services, Inc.......................... 190,468 95.2% 190,468 95.2%
Global TeleSystems Group, Inc...................... -- -- 6,565 3.3
Gerard Caccappolo(1)............................... 1,714 * 571 *
Bruce Rudy(1)...................................... 476 * 158 *
John Shearing(1)................................... 318 * 159 *
Jan De Wispelaere(1)............................... 318 * 159 *
------- -------
All Directors and Executive Officers as a Group (4
persons)......................................... 2,826 1.4% 1,047 *
------- -------
Total of above........................... 193,294 198,080
======= =======
</TABLE>
- ------------------------------
* Less than 1%.
(1) The shares are beneficially owned by these persons and GTS Europe has
established a stock option plan pursuant to which key officers and
employees were granted options to purchase common shares of GTS Europe.
GTS Europe does not intend to grant additional options to purchase common
shares of GTS Europe. See "Management -- Executive Compensation."
(2) On October 15, 1999, GTS entered into an exchange agreement with all of
the minority interest holders of GTS Europe's common shares and grantees
of GTS Europe stock options that provides for the acquisition by GTS of
their equity interest in GTS Europe. Specifically, the agreement provides
that GTS will acquire the respective minority interest holders common
shares of GTS Europe that have been held by them for a period greater than
six months based on the current fair market value of GTS Europe on the
date of the exchange, as determined by a globally-recognized investment
banking firm that is mutually acceptable to the parties of the agreement.
The agreement also provides that GTS would issue its common shares to GTS
Europe's minority interest holders based on the fair market value, as
defined in the exchange agreement, of GTS common shares on the date of the
exchange.
In addition, as part of this agreement, and effective October 15, 1999,
GTS has exchanged 5,985,930 of its common shares for 6,565 of GTS Europe's
common shares. Accordingly, subsequent to the October 15, 1999 exchange,
minority interest holders of GTS Europe have beneficial ownership rights
in GTS Europe's common shares, and stock options to purchase common
shares, totaling 3,601 common shares of GTS Europe. As stated previously,
GTS intends to acquire these common shares in the future; however, future
acquisitions will be based on future market values of GTS Europe and GTS.
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<PAGE> 78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASE OF SHARES BY GTS CARRIER SERVICES
In connection with its purchases of AB Swed Carrier's and SNCB/NMBS's
minority common share interests in GTS Europe in December 1998 and June 1999,
respectively, GTS Carrier Services paid approximately $10.0 million to a company
that is affiliated with a member of the Supervisory Board of GTS Europe for
negotiating with AB Swed Carrier and SNCB/NMBS on behalf of GTS Carrier Services
to purchase their respective ownership interests in GTS Europe.
GTS EMPLOYMENT AGREEMENTS
Messrs. Loeber, Caccappolo, Blanchette and Rudy are parties to GTS
Employment Agreements. Each GTS Employment Agreement provides the relevant Named
Executive Officer with a salary, bonus and a standard company welfare benefits
package as well as the use of an automobile, cost of living allowance, tax
equalization and certain other fringe benefits. In addition, the GTS Employment
Agreements include severance benefit provisions. Finally, the GTS Employment
Agreements include noncompete and nonsolicitation clauses that cover the term of
employment and twelve months thereafter. Under the GTS Agreements, each party
employee, except Mr. Blanchette, was entitled to participate in the GTS-Hermes
Plan. The options outstanding under the GTS-Hermes Plan were cancelled and
replaced by options under the GTS Europe Stock Option Plan. In addition, in
1996, Mr. Loeber received a restricted stock award of 30,000 shares of GTS
common stock.
TRANSACTIONS WITH OUR GTS BUSINESS SERVICES AFFILIATES
Our parent, GTS, provides a range of telecommunications services to
businesses and other high usage customers throughout Europe through its Business
Services division. GTS conducts its Business Services operations through its
recently acquired subsidiaries NetSource Europe ASA, Esprit Telecom Group plc,
Omnicom SA and InTouch Telecom B.V. As a result of these acquisitions, GTS has a
significant established retail customer base of businesses, governmental
agencies and other high usage customers.
As GTS integrates NetSource, Esprit Telecom, Omnicom and InTouch into its
Business Services operations, GTS intends to route as much of their end-user
customers' traffic as possible over the GTS Europe network in order to realize
the benefits of owning its own infrastructure.
PURCHASES OF SERVICES
As part of GTS' strategy of increasing the amount of "on-net" customer
traffic, we are leasing point to point circuits on our network to Esprit Telecom
to connect switches on its switched voice network, and we may enter into similar
arrangements in the future with other Business Services affiliates. We are also
leasing capacity on our network to Esprit Telecom to enable it to fulfill orders
from carrier customers who had purchased transport services on the fiber optic
network that Esprit Telecom was building when it was acquired by GTS in March
1999.
We may also enter into transactions with Business Services affiliates in
connection with our implementing our plan to build City Enterprise Networks in
sixteen metropolitan markets in Europe by year-end 2001. GTS's City Enterprise
Networks in Berlin and Paris were deployed by Esprit Telecom and Omnicom,
respectively. The City Enterprise Networks in Prague and Budapest were deployed
by other GTS subsidiaries operating in Central Europe. We do not currently
expect to own or operate the city networks in Berlin, Paris, Prague and
Budapest. Therefore, we may in the future purchase local connectivity on those
city networks from our GTS affiliates for resale to our own customers.
Conversely, as we deploy City Enterprise Networks in other cities, we may sell
or lease local connectivity services on these city networks to our Business
Services affiliates to enable them to resell those services to their retail
customers.
We intend to enter into and conduct these intercompany transactions with
NetSource, Esprit Telecom, Omnicom and other Business Services affiliates in
accordance with applicable covenants under our existing
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<PAGE> 79
indebtedness, in the indentures governing the Notes and in the indentures or
other agreements governing the existing indebtedness of such affiliates.
PURCHASES OF ASSETS
We used approximately $250.0 million of the proceeds of this offering to
finance our purchase from a subsidiary of GTS of a dedicated fiber pair on the
FLAG Atlantic-1 transatlantic cable link. In addition, as part of GTS' strategy
for integrating the operations of NetSource, Esprit Telecom, Omnicom and
InTouch, we may purchase assets from one or more of those companies. As noted
above, we intend to enter into and conduct these intercompany transactions in
accordance with applicable covenants under our existing indebtedness and in the
indentures governing the Notes and in the indentures or other agreements
governing the existing indebtedness of such affiliates.
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<PAGE> 80
DESCRIPTION OF OTHER INDEBTEDNESS
PROPOSED NEW SENIOR CREDIT FACILITIES
$400.0 to $750.0 million facility
We are currently evaluating entering into an up to E500.0 million
multi-currency eight-year senior credit facility through a subsidiary of ours.
Our ability to enter into a credit facility is subject to, among other things,
the arranging banks' review and satisfaction with our business plan and
operations, there not being any material adverse change in our business or
operating results, and there not being any disruption in the commercial lending
markets.
E35 million facility
We are currently negotiating a E35 million credit facility with another
bank. The borrower would be a subsidiary of ours. The credit facility would be
structured in three tranches with varying maturities of up to 5 years. Advances
under the facility would be used to finance the purchases of network assets and
equipment and for the issuance of performance and/or payment guarantees in the
ordinary course of business.
GTS EUROPE SENIOR NOTES DUE 2007
We sold $265.0 million aggregate principal amount of notes in August 1997.
These notes have a ten year maturity and are unsecured, senior obligations of
GTS Europe. The notes were issued pursuant to an indenture containing certain
covenants for the benefit of the holders of the notes, including, among other
things, covenants limiting the incurrence of indebtedness, restricted payments,
liens, payment restrictions affecting certain subsidiaries and joint ventures,
transactions with affiliates, assets sales and mergers. The notes are redeemable
in whole or part, at our option at any time on or after August 15, 2002 at a
price ranging from 105.75% to 100.0% of the principal amount.
A portion of the notes are also redeemable at any time or from time to time
prior to August 15, 2000 at a redemption price equal to 111.5% of the principal
amount of the notes so redeemed, plus accrued and unpaid interest thereon, if
any, to the date of redemption with the net cash proceeds of one or more public
equity offerings or strategic equity investments resulting in aggregate gross
cash proceeds to us of at least $75.0 million, provided, however, that following
such redemption at least two-thirds of the principal amount of the original
notes remains outstanding. In the event of a change of control of GTS Europe,
the holders of the notes have the right to require us to purchase such holder's
notes at a price equal to 101% of the aggregate principal amount plus accrued
and unpaid interest thereon to the date of repurchase.
GTS EUROPE 10 3/8% SENIOR NOTES DUE 2006 AND 10 3/8% SENIOR NOTES DUE 2009
In January 1999, we sold $200.0 million aggregate principal amount of U.S.
dollar notes and E85 million aggregate principal amount of Euro denominated
notes. The U.S. dollar notes have a ten year maturity and the Euro denominated
notes have a seven year maturity. The notes are unsecured, senior obligations of
GTS Europe. The notes were issued pursuant to two indentures between GTS Europe
and The Bank of New York as trustee, both dated January 4, 1999, which are
substantially similar to the indenture governing the Senior Notes due 2007. Both
indentures dated January 4, 1999, contain certain covenants made by us for the
benefit of the holders of the notes, including, among other things, covenants
limiting the incurrence of indebtedness, restricted payments, liens, payment
restrictions affecting certain subsidiaries, transactions with affiliates, asset
sales and mergers. The U.S. dollar notes are redeemable in whole or in part, at
our option at any time on or after January 15, 2004 at a price ranging from
105.188% to 100.0% of the principal amount. The Euro denominated notes are
redeemable in whole or in part, at our option at any time on or after January
15, 2003 at a price ranging from 105.188% to 100.0% of the principal amount.
A portion of the notes are also redeemable at any time prior to or from
time to time prior to January 15, 2002 at a redemption price equal to 110.375%
of the principal amount of the notes so redeemed, plus accrued and unpaid
interest thereon, if any, to the date of redemption with the net cash proceeds
of one or more public
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<PAGE> 81
equity offerings or strategic equity investments resulting in aggregate gross
cash proceeds to us of at least $75.0 million, provided, however, that following
such redemption at least two-thirds of the principal amount of the original U.S.
dollar notes and two-thirds of the principal amount of the Euro notes remain
outstanding. In the event of a change of control of GTS Europe, the holders of
the notes have the right to require us to purchase such holder's notes at a
price equal to 101% of the aggregate principal amount plus accrued and unpaid
interest thereon to the date of repurchase.
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<PAGE> 82
DESCRIPTION OF THE EXCHANGE NOTES
The Outstanding Notes due 2006 were issued under an Indenture (the "Notes
due 2006 Indenture"), and the Outstanding Notes due 2009 were issued under an
Indenture (the "Notes due 2009 Indenture," and, together with the Notes due 2006
Indenture, the "Indentures"), each dated as of November 24, 1999 between the
Company and United States Trust Company of New York, as trustee (the "Trustee").
The Exchange Notes will be issued under the Indentures, which will be qualified
under the United States Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), upon the effectiveness of the registration statement of which
this prospectus is a part. The form and terms of the Exchange Notes are the same
in all material respects as the form and terms of the Outstanding Notes, except
that the Exchange Notes will have been registered under the Securities Act and,
therefore, will not bear legends restricting transfer thereof (other than those
relating to the offer and sale of Exchange Notes in The Netherlands). Upon the
consummation of the Exchange Offer, holders of the Outstanding Notes will not be
entitled to registration rights under, or the contingent increase in interest
rate provided pursuant to, the Registration Rights Agreement. The Exchange Notes
will evidence the same debt as the Outstanding Notes and will be treated as a
single class under the Indentures with any Outstanding Notes that remain
outstanding. The Outstanding Notes and Exchange Notes are herein collectively
referred to as the "Notes."
The following summary of certain provisions of the Indentures and the
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act, and
to all of the provisions of the Indentures and the Registration Rights
Agreement, including the definitions of certain terms therein and those terms
made a part of the Indentures by reference to the Trust Indenture Act. Copies of
the Indentures and the Registration Rights Agreement may be obtained upon
request to the Company at its address set forth elsewhere herein and any of the
Paying Agents set forth on the back cover hereof. The definitions of certain
terms used in the following summary are set forth under "--Certain Definitions."
References in this "Description of the Exchange Notes" section to "the Company"
mean only Global Telesystems Europe B.V. and not any of its Subsidiaries.
GENERAL
The Outstanding Notes have been issued only in registered form, without
coupons, in denominations of E1,000 and integral multiples of E1,000. The
Company has initially appointed Deutsche Bank AG, London branch to serve as
principal paying agent under the Indentures at its offices at Winchester House,
1 Great Winchester Street, London, EC2N 2DB, England and the Trustee to serve as
New York paying agent and registrar under the Indentures at its offices at 114
West 47th Street, New York, New York 10036-1532. The registrar, paying agents
and transfer agents (the "Registrar," "Paying Agents" and "Transfer Agents,"
respectively) are appointed in accordance with the Indentures and initially are
as set forth on the inside back cover page hereof. No service charge will be
made for any registration of transfer or exchange of the Notes, except for any
tax or other governmental charge that may be imposed in connection therewith.
In the event that definitive Notes are issued to the Holders, transfers of
the Notes may be made by presenting definitive Notes at the offices of the
Transfer Agents in Luxembourg during the term of the Notes. Where not all the
Notes represented by a definitive Note are the subject of a transfer, a new
definitive Note in respect of the principal amount of the Notes that have not
been so transferred will be issued to the transferor, and will be available at
the office of the Trustee in New York City or at the offices of the Transfer
Agents in Luxembourg, as applicable. As soon as reasonably practicable after
surrender of a definitive Note in accordance with the previous sentence, the
Trustee will register the transfer and deliver a new definitive Note in a
principal amount equal to the principal amount of the definitive Notes so
transferred to the transferee at the office of the Trustee in New York City or
at the offices of the Transfer Agents in Luxembourg, as the case may be.
RANKING
The Notes will be general unsecured obligations of the Company and will
rank senior in right of payment to all future indebtedness of the Company that
is, by its terms or by the terms of the agreement or instrument
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<PAGE> 83
governing such Indebtedness, expressly subordinated in right of payment to the
Notes and pari passu in right of payment with each other and with all existing
and future unsecured liabilities of the Company that are not so subordinated,
including the Company's 11 1/2% Senior Notes due 2007, 10 3/8% Senior Notes due
2009 and 10 3/8% Senior Notes due 2006 (collectively, the "Existing Notes").
The Company is a holding company with limited assets and operates its
business through Subsidiaries. Any right of the Company and its creditors,
including holders of the Notes, to participate in the assets of any of the
Company's Subsidiaries upon any liquidation or administration of any such
Subsidiary will be subject to the prior claims of the creditors of such
Subsidiary. The claims of creditors of the Company, including holders of the
Notes, will be effectively subordinated to all existing and future third-party
indebtedness and liabilities, including trade payables, of the Company's
Subsidiaries. As of September 30, 1999 on a pro forma basis, the Company would
have had total long-term debt (including long-term portion of capital leases) of
$1,058.3 million (including the Notes and the Existing Notes), and the Company's
Subsidiaries would have had total liabilities of $454.3 million reflected on the
Company's balance sheet. The Company and its Subsidiaries may incur other debt
in the future, including secured debt.
The Notes will not be entitled to any security, and will not be entitled to
the benefit of any guarantees, except under the circumstances described under
"-- Certain Covenants -- Limitation on Issuances of Guarantees by Restricted
Subsidiaries."
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The Outstanding Notes due 2006 will be limited to E225 million aggregate
principal amount and will mature on December 1, 2006. The Outstanding Notes due
2009 will be limited to E275 million aggregate principal amount and will mature
on December 1, 2009. The Notes will be payable in each case at maturity at par,
plus accrued and unpaid interest, if any. Cash interest on the Notes will accrue
at the rate per annum set forth on the cover page of this prospectus and will be
payable semi-annually in arrears on each June 1 and December 1, commencing June
1, 2000, to the holders of record of Notes (the "Holders") at the close of
business on May 15 and November 15, respectively, immediately preceding such
interest payment date. Cash interest will accrue from the most recent interest
payment date to which interest has been paid or, if no interest has been paid,
from the date of original issuance of the Notes. Interest will be computed on
the basis of a 360-day year of twelve 30-day months.
The Luxembourg Stock Exchange will be informed of each change in the
interest rate of the Notes on the date of such change. The Company will cause a
copy of such notice to be published in a daily newspaper with general
circulation in Luxembourg (which is expected to be the Luxemburger Wort).
Principal of, and interest on, the Notes will be payable, and the transfer
of Notes will be registrable, at the offices of the Paying Agents and Transfer
Agents, respectively. Where not all of the Notes represented by a Certificated
Note are the subject of a transfer, a new Certificated Note in respect of the
principal amount of Notes that have not been so transferred will be issued to
the transferor and will be available at the office of the Transfer Agent in New
York City or at the office of the Transfer Agent in London or Luxembourg, as
applicable. Payments of such principal and premium, if any, including any
Additional Amounts pursuant to an optional redemption or pursuant to a
redemption following the occurrence of a Change of Control or otherwise will be
made against surrender of Certificated Notes at the corporate trust office of
the Paying Agent in New York City or, subject to any applicable laws and
regulations, at the offices of the Paying Agent in London or Luxembourg, as
applicable, by Euro denominated check drawn on, or wire transfer to a Euro
currency account maintained by the holder with, a bank located in New York City
or London. Payments of any installment of interest on Certificated Notes will be
made by a Euro denominated check drawn on a bank in New York City mailed to the
holder at such holder's registered address or (if arrangements satisfactory to
the Company and the Paying Agents are made) by wire transfer to a Euro account
maintained by the holder with a bank in New York City. For so long as the Notes
are listed on the Luxembourg Stock Exchange and the rules of such stock exchange
so require, the Company will maintain a Paying Agent and a Transfer Agent in
Luxembourg.
If a payment date is not a Business Day at a place of payment, payment may
be made at that place on the next succeeding Business Day and no interest shall
accrue for the intervening period.
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<PAGE> 84
The Company may at any time deliver Notes to the Trustee for cancellation.
Subject to the terms of the Indentures, the Company may not issue new Notes to
replace Notes that it has paid or delivered to the Trustee for cancellation. If
the Company wishes to make any modifications or amendments to the terms and
provisions of the Indentures or if the Company wishes to have compliance with
any provisions of the Indentures waived, the Company shall request the holders
of the Notes to consent to such modifications, amendments or waivers, as
applicable, as required by the terms and procedures set forth in the Indentures.
ADDITIONAL AMOUNTS
All payments made by the Company under or with respect to the Notes will be
made free and clear of and without withholding or deduction for or on account of
any present or future Taxes imposed or levied by or on behalf of any Taxing
Authority within the Netherlands, or within any other jurisdiction in which the
Company is organized or is otherwise resident for tax purposes or any
jurisdiction from or through which payment is made (each a "Relevant Taxing
Jurisdiction"), unless the Company is required to withhold or deduct Taxes by
law or by the interpretation or administration thereof. If the Company is
required to withhold or deduct any amount for or on account of Taxes imposed by
a Relevant Taxing Jurisdiction, from any payment made under or with respect to
the Notes, the Company will pay such additional amounts ("Additional Amounts")
as may be necessary so that the net amount received by each holder of Notes
(including Additional Amounts) after such withholding or deduction will equal
the amount the holder would have received if such Taxes had not been withheld or
deducted; provided, however, that no Additional Amounts will be payable with
respect to any Tax that would not have been imposed, payable or due (i) but for
the existence of any present or former connection between the holder (or the
beneficial owner of, or person ultimately entitled to obtain an interest in,
such Notes) and the Relevant Taxing Jurisdiction (including being a citizen or
resident or national of, or carrying on a business or maintaining a permanent
establishment in, or being physically present in, the Relevant Taxing
Jurisdiction) other than the mere holding of the Notes or enforcement of rights
thereunder or the receipt of payments in respect therefrom; (ii) but for the
failure to satisfy any certification, identification or other reporting
requirements whether imposed by statute, treaty, regulation or administrative
practice, provided, however, that the Company has delivered a request to the
holder to comply with such requirements at least 30 days prior to the date by
which such compliance is required; or (iii) if the presentation of Notes (where
presentation is required) for payment had occurred within 30 days after the date
such payment was due and payable or was duly provided for, whichever is later.
In addition, Additional Amounts will not be payable if the beneficial owner of,
or person ultimately entitled to obtain an interest in, such Notes had been the
holder of the Notes and, such beneficial owner would not be entitled to the
payment of Additional Amounts by reason of clauses (i) to (iii) inclusive above.
In addition, Additional Amounts will not be payable with respect to any Tax
which is payable otherwise than by withholding from payments of, or in respect
of principal of, or any interest on, the Notes.
Whenever in the Indentures or in this "Description of the Exchange Notes"
there is mentioned, in any context, the payment of amounts based upon the
principal amount of the Notes or of principal, interest or of any other amount
payable under or with respect to any of the Notes, such mention shall be deemed
to include mention of the payment of Additional Amounts to the extent that, in
such context, Additional Amounts are, were or would be payable in respect
thereof.
Upon request, the Company will provide the Trustee with documentation
satisfactory to the Trustee evidencing the payment of Additional Amounts.
The Company will pay any present or future stamp, court or documentary
taxes, or any other excise or property taxes, charges or similar levies which
arise in any jurisdiction from the execution, delivery or registration of the
Notes or any other document or instrument referred to therein, or the receipt of
any payments with respect to the Notes, excluding any such taxes, charges or
similar levies imposed by any jurisdiction outside of The Netherlands, any
jurisdiction in which the Company is organized or is otherwise resident for tax
purposes, the United States of America or any jurisdiction in which a Paying
Agent is located, but not excluding those resulting from, or required to be paid
in connection with, the enforcement of the Notes or any other such document or
instrument following the occurrence of any Event of Default with respect to the
Notes.
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<PAGE> 85
OPTIONAL REDEMPTION
OPTIONAL REDEMPTION OF NOTES DUE 2006
Except as set forth under "-- Redemption for Changes in Withholding Taxes"
below, the Notes due 2006 will not be redeemable at the option of the Company at
any time prior to their maturity.
OPTIONAL REDEMPTION OF NOTES DUE 2009
The Notes due 2009 will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on or after December 1, 2004,
upon not less than 30 nor more than 60 days' prior notice mailed by first class
mail to the registered address of each Holder of Notes due 2009, at the
redemption prices (expressed as a percentage of principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the date of
redemption, if redeemed during the 12-month period beginning on December 1 of
the years indicated below:
<TABLE>
<CAPTION>
EURO NOTES
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2004....................................................... 105.500%
2005....................................................... 103.667%
2006....................................................... 101.833%
2007 and thereafter........................................ 100.000%
</TABLE>
The Company will cause a copy of such notice to be published in a daily
newspaper with general circulation in Luxembourg (which is expected to be the
Luxemburger Wort).
REDEMPTION OF NOTES DUE 2009 UPON PUBLIC EQUITY OFFERING OR STRATEGIC EQUITY
INVESTMENT
At any time, or from time to time, prior to December 1, 2002, upon not less
than 30 nor more than 60 days' prior notice mailed by first class mail to the
registered address of each Holder of Notes due 2009, the Company may redeem up
to 35% of the principal amount of Notes due 2009 at a redemption price equal to
111% of the principal amount of the Notes due 2009 so redeemed, plus accrued and
unpaid interest thereon, if any, to the date of redemption with the net cash
proceeds of one or more Public Equity Offerings or Strategic Equity Investments
resulting in aggregate gross cash proceeds to the Company of at least $75.0
million; provided, however, that at least 65% of the principal amount of Notes
due 2009 originally issued would remain outstanding immediately after giving
effect to any such redemption (excluding any Notes due 2009 owned by the Company
or any of its Affiliates).
Notice of any such redemption must be given within 60 days after the date
of a Public Equity Offering or Strategic Equity Investment resulting in gross
cash proceeds to the Company, when aggregated with all prior Public Equity
Offerings and Strategic Equity Investments, of at least $75.0 million. The
Company will cause a copy of such notice to be published in a daily newspaper
with general circulation in Luxembourg (which is expected to be the Luxemburger
Wort).
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The Company may, at its option, redeem all (but not less than all) of the
Notes then outstanding, in each case at 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of redemption, if the
Company has become or would become obligated to pay, on the next date on which
any amount would be payable with respect to such Notes, any Additional Amounts
as a result of change in law (including any regulations promulgated thereunder)
or in the interpretation or administration thereof, if such change is announced
and becomes effective on or after the Issue Date. Notice of any such redemption
must be given within 60 days of the earlier of the announcement and the
effectiveness of any such change.
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SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes due 2009 are to be redeemed at
any time pursuant to an optional redemption, selection of such Notes due 2009
for redemption will be made by the Trustee in compliance with the requirements
of the principal national securities exchange, if any, on which the Notes due
2009 are listed or, if the Notes due 2009 are not then listed on a national
securities exchange, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Notes due
2009 of a principal amount of Euro 1,000 or less shall be redeemed in part;
provided, further, however, that if a partial redemption is made pursuant to the
provisions described in the second paragraph under "-- Optional Redemption,"
selection of the Notes due 2009 or portions thereof for redemption shall be made
by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to the procedures of Euroclear and Clearstream,
Luxembourg), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the date of redemption to each Holder of Notes due 2009 to be redeemed at its
registered address. The Company will cause a copy of such notice to be published
in a daily newspaper with general circulation in Luxembourg (which is expected
to be the Luxemburger Wort). If any Note due 2009 is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note due 2009 in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note due 2009. On
and after the date of redemption, interest will cease to accrue on Notes due
2009 or portions thereof called for redemption so long as the Company has
deposited with the Paying Agents in London and Luxembourg for the Notes due 2009
funds in satisfaction of the redemption price pursuant to the Indenture
governing such Notes due 2009.
CHANGE OF CONTROL
Following the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall notify the
Holders of such occurrence in the manner prescribed by the Indentures and shall,
within 30 days after the Change of Control Date, make an Offer to Purchase all
Notes then outstanding at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the Purchase Date. The Company will cause a copy of such notice to be
published in a daily newspaper with general circulation in Luxembourg (which is
expected to be the Luxemburger Wort). The Company's obligations may be satisfied
if a third party makes the Offer to Purchase in the manner, at the times and
otherwise in compliance with the requirements of the Indentures applicable to an
Offer to Purchase made by the Company and purchases all Notes validly tendered
and not withdrawn under such Offer to Purchase.
If an Offer to Purchase is made, there can be no assurance that the Company
will have available funds sufficient to pay for all of the Notes that might be
tendered by Holders seeking to accept the Offer to Purchase. If the Company
fails to purchase all of the Notes tendered for purchase upon the occurrence of
a Change of Control, such failure will constitute an Event of Default. See
"-- Events of Default" and "-- Risk Factors -- Change of Control."
If the Company makes an Offer to Purchase, the Company will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable Federal or state securities laws and regulations and any applicable
requirements of any securities exchange on which the Notes are listed, and any
violation of the provisions of the Indentures relating to such Offer to Purchase
occurring as a result of such compliance shall not be deemed a Default.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company shall not, and shall not
cause or permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or any other distribution on any
Equity Interests of the Company or any Restricted Subsidiary or make any
payment or distribution to the direct or indirect holders of Equity
Interests of the Company or any Restricted Subsidiary (other than any
dividends, distributions and
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payments made to the Company or any Restricted Subsidiary and dividends or
distributions payable to any Person solely in Qualified Equity Interests or
in options, warrants or other rights to purchase Qualified Equity
Interests);
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Restricted Subsidiary (other than
any such Equity Interests owned by the Company or any Restricted
Subsidiary);
(iii) purchase, redeem, defease or retire for value, or make any
principal payment on, prior to any scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by any Restricted Subsidiary); or
(iv) make any Investment (other than Permitted Investments)
(any of the foregoing, a "Restricted Payment"), unless
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
Company would be able to Incur $1.00 of additional Indebtedness under the
first paragraph of "-- Limitation on Incurrence of Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments (including the Fair Market
Value of any non-cash Restricted Payment) declared or made on or after the
Issue Date (excluding any Restricted Payment described in clauses (ii),
(iii) or (iv) of the next paragraph) does not exceed an amount equal to the
sum of the following (the "Basket"):
(1) (x) the Cumulative Operating Cash Flow determined at the time
of such Restricted Payment less (y) 150% of cumulative Consolidated
Interest Expense determined for the period (treated as one accounting
period) commencing on January 4, 1999 and ending on the last day of the
most recent fiscal quarter immediately preceding the date of such
Restricted Payment for which consolidated financial information of the
Company is required to be available, plus
(2) the aggregate net cash proceeds received by the Company either
(x) as capital contributions to the Company after the Issue Date or (y)
from the issue and sale (other than to a Subsidiary) of Qualified Equity
Interests after the Issue Date (other than any issuance and sale of
Qualified Equity Interests (A) financed, directly or indirectly, using
funds (I) borrowed from the Company or any Subsidiary until and to the
extent such borrowing is repaid or (II) contributed, extended,
guaranteed or advanced by the Company or any Subsidiary (including,
without limitation, in respect of any employee stock ownership or
benefit plan) or (B) the proceeds of which are used to effect any
transaction permitted by clauses (ii), (iii) or (iv) of the next
paragraph), plus
(3) the aggregate amount by which Indebtedness (other than any
Subordinated Indebtedness) of the Company or any Restricted Subsidiary
is reduced on the Company's balance sheet upon the conversion or
exchange (other than by a Subsidiary of the Company) subsequent to the
Issue Date into Qualified Equity Interests (less the amount of any cash,
or the fair value of property, distributed by the Company or any
Restricted Subsidiary upon such conversion or exchange), plus
(4) in the case of the disposition or repayment of any Investment
that was treated as a Restricted Payment made after the Issue Date, an
amount (to the extent not included in the computation of Cumulative
Operating Cash Flow) equal to the lesser of: (x) the return of capital
with respect to such Investment and (y) the amount of such Investment
that was treated as a Restricted Payment, in either case, less the cost
of the disposition of such Investment and net of taxes, plus
(5) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted
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Subsidiary after the Issue Date in accordance with "-- Designation of
Unrestricted Subsidiaries," the Company's proportionate interest in an
amount equal to the excess of (x) the total assets of such Subsidiary,
valued on an aggregate basis at the lesser of book value and Fair Market
Value, over (y) the total liabilities of such Subsidiary, determined in
accordance with GAAP (and provided that such amount shall not in any
case exceed the Designation Amount with respect to such Restricted
Subsidiary upon its Designation), minus
(6) with respect to each Subsidiary of the Company which has been
designated as an Unrestricted Subsidiary after the Issue Date in
accordance with "-- Designation of Unrestricted Subsidiaries," the
greater of (x) $0 and (y) the Designation Amount thereof (measured as of
the Date of Designation).
The foregoing provisions will not prevent (i) the payment of any dividend
or distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of
formal notice such payment or redemption would comply with the provisions of the
Indentures; (ii) the purchase, redemption, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent (A) common equity capital contribution
to the Company from any Person (other than a Subsidiary) or (B) issue and sale
(other than to a Subsidiary) of, Qualified Equity Interests; (iii) any
Investment to the extent that the consideration therefor consists of the net
proceeds of the substantially concurrent issue and sale (other than to a
Subsidiary) of Qualified Equity Interests; (iv) the purchase, redemption,
retirement, defeasance or other acquisition of Subordinated Indebtedness made in
exchange for, or out of the net cash proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary) of, (x) Qualified Equity Interests
or (y) other Subordinated Indebtedness having no stated maturity for the payment
of principal thereof prior to the Maturity Date; or (v) any Investment in any
Person; provided, however, that Investments pursuant to this clause (v) shall
not exceed $25.0 million in the aggregate at any time outstanding; provided,
further, however, that in the case of each of clauses (ii), (iii), (iv) and (v),
no Default shall have occurred and be continuing or would arise therefrom.
Limitation on Incurrence of Indebtedness. (a) The Company shall not, and
shall not cause or permit any Restricted Subsidiary to, directly or indirectly,
Incur any Indebtedness; provided, however, that the Company and any Restricted
Subsidiary may Incur Indebtedness (including Acquired Indebtedness) if, at the
time of such Incurrence, both (i) the Debt to Annualized Operating Cash Flow
Ratio would be less than or equal to 6.0 to 1.0 and (ii) in the case of the
Incurrence of Indebtedness by a Restricted Subsidiary, the Subsidiary Debt to
Annualized Operating Cash Flow Ratio would be less than or equal to 4.0 to 1.0.
(b) The foregoing limitations of paragraph (a) of this covenant will
not apply to any of the following, each of which shall be given independent
effect:
(i) the Notes and the Exchange Notes, and Permitted Refinancings
thereof;
(ii) Indebtedness of the Company or any Restricted Subsidiary to
the extent outstanding on the date of the Indentures, and Permitted
Refinancings thereof;
(iii) Indebtedness of the Company or Qualified Subsidiary
Indebtedness, in each case, to the extent that the proceeds of or credit
support provided by such Indebtedness is used to finance the cost
(including the cost of design, development, engineering, construction,
acquisition, installation, or integration or improvement) of
Telecommunications Assets acquired by the Company or a Restricted
Subsidiary after the Issue Date or to finance or support working capital
or capital expenditures for a Telecommunications Business, and Permitted
Refinancings thereof;
(iv) (1) Indebtedness (including Acquired Indebtedness) of the
Company or Qualified Subsidiary Indebtedness, in each case, to the
extent that the proceeds of or credit support provided by such
Indebtedness is used in connection with the development, expansion or
operation of a Telecommunications Business or is used to finance (or is
incurred as Acquired Indebtedness in the consummation of) a
Telecommunications Acquisition, or working capital for, or to finance
the
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construction of, the business or network acquired and (2) Acquired
Indebtedness, and, in each case, Permitted Refinancings thereof, but in
each case only to the extent that (x) the aggregate amount of
Indebtedness outstanding of the Company and the Restricted Subsidiaries
after giving effect to the Incurrence of such Indebtedness and the
application of the proceeds therefrom does not exceed the product of 2.0
and the Share Capital of the Company at the date of Incurrence of such
Indebtedness or (y) the aggregate amount of such Indebtedness or
Acquired Indebtedness, together with all Indebtedness of the Person, if
any, that is to become a Restricted Subsidiary or be merged or
consolidated with or into the Company or any Restricted Subsidiary in
the contemplated transaction outstanding at the time of such transaction
(whether or not Incurred in connection with, or in contemplation of,
such transaction), does not exceed the net sum of the plant, property
and equipment set forth on the Latest Balance Sheet of such Person;
(v) (1) Indebtedness of any Restricted Subsidiary owed to and held
by the Company or any Restricted Subsidiary and (2) Indebtedness of the
Company owed to and held by any Restricted Subsidiary which is unsecured
and subordinated in right of payment to the payment and performance of
the Company's obligations under the Notes; provided, however, that an
Incurrence of Indebtedness that is not permitted by this clause (v)
shall be deemed to have occurred upon (x) any sale or other disposition
of any Indebtedness of the Company or any Restricted Subsidiary referred
to in this clause (v) to any Person other than the Company or any
Restricted Subsidiary or (y) any Restricted Subsidiary that holds
Indebtedness of the Company or another Restricted Subsidiary ceasing to
be a Restricted Subsidiary;
(vi) Interest Rate Protection Obligations of the Company or any
Restricted Subsidiary relating to Indebtedness of the Company or such
Restricted Subsidiary, as the case may be (which Indebtedness (x) bears
interest at fluctuating interest rates and (y) is otherwise permitted to
be Incurred under this covenant); provided, however, that the notional
principal amount of such Interest Rate Protection Obligations does not
exceed the principal amount of the Indebtedness to which such Interest
Rate Protection Obligations relate;
(vii) Indebtedness of the Company or any Restricted Subsidiary
under Currency Agreements; provided, however, that in the case of
Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness or other obligations of the
Company and the Restricted Subsidiaries outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason
of fees, indemnities or compensation payable thereunder;
(viii) Indebtedness of the Company and/or any Restricted Subsidiary
in respect of performance bonds of the Company or any Restricted
Subsidiary or surety bonds provided by the Company or any Restricted
Subsidiary incurred in the ordinary course of business and on ordinary
business terms in connection with the construction or operation of a
Telecommunications Business;
(ix) Indebtedness of the Company so long as the sum of (1) the
aggregate amount of Indebtedness Incurred and outstanding by the Company
pursuant to this clause (ix) and (2) the product of 2.0 and the
aggregate amount of Indebtedness Incurred and outstanding by the
Restricted Subsidiaries (collectively) pursuant to this clause (ix) does
not exceed the product of 2.0 and (A) 100% of the Net Proceeds received
by the Company after the Issue Date from contributions of capital or the
issuance and sale of its Qualified Equity Interests to any Person (other
than any Restricted Subsidiary) and (B) 80% of the Net Proceeds of
property other than cash received by the Company after the Issue Date
from contributions of capital or the issuance and sale of its Qualified
Equity Interests to any Person (other than any Restricted Subsidiary),
in each case (A) and (B) only to the extent that such Net Proceeds have
not been used pursuant to clause (c)(2) of the first paragraph of
"-- Limitation on Restricted Payments" above to make a Restricted
Payment; provided, however, that no such Indebtedness may be incurred
pursuant to this clause (ix) to the extent that such contributions to
capital or issuance and sale of Qualified Equity Interests were
previously included in the determination of Share Capital for purposes
of Incurring Indebtedness under clause (iv) above of this paragraph (b)
of this covenant;
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(x) guarantees by the Company or any of its Restricted Subsidiaries
of Indebtedness of the Company or any Restricted Subsidiary of the
Company that is permitted to be incurred under the Indentures; and
(xi) in addition to the items referred to in clauses (i) through
(x) above, Indebtedness of the Company or Qualified Subsidiary
Indebtedness in an aggregate amount not to exceed $25.0 million at any
time outstanding.
(c) For purposes of determining any particular amount of Indebtedness
under this covenant, guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included; provided,
however, that the foregoing shall not in any way be deemed to limit the
provisions of "-- Limitation on Issuances of Guarantees by Restricted
Subsidiaries."
(d) For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness may be Incurred through the first
paragraph of this covenant or by meeting the criteria of one or more of the
types of Indebtedness described in the second paragraph of this covenant
(or the definitions of the terms used therein), the Company, in its sole
discretion, may, at the time of such Incurrence, (i) classify such item of
Indebtedness under and comply with either of such paragraphs (or any of
such definitions), as applicable, (ii) classify and divide such item of
Indebtedness into more than one of such paragraphs (or definitions), as
applicable, and (iii) elect to comply with such paragraphs (or
definitions), as applicable, in any order.
Limitation on Restrictions Affecting Restricted Subsidiaries. The Company
shall not, and shall not cause or permit any Restricted Subsidiary to, directly
or indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to
(x) pay dividends or make any other distributions to the Company or any other
Restricted Subsidiary on its Equity Interests or with respect to any other
interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (y) make
loans or advances to, or guarantee any Indebtedness or other obligations of, the
Company or any other Restricted Subsidiary or (z) transfer any of its properties
or assets to the Company or any other Restricted Subsidiary.
The foregoing shall not prohibit (a) any encumbrances or restrictions
existing under or by reason of any agreement in effect on the Issue Date, as any
such agreement is in effect on such date or as thereafter amended, renewed,
supplemented, restated or replaced but only if such encumbrances or restrictions
are no more restrictive, taken as a whole, than in the agreement being amended;
(b) customary provisions contained in an agreement that has been entered into
for the sale or disposition of all or substantially all of the Capital Stock or
assets of a Restricted Subsidiary; provided, however, that (x) such encumbrance
or restriction is applicable only to such Restricted Subsidiary or assets and
(y) such sale or disposition is made in accordance with "-- Limitation on Asset
Sales"; (c) any encumbrance or restriction existing under or by reason of
applicable law; (d) customary provisions that restrict the subletting or
assignment of any lease governing any leasehold interest of any Restricted
Subsidiary or that are contained in any agreement entered into in the ordinary
course of business; (e) covenants in purchase money obligations for property
acquired in the ordinary course of business restricting transfer of such
property; (f) covenants in security, pledge and similar agreements securing
Indebtedness of a Restricted Subsidiary (to the extent that such Liens were
otherwise incurred in accordance with "-- Limitation on Liens") that restrict
the transfer of property subject to such agreements; (g) any agreement or other
instrument of a Person acquired by the Company or any Restricted Subsidiary in
existence at the time of such acquisition, which encumbrance or restriction (x)
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the properties or assets of the Person so acquired,
and (y) is not incurred in connection with or in contemplation of such
acquisition; (h) contained in any agreement entered into after the Issue Date,
so long as such encumbrances or restrictions are not materially more
disadvantageous, taken as a whole, to the Holders than the encumbrances and
restrictions in existence at the Issue Date; (i) encumbrances or restrictions
contained in any agreement entered into after the Issue Date for Indebtedness so
long as (a) such encumbrances or restrictions, taken as a whole, are not more
restrictive than those which are customary in comparable financing agreements
and
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(b) management of the Company determines that such encumbrances or restrictions
will not materially impair the Company's ability to make payments when due on
the Notes; or (j) customary limitations on the disposition or distribution of
assets or property in joint venture agreements entered into in the ordinary
course of business; provided, however, that such encumbrance or restriction is
applicable only to such Restricted Subsidiary constituting such joint venture.
Designation of Unrestricted Subsidiaries. (a) The Company may designate
any Subsidiary of the Company as an "Unrestricted Subsidiary" under the
Indentures (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(ii) the Company would be permitted to make an Investment at the time
of Designation (assuming the effectiveness of such Designation) pursuant to
the first paragraph of "-- Limitation on Restricted Payments" in an amount
(the "Designation Amount") equal to the Fair Market Value of the Company's
proportionate interest in the net worth of such Subsidiary on such date
calculated in accordance with GAAP.
All Subsidiaries of Unrestricted Subsidiaries shall be Unrestricted
Subsidiaries.
The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, directly or indirectly, at any time (x) provide credit support
for, subject any of its properties or assets (other than the Equity Interests of
any Unrestricted Subsidiary) to the satisfaction of, or guarantee, any
Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary.
(b) The Company may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") only if:
(i) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
Indentures; and
(iii) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary
was an Unrestricted Subsidiary would be permitted by "-- Limitation on
Transactions with Affiliates" as if such transaction (or series of related
transactions) had occurred at the time of such Revocation (after giving
effect to any modification to such transaction (or series of related
transactions) effective at such time).
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Restricted Subsidiary to, directly or indirectly, Incur any Lien (other than
any Permitted Lien) of any kind securing Indebtedness or trade payables against
or upon any of their respective properties or assets now owned or hereafter
acquired, or any proceeds, income or profits therefrom, unless contemporaneously
therewith or prior thereto, (i) in the case of any Lien securing an obligation
that ranks pari passu with the Notes, effective provision is made to secure the
Notes equally and ratably with or prior to such obligation with a Lien on the
same collateral and (ii) in the case of any Lien securing an obligation that is
subordinated in right of payment to the Notes, effective provision is made to
secure the Notes with a Lien on the same collateral that is prior to the Lien
securing such subordinated obligation, in each case, for so long as such
obligation is secured by such Lien.
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Limitation on Asset Sales. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, make any Asset
Sale, unless (x) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the assets sold or otherwise disposed of and (y) at least 75% of
such consideration consists of (i) cash or Cash Equivalents, (ii) Replacement
Assets, (iii) publicly traded Equity Interests of a Person who is engaged
primarily in a Telecommunications Business; provided, however, that the Company
or such Restricted Subsidiary shall sell (a "Monetization Sale"), for cash or
Cash Equivalents, such Equity Interests to a third Person (other than to the
Company or a Subsidiary thereof) at a price not less than the Fair Market Value
thereof within 365 days of the consummation of such Asset Sale, or (iv) any
combination of the foregoing clauses (i) through (iii). The amount of any (x)
Indebtedness (other than any Subordinated Indebtedness) of the Company or any
Restricted Subsidiary that is actually assumed by the transferee in such Asset
Sale and from which the Company and the Restricted Subsidiaries are fully
released shall be deemed to be cash for purposes of determining the percentage
of cash consideration received by the Company or such Restricted Subsidiary, (y)
notes or other similar obligations received by the Company or any Restricted
Subsidiary from such transferee that are immediately converted, sold or
exchanged (or are converted, sold or exchanged within 365 days of the related
Asset Sale) by the Company or any Restricted Subsidiary into cash shall be
deemed to be cash, in an amount equal to the net cash proceeds realized upon
such conversion, sale or exchange for purposes of determining the percentage of
cash consideration received by the Company or such Restricted Subsidiary and (z)
Indebtedness of any Restricted Subsidiary that is no longer a Restricted
Subsidiary as a result of such Asset Sale, if the Company and all of its
Restricted Subsidiaries immediately are released from all guarantees of payment
of such Indebtedness and such Indebtedness is no longer the liability of the
Company or any of its Restricted Subsidiaries shall be deemed to be cash for
purposes of determining the percentage of cash consideration received by the
Company or such Restricted Subsidiary. Any Net Cash Proceeds from any Asset Sale
or any Monetization Sale that are not invested in Replacement Assets or used to
repay and permanently reduce the commitments under Indebtedness of any
Restricted Subsidiary within 365 days of the consummation of such Asset Sale or
Monetization Sale shall constitute "Excess Proceeds" subject to disposition as
provided below. Pending final application of any such Net Cash Proceeds, the
Company or any Restricted Subsidiary that is a borrower under Qualified
Subsidiary Indebtedness may temporarily reduce revolving credit borrowings or
otherwise invest such Net Cash Proceeds in any manner that is not prohibited by
the Indenture.
Within 40 days after the aggregate amount of Excess Proceeds equals or
exceeds $10.0 million, the Company shall make an Offer to Purchase, from all
Holders on a pro rata basis, that aggregate principal amount of Notes as can be
purchased with the Note Portion of Excess Proceeds at a price in cash equal to
100% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to any purchase date. To the extent that the aggregate amount
of principal and accrued interest of Notes validly tendered and not withdrawn
pursuant to an Offer to Purchase is less than the Excess Proceeds, the Company
may use such surplus for general corporate purposes. If the aggregate amount of
principal and accrued interest of Notes validly tendered and not withdrawn by
Holders thereof exceeds the amount of Notes that can be purchased with the Note
Portion of Excess Proceeds, Notes to be purchased will be selected pro rata
based on the aggregate principal amount of Notes tendered by each Holder. Upon
completion of an Offer to Purchase, the amount of Excess Proceeds with respect
to the applicable Asset Sale or Monetization Sale shall be reset to zero.
In the event that any other Indebtedness of the Company that ranks pari
passu with the Notes (the "Other Debt") requires an offer to purchase to be made
to repurchase such Other Debt upon the consummation of an Asset Sale, the
Company may apply the Excess Proceeds otherwise required to be applied to an
Offer to Purchase to offer to purchase such Other Debt and to an Offer to
Purchase so long as the amount of such Excess Proceeds applied to purchase the
Notes is not less than the Note Portion of Excess Proceeds. With respect to any
Excess Proceeds, the Company shall make the Offer to Purchase in respect thereof
at the same time as the analogous offer to purchase is made pursuant to any
Other Debt and the Purchase Date in respect thereof shall be the same as the
purchase date in respect thereof pursuant to any Other Debt.
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For purposes of this covenant, "Note Portion of Excess Proceeds" means (1)
if no Other Debt is being offered to be purchased, the amount of the Excess
Proceeds and (2) if Other Debt is being offered to be purchased, the amount of
the Excess Proceeds equal to the product of (x) the Excess Proceeds and (y) a
fraction the numerator of which is the aggregate amount of all Notes tendered
pursuant to the Offer to Purchase related to such Excess Proceeds (the "Note
Amount") and the denominator of which is the sum of the Note Amount and the
aggregate amount as of the relevant purchase date of all Other Debt tendered and
purchased pursuant to a concurrent offer to purchase such Other Debt made at the
time of such Offer to Purchase.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any violation of the provisions of the Indentures relating
to such Offer to Purchase occurring as a result of such compliance shall not be
deemed a Default or an Event of Default.
Limitation on Transactions with Affiliates. The Company shall not, and
shall not cause or permit any Restricted Subsidiary to, directly or indirectly,
conduct any business or enter into any transaction or series of related
transactions with or for the benefit of any Affiliate, any holder of 5% or more
of any class of Equity Interests or any officer, director or employee of the
Company or any Restricted Subsidiary (each, an "Affiliate Transaction"), unless
such Affiliate Transaction is on terms that are no less favorable to the Company
or such Restricted Subsidiary, as the case may be, than could reasonably be
obtained at such time in a comparable transaction with an unaffiliated third
party. For any such transaction that involves value in excess of $5.0 million,
the Company shall deliver to the Trustee an Officers' Certificate stating that a
majority of the Disinterested Directors has determined that the transaction
satisfies the above criteria and shall evidence such a determination by a Board
Resolution delivered to the Trustee. For any such transaction that involves
value in excess of $20.0 million, the Company shall also obtain a written
opinion from an Independent Financial Advisor to the effect that such
transaction is fair, from a financial point of view, to the Company or such
Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions between or among the Company and one or more
Restricted Subsidiaries or between or among Restricted Subsidiaries; (ii)
customary directors' fees, indemnification and similar arrangements, employee
salaries, bonuses or employment agreements, compensation or employee benefit
arrangements and incentive arrangements with any officer, director or employee
of the Company or any Restricted Subsidiary entered into in the ordinary course
of business (including customary benefits thereunder); (iii) transactions
pursuant to agreements or arrangements in effect on the Issue Date, as such
agreements or arrangements are in effect on the Issue Date or as thereafter
amended or supplemented in a manner not adverse to the Holders; (iv) loans and
advances to officers, directors and employees of the Company or any Restricted
Subsidiary for travel, entertainment, moving and other relocation expenses, in
each case made in the ordinary course of business and consistent with past
business practices; (v) any transaction between the Company or any Restricted
Subsidiary, on the one hand, and any Affiliate of the Company engaged primarily
in a Telecommunications Business, on the other hand, (x) in the ordinary course
of business and consistent with commercially reasonable practices or (y)
approved by a majority of the Disinterested Directors; (vi) any payment pursuant
to any tax sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; provided, however, that such payment is
not greater than that which the Company would be required to pay as a
stand-alone taxpayer; (vii) the pledge of Equity Interests of Unrestricted
Subsidiaries to support the Indebtedness thereof; (viii) Restricted Payments
permitted under the covenant described under "-- Limitation on Restricted
Payments;"and (ix) the issuance and sale by the Company for cash of Qualified
Equity Interests.
Limitation on Issuances of Guarantees by Restricted Subsidiaries. The
Company shall not cause or permit any Restricted Subsidiary, directly or
indirectly, to guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to each Indenture pursuant to which such
Restricted Subsidiary guarantees (a
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"Subsidiary Guarantee") all of the Company's obligations under the applicable
Notes and such Indenture and (ii) such Restricted Subsidiary waives and will not
in any manner whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee. If the Guaranteed
Indebtedness is (A) pari passu with the Notes, then the guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Any Subsidiary Guarantee by a Restricted Subsidiary shall provide by its
terms that it shall be automatically and unconditionally released and discharged
upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Equity Interests of the Company or any Restricted
Subsidiary in, or all or substantially all the assets of, such Restricted
Subsidiary (which sale, exchange or transfer is made in accordance with the
Indentures) or (ii) the release or discharge of the guarantee which resulted in
the creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such guarantee.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries. The Company shall not sell, and shall not cause or permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any Equity
Interests of a Restricted Subsidiary, except (i) to the Company or a Wholly
Owned Restricted Subsidiary; (ii) if, immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary; or (iii) in the case of issuance of Equity Interests by a
non-Wholly Owned Restricted Subsidiary if, after giving effect to such issuance,
the Company maintains its direct or indirect percentage of beneficial and
economic ownership of such non-Wholly Owned Restricted Subsidiary.
Merger, Sale of Assets, etc. The Company shall not consolidate with or
merge with or into (whether or not the Company is the Surviving Person) any
other Person, and the Company shall not, and shall not cause or permit any
Restricted Subsidiary to, sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the property and assets of the Company
and the Restricted Subsidiaries, taken as a whole, to any Person or Persons
(other than any Restricted Subsidiary), in each case, in a single transaction or
series of related transactions, unless: (i) either (x) the Company shall be the
Surviving Person or (y) the Surviving Person (if other than the Company) shall
be a corporation organized and validly existing under the laws of The
Netherlands, the United States of America or any State thereof or the District
of Columbia, and shall, in any such case, expressly assume by a supplemental
indenture to each Indenture, the due and punctual payment of the principal of
and interest on the applicable Notes and the performance and observance of every
covenant of such Indenture and the Registration Rights Agreement to be performed
or observed on the part of the Company; (ii) immediately after giving effect to
such transaction, no Default shall have occurred and be continuing; and (iii)
immediately after giving effect to such transaction, the Surviving Person (as
the Company) could Incur at least $1.00 of additional Indebtedness under the
first paragraph of "-- Limitation on Incurrence of Indebtedness."
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interests of which constitutes all or substantially all
the properties and assets of the Company shall be deemed to be the transfer of
all or substantially all the properties and assets of the Company.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the first paragraph of this covenant in
which the Company is not the Surviving Person and the Surviving Person is to
assume all the Obligations of the Company under the Notes, the Indentures and
the Registration Rights Agreement pursuant to supplemental indentures, such
Surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, the Company and the Company shall be discharged from
its Obligations under the Notes, the Indentures and the Registration Rights
Agreement.
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Provision of Financial Information. Whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) the annual reports, quarterly reports and other
documents which the Company would have been required to file with the SEC
pursuant to such Section 13(a) or 15(d) or any successor provision thereto if
the Company were so required, such documents to be filed with the SEC on or
prior to the respective dates (the "Required Filing Dates") by which the Company
would have been required so to file such documents if the Company were so
required; provided, however, that until the Company is subject to Section 13(a)
or Section 15(d) of the Exchange Act or any successor provisions thereto, the
Required Filing Dates for such quarterly reports shall be 75 days following the
end of the applicable fiscal quarter. The Company shall also in any event (a)
within 15 days of each Required Filing Date (whether or not permitted or
required to be filed with the SEC but subject to the proviso in the previous
sentence) (i) transmit (or cause to be transmitted) by mail to all Holders, as
their names and addresses appear in the Note register, without cost to such
Holders, and (ii) file with the Trustee, copies of the annual reports, quarterly
reports and other documents which the Company is required to file with the SEC
pursuant to the preceding sentence, or, if such filing is not so permitted,
information and data of a similar nature, and (b) if, notwithstanding the
preceding sentence, filing such documents by the Company with the SEC is not
permitted by SEC practice or applicable law or regulations, promptly upon
written request supply copies of such documents to any Holder. In addition, for
so long as any Notes remain outstanding, the Company will furnish to the Holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial holder of Notes, if not obtainable from
the SEC, information of the type that would be filed with the SEC pursuant to
the foregoing provisions, upon the request of any such holder.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Event of
Default" under the Indentures: (a) failure to pay principal of any Note when
due; (b) failure to pay any interest on any Note when due, continued for 30 days
or more; (c) failure to pay on the Purchase Date the Purchase Price for any Note
validly tendered pursuant to any Offer to Purchase; (d) failure to perform or
comply with any of the provisions described under "-- Certain
Covenants -- Merger, Sale of Assets, etc."; (e) failure to perform any other
covenant, warranty or agreement of the Company under the Indentures or in the
Notes continued for 30 days or more after written notice to the Company by the
Trustee or Holders of at least 25% in aggregate principal amount of the
outstanding Notes due 2006 or 25% in aggregate principal amount of the
outstanding Notes due 2009, as the case may be; (f) there shall be, with respect
to any issue or issues of Indebtedness of the Company or any Restricted
Subsidiary having an outstanding principal amount of $10.0 million or more in
the aggregate for all such issues of all such Persons, whether such Indebtedness
now exists or shall hereafter be created, (x) an event of default that has
caused the holders thereof (or their representative) (I) to declare such
Indebtedness to be due and payable prior to its scheduled maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 45 days following such acceleration and/or (II) to
commence judicial proceeding to foreclose upon, or to exercise remedies under
applicable law or applicable security documents to take ownership of, the
property or assets securing such Indebtedness and/or (y) the failure to make a
principal payment at the final (but not any interim) fixed maturity and such
defaulted payment shall not have been made, waived or extended within 45 days of
such payment default; (g) the rendering of a final judgment or judgments against
the Company or any Restricted Subsidiary in an amount of $10.0 million or more
which remains undischarged or unstayed for a period of 60 consecutive days; or
(h) certain events of bankruptcy, insolvency or reorganization affecting the
Company or any Significant Restricted Subsidiary.
If an Event of Default with respect to the Notes (other than an Event of
Default with respect to the Company described in clause (h) of the preceding
paragraph) occurs and is continuing, the Trustee or the Holders of at least 25%
in aggregate principal amount of the outstanding Notes due 2006 or 25% in
aggregate principal amount of the outstanding Notes due 2009, as the case may
be, by notice in writing to the Company and the Trustee, if applicable, may
declare the unpaid principal of and accrued interest to the date of acceleration
on all outstanding Notes of such series to be due and payable immediately and,
upon any such
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declaration, such principal amount and accrued interest, notwithstanding
anything contained in such Notes or the Indenture governing such Notes to the
contrary, will become immediately due and payable; provided, however, that after
a declaration of such acceleration, but before a judgment or decree based on
acceleration, the Holders of not less than a majority in aggregate principal
amount of outstanding Notes of such series may, under certain circumstances,
rescind such acceleration and its consequences if all existing Events of
Default, other than the nonpayment of accelerated principal of and interest on
such Notes which has become due solely by virtue of such acceleration, have been
cured or waived as provided in the Indenture governing such Notes and if the
recission would not conflict with any judgment or decree. If an Event or Default
specified in clause (h) of the preceding paragraph with respect to the Company
occurs under the Indentures, the Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder.
The Indentures provide that the Trustee shall, within 30 days after the
occurrence of any Default with respect to the Notes, give the Holders notice of
all uncured Defaults thereunder known to it; provided, however, that, except in
the case of an Event of Default in payment with respect to the Notes or a
Default or Event of Default in complying with "-- Certain Covenants -- Merger,
Sale of Assets, etc.," the Trustee shall be protected in withholding such notice
if and so long as a committee of its trust officers in good faith determines
that the withholding of such notice is in the interest of the Holders.
No Holder will have any right to institute any proceeding with respect to
an Indenture or pursue any remedy thereunder, unless the Trustee (i) shall have
failed to act for a period of 60 days after receiving written notice of a
continuing Event of Default by such Holder and a request to act by Holders of at
least 25% in aggregate principal amount of Notes due 2006 outstanding or 25% in
aggregate principal amount of the outstanding Notes due 2009, as the case may
be, (ii) shall have been offered indemnity reasonably satisfactory to it and
(iii) shall not have received from the Holders of a majority in aggregate
principal amount of the outstanding Notes due 2006 or Notes due 2009, as the
case may be, a direction which, in the opinion of the Trustee, is inconsistent
with such request. However, such limitations do not apply to a suit instituted
by a Holder of any Note for enforcement of payment of the principal of or
interest on such Note on or after the due date therefor (after giving effect to
the grace period specified in clause (b) of the first paragraph of this
"-- Events of Default" section).
The Company will be required to furnish to the Trustee within 120 days
after the end of each fiscal year a statement as to the performance by it of
certain of its obligations under the Indentures and as to any default in such
performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any of its Affiliates, as such, shall have any liability for any obligations
of the Company or any of its Affiliates under the Notes or the Indentures or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes.
SATISFACTION AND DISCHARGE OF INDENTURES; DEFEASANCE
The Company may terminate its substantive obligations in respect of the
Notes due 2006 or the Notes due 2009 by delivering all such outstanding Notes to
the Trustee for cancellation and paying all sums payable by it on account of
principal of, premium, if any, and interest on all such Notes or otherwise. In
addition to the foregoing, the Company may terminate the applicability of
certain covenants under "-- Certain Covenants" and "-- Change of Control" or any
Event of Default under clause (e) of "-- Events of Default" by (i) depositing
with the Trustee, under the terms of an irrevocable trust agreement, cash in
Euros, Euro Government Obligations or a combination thereof sufficient to pay
all remaining indebtedness on such Notes at maturity or upon earlier redemption;
(ii) delivering to the Trustee either an Opinion of Counsel or a ruling directed
to the Trustee from the Internal Revenue Service to the effect that the Holders
of such Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and termination of
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obligations; and (iii) complying with certain other requirements set forth in
the Indentures. In addition, the Company may, provided that no Default has
occurred and is continuing or would arise therefrom (or, with respect to a
Default specified in clause (h) of "-- Events of Default," occurs at any time on
or prior to the 91st calendar day after the date of the deposit (it being
understood that this condition shall not be deemed satisfied until after such
91st day)) under the Indentures, terminate all of its substantive obligations in
respect of the Notes due 2006 or the Notes due 2009 (including its obligations
to pay the principal of and interest on such Notes) by (i) depositing with the
Trustee, under the terms of an irrevocable trust agreement, cash in Euros, Euro
Government Obligations or a combination thereof sufficient to pay all remaining
Indebtedness on such Notes at maturity or upon earlier redemption; (ii)
delivering to the Trustee either a ruling directed to the Trustee from the
Internal Revenue Service to the effect that the Holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and termination of obligations or an Opinion of Counsel addressed
to the Trustee based upon such a ruling or based on a change in the applicable
federal tax law since the date of the Indentures, to such effect; and (iii)
complying with certain other requirements set forth in the Indentures.
MODIFICATION AND WAIVER
Modifications and amendments of each Indenture may be made by the Company,
when authorized by a resolution of its Board of Directors, and the Trustee with
the consent of the Holders of a majority in aggregate principal amount of the
Notes to which such Indenture applies (including consents obtained in connection
with a tender offer or exchange offer for such Notes); provided, however, that
no such modification or amendment to either Indenture may, without the consent
of the Holder of each Note affected thereby, (a) change the maturity of the
principal of any such Note; (b) alter the optional redemption or repurchase
provisions of any such Note or such Indenture in a manner adverse to the Holders
of such Notes; (c) reduce the principal amount of any such Note; (d) reduce the
rate of or extend the time for payment of interest on any such Note; (e) change
the place or currency of payment of principal of or interest on any such Note;
(f) modify any provisions of such Indenture relating to the waiver of past
defaults (other than to add sections of such Indenture or the Notes subject
thereto) or the right of the Holders of Notes to institute suit for the
enforcement of any payment on or with respect to any such Note in respect
thereof or the modification and amendment provisions of such Indenture and such
Notes (other than to add sections of such Indenture or such Notes which may not
be amended, supplemented or waived without the consent of each Holder therein
affected); (g) reduce the percentage of the principal amount of outstanding
Notes necessary for amendment to or waiver of compliance with any provision of
such Indenture or the Notes or for waiver of any Default in respect thereof; (h)
waive a default in the payment of principal of, interest on, or redemption
payment with respect to, such Note (except a rescission of acceleration of the
relevant Notes by the Holders thereof as provided in the Indenture and a waiver
of the payment default that resulted from such acceleration); (i) modify the
ranking or priority of any such Note; or (j) modify the provisions of any
covenant (or the related definitions) in such Indenture requiring the Company to
make an Offer to Purchase in a manner materially adverse to the Holders of Notes
affected thereby.
The Holders of a majority in aggregate principal amount of the outstanding
Notes due 2006 or Notes due 2009, as the case may be, on behalf of all Holders
thereof, may waive compliance by the Company with certain restrictive provisions
of the Indenture governing such Notes. Subject to certain rights of the Trustee
as provided in the Indentures, the Holders of a majority in aggregate principal
amount of the Notes due 2006 or Notes due 2009, as the case may be, on behalf of
all Holders thereof, may waive any past default under the Indenture governing
such Notes (including any such waiver obtained in connection with a tender offer
or exchange offer for such Notes), except a default in the payment of principal
or interest or a default arising from failure to purchase any Notes tendered
pursuant to an Offer to Purchase pursuant thereto, or a default in respect of a
provision that under such Indenture cannot be modified or amended without the
consent of the Holder of each Note that is affected.
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GOVERNING LAW
The Indentures and the Notes will be governed by the laws of the State of
New York without regard to principles of conflicts of laws. Under the Judiciary
Law of the State of New York, a judgment or decree in an action based upon an
obligation denominated in a currency other than U.S. dollars will be rendered in
the foreign currency of the underlying obligation and converted into U.S.
dollars at a rate of exchange prevailing on the date of entry of the judgment or
decree.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indentures. During the
existence of a Default under either Indenture, the Trustee will exercise such
rights and powers vested in it under such Indenture and use the same degree of
care and skill in its exercise as a prudent person would exercise or use under
the circumstances in the conduct of such person's own affairs.
The Indentures and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company or any other obligor upon the Notes, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claim as the Notes or otherwise. The Trustee is
permitted to engage in other transactions with the Company or an Affiliate of
the Company; provided, however, that if it acquires any conflicting interest (as
defined in the Indentures or in the Trust Indenture Act), it must eliminate such
conflict or resign.
LISTING
The Notes are listed on the Luxembourg Stock Exchange. The Exchange Notes
are expected to be listed on the Luxembourg Stock Exchange upon the expiration
of the Exchange Offer. The legal notice relating to the issuance of the Notes
and the Articles of Association of the Company are registered with the Registrar
of the District Court in Luxembourg, where such documents are available for
inspection and where copies thereof can be obtained upon request. As long as the
Notes are listed on the Luxembourg Stock Exchange, an agent for making payments
on, and transfers of, Notes will be maintained in Luxembourg. The Company has
initially designated Bankers Trust Luxembourg S.A. and Banque Internationale a
Luxembourg S.A. as its agents for such purposes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time such
Person becomes a Restricted Subsidiary or is merged or consolidated with or into
the Company or any Restricted Subsidiary; provided, however, that such
Indebtedness was not Incurred in connection with, or in contemplation of, such
Acquisition, such Person becoming a Restricted Subsidiary or such merger or
consolidation.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Restricted Subsidiary
or shall be consolidated, merged with or into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
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"Additional Interest" has the meaning provided in Section 4(a) of each
Registration Rights Agreement.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Restricted Subsidiary, in one transaction or
a series of related transactions, of (i) any Equity Interest of any Restricted
Subsidiary; (ii) any material license, franchise or other authorization of the
Company or any Restricted Subsidiary; (iii) any assets of the Company or any
Restricted Subsidiary which constitute substantially all of an operating unit or
line of business of the Company or any Restricted Subsidiary; or (iv) any other
property or asset of the Company or any Restricted Subsidiary outside of the
ordinary course of business (including the receipt of proceeds paid on account
of the loss of or damage to any property or asset and awards of compensation for
any asset taken by condemnation, eminent domain or similar proceedings). For the
purposes of this definition, the term "Asset Sale" shall not include (a) any
transaction consummated in compliance with "-- Certain Covenants -- Merger, Sale
of Assets, etc." and the creation of any Lien not prohibited by "-- Certain
Covenants -- Limitation on Liens"; provided, however, that any transaction
consummated in compliance with "-- Certain Covenants -- Merger, Sale of Assets,
etc." involving a sale, conveyance, assignment, transfer, lease or other
disposal of less than all of the properties or assets of the Company and the
Restricted Subsidiaries shall be deemed to be an Asset Sale with respect to the
properties or assets of the Company and Restricted Subsidiaries that are not so
sold, conveyed, assigned, transferred, leased or otherwise disposed of in such
transaction; (b) sales of property or equipment that has become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company or any Restricted Subsidiary, as the case may be; (c)
any transaction consummated in compliance with "-- Certain
Covenants -- Limitation on Restricted Payments" or that constitutes a Permitted
Investment; and (d) any sale, lease, transfer, conveyance or other disposition
in the ordinary course of business of capacity on any fiber optic or cable
system controlled or operated by the Company or any Restricted Subsidiary or of
telecommunications capacity, transmission rights, conduit or rights-of-way
acquired by the Company or any Restricted Subsidiary for use in a
Telecommunications Business of the Company or any Restricted Subsidiary. In
addition, solely for purposes of "-- Certain Covenants -- Limitation on Asset
Sales," any sale, conveyance, transfer, lease or other disposition of any
property or asset, whether in one transaction or a series of related
transactions, involving assets with a Fair Market Value not in excess of $1.0
million in any fiscal year shall be deemed not to be an Asset Sale.
"Basket" has the meaning set forth in "-- Certain Covenants -- Limitation
on Restricted Payments."
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person (or comparable governing body), or any authorized
committee of that Board (it being understood that the Board of Directors of the
Company shall be its Board of Managing Directors and its Board of Supervisory
Directors, collectively).
"Board of Managing Directors" means, with respect to the Company, its
executive board.
"Board of Supervisory Directors" means, with respect to the Company, its
supervisory board.
"Business Day" means a day (other than a Saturday or Sunday) on which the
Depository and banks in the place of payment are open for business.
"Capacity Swaps" means the exchange by the Company or any Restricted
Subsidiary of capacity on the Company's or such Restricted Subsidiary's network
(including without limitation through the transfer of indefeasible rights of use
or multiple investment units and/or the sale or lease of dark fibers or
wavelengths thereon) for Equity Interests in any Permitted ISP.
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means: (a) U.S. dollars or Euros; (b) securities (i)
issued or directly and fully guaranteed or insured by the U.S. government or any
agency or instrumentality thereof or (ii) which are denominated in Euros and are
issued by or directly and fully guaranteed or insured by a member of the
European Union, or any agency or instrumentality thereof, in each case having
maturities of not more than twelve months from the date of acquisition; (c)
certificates of deposit and time deposits with maturities of twelve months or
less from the date of acquisition, bankers' acceptances with maturities not
exceeding twelve months and overnight bank deposits, in each case with any
commercial bank having capital and surplus in excess of $500 million; (d)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (b) and (c) entered into with any
financial institution meeting the qualifications specified in clause (c) above;
(e) commercial paper rated P-1, A-1 or the equivalent thereof by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group, respectively, and in
each case maturing within twelve months after the date of acquisition; and (f)
any money market accounts or funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (a) through (e)
above.
"Change of Control" shall mean the occurrence of any of the following
events (whether or not approved by the Board of Directors of the Company): (a)
any Person or group (other than a Permitted Holder, or an Investment Grade
Person) is or becomes the beneficial owner, directly or indirectly, of Voting
Equity Interests representing 35% or more of the total voting power of the
Voting Equity Interests of the Company at a time when the Permitted Holders
together (x) own Voting Equity Interests representing a lesser percentage of the
total voting power of the Voting Equity Interests of the Company, than such
Person or group (for purposes of determining the percentage of the Voting Equity
Interests of such Person or group, the holdings of the Permitted Holders who are
part of such Person or group shall not be counted in the Voting Equity Interests
of such Person or group) or (y) do not hold the power to elect a majority of the
members of the Board of Directors of the Company; (b) any Person or group (other
than an Investment Grade Person) is or becomes the beneficial owner, directly or
indirectly, of Voting Equity Interests representing 50% or more of the total
voting power of the Voting Equity Interests of GTS or has the power, directly or
indirectly, to elect a majority of the members of the Board of Directors of GTS;
(c) the Company consolidates with, or merges with or into, another Person (other
than an Investment Grade Person) or the Company or one or more Restricted
Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of all
or substantially all of the assets of the Company and the Restricted
Subsidiaries, taken as a whole, to any Person (other than a Wholly Owned
Restricted Subsidiary or an Investment Grade Person), or any Person (other than
an Investment Grade Person) consolidates with, or merges with or into, the
Company, in any such event other than pursuant to a transaction in which the
Person or Persons that "beneficially owned," directly or indirectly, Voting
Equity Interests representing a majority of the total voting power of the Voting
Equity Interests of the Company immediately prior to such transaction,
"beneficially own," directly or indirectly, Voting Equity Interests representing
a majority of the total voting power of the Voting Equity Interests of the
surviving or transferee Person; provided, however, that sales, transfers,
conveyances or other dispositions in the ordinary course of business of capacity
on fiber optic or cable systems owned, controlled or operated by the Company or
any Restricted Subsidiary or of telecommunications capacity or transmission
rights, rights-of-way or conduit acquired by the Company or any Restricted
Subsidiary for use in the Telecommunications Business of the Company or a
Restricted Subsidiary, including, without limitation, for sale, lease, transfer,
conveyance or other disposition to any customer of the Company or any Restricted
Subsidiary shall not be deemed a disposition of assets for purposes of this
clause (c); (d) GTS consolidates with, or merges with or into, another Person
(other than an Investment Grade Person) or GTS or one or more of its
Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of all
or substantially all of the assets of GTS and its Subsidiaries, taken as a
whole, to any Person (other than a wholly owned Subsidiary of GTS or an
Investment Grade Person), or any Person (other than an Investment Grade Person)
consolidates with, or merges with or into, GTS, in any such event other than
pursuant to a transaction in which the Person or Persons that "beneficially
owned," directly or indirectly, Voting Equity Interests representing a majority
of the total voting power of the Voting Equity Interests of GTS immediately
prior to such transaction, "beneficially own," directly or
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indirectly, Voting Equity Interests representing a majority of the total voting
power of the Voting Equity Interests of the surviving or transferee Person; (e)
during any consecutive two-year period, individuals who at the beginning of such
period constituted the Board of Supervisory Directors of the Company (together
with any new directors elected or nominated for election to the Board of
Supervisory Directors by the stockholders of the Company with the approval or
consent of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved or consented to) cease for any reason (other
than by action of the Permitted Holders) to constitute a majority of the Board
of Directors of the Company then in office; (f) during any consecutive two year
period, individuals who at the beginning of such period constituted the Board of
Managing Directors of GTS (together with any new directors whose election by the
Board of Directors of GTS or whose nomination for election by the stockholders
of GTS was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of GTS then in office;
or (g) there shall occur the liquidation or dissolution of the Company or GTS.
For purposes of this definition, (I) "group" has the meaning under Section 13(d)
and 14(d) of the Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act, and (II) "beneficial ownership" has the meaning set forth in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have "beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time, upon the happening of an event or otherwise.
"Change of Control Date" has the meaning set forth under "-- Change of
Control."
"Common Depositary" means, with respect to the Securities issued in the
form of one or more Global Securities, the Person designated as the common
depositary by Euroclear or Clearstream, Luxembourg, which shall initially be
Bankers Trust Company.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for federal, state, local and foreign income taxes payable by the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance financing
and (e) all capitalized interest and all accrued interest, (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP and (iii)
dividends and distributions in respect of Disqualified Equity Interests actually
paid in cash by the Company or any Restricted Subsidiary (other than to the
Company or another Restricted Subsidiary) during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (a) other than
for purposes of calculating the Basket, all extraordinary gains or losses for
such period, (b) other than for purposes of calculating the Basket, all gains or
losses from the sales or other dispositions of assets out of the ordinary course
of business (net of taxes, fees and expenses relating to the transaction giving
rise thereto) for such period; (c) that portion of such net income derived from
or in respect of investments in Persons other than Restricted Subsidiaries,
except to the extent actually received in cash by the Company or any Restricted
Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions
of clause (f) of this definition); (d) the portion of such net income (or loss)
allocable to minority interests in any Person (other than a
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Restricted Subsidiary) for such period, except to the extent the Company's
allocable portion of such Person's net income for such period is actually
received in cash by the Company or any Restricted Subsidiary (subject, in the
case of any Restricted Subsidiary, to the provisions of clause (f) of this
definition); (e) the net income (or loss) of any other Person combined with the
Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination; and (f) the net
income of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is not at the time (regardless of any waiver) permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its Equity Interest holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to the
extent deducted in calculating such Consolidated Net Income, by (a) Consolidated
Income Tax Expense for such period; (b) Consolidated Interest Expense for such
period; and (c) depreciation, amortization and any other non-cash items for such
period (other than any non-cash item which requires the accrual of, or a reserve
for, cash charges for any future period) of the Company and the Restricted
Subsidiaries, including, without limitation, amortization of capitalized debt
issuance costs for such period, all of the foregoing determined on a
consolidated basis in accordance with GAAP minus non-cash items to the extent
they increase Consolidated Net Income (including the partial or entire reversal
of reserves taken in prior periods) for such period.
"Cumulative Operating Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on January 4, 1999 and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Agreement" shall mean any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement, which may include the
use of derivatives, designed to protect the Company or any Restricted Subsidiary
against fluctuations in currency values and not for speculative purposes.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow for
the latest two fiscal quarters for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (I) any Person that
is a Restricted Subsidiary on the Determination Date (or would become a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed to have been a Restricted Subsidiary at all times during
such Measurement Period, (II) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (III) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (through an Acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by way of an Asset
Sale or the termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement Period or
after the end of such period and on or prior to such Determination Date, such
calculation will be made on a pro forma basis in accordance with GAAP as if, in
the case of an Acquisition or the commencement of activities constituting such
operating business, all such transactions had been consummated on the first day
of such Measurement Period and, in the case of an Asset Sale or termination or
discontinuance of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period (it being understood that in calculating Consolidated Operating Cash Flow
the exclusions set forth in clauses (a) through (f) of the definition of
Consolidated Net Income shall apply to an Acquired Person as if it were a
Restricted Subsidiary).
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"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designation" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries."
"Disinterested Director" means a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to the transaction being considered. For purposes of the
Indentures, a member of the Board of Directors of the Company shall not be
deemed to have any material direct or indirect financial interest in or with
respect to the transaction being considered solely by virtue of also being a
director or officer of GTS.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, on or prior to the Maturity Date; provided, however, that any
Equity Interests that would not constitute Disqualified Equity Interests but for
provisions thereof giving holders thereof the right to require the Company to
repurchase or redeem such Equity Interests upon the occurrence of a change in
control occurring prior to the Maturity Date shall not constitute Disqualified
Equity Interests if the change in control provisions applicable to such Equity
Interests are no more favorable to the holders of such Equity Interests than the
provisions described under "-- Change of Control" and such Equity Interests
specifically provide that the Company will not repurchase or redeem any such
Equity Interests pursuant to such provisions prior to the Company's repurchase
of Notes as are required to be repurchased pursuant to the provisions described
under "-- Change of Control."
"Dollar Equivalent" shall mean, with respect to a monetary amount in a
currency other than U.S. Dollars, at any time for the determination thereof, the
amount of U.S. Dollars obtained by converting such other currency involved in
such computation into U.S. dollars at the rate for the purchase of U.S. dollars
with the applicable currency as set forth in the Key Currency Cross Rates table
of The Wall Street Journal (or a successor table) on the date that is two
Business Days prior to such determination.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Equity Interests.
"Euro Government Obligations" means Euro-denominated direct non-callable
obligations of, or obligations guaranteed by, a member state of the European
Union for the payment of which guarantee or obligations the full faith and
credit of such member state is pledged.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Notes" means, collectively, the Company's 11 1/2% Senior Notes
due 2007, 10 3/8% Senior Notes due 2009 and 10 3/8% Senior Notes due 2006.
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase."
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; provided, however, that the Fair Market
Value of any such asset or assets shall be determined
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conclusively by the Board of Directors of the Company acting in good faith,
which determination shall be evidenced by a resolution of such Board delivered
to the Trustee.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"GTS" means Global TeleSystems Group, Inc., a Delaware corporation, and its
successors.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged or consolidated with or
into the Company or any Restricted Subsidiary shall be deemed to be Incurred at
such time.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed; (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person; (d)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable incurred in the
ordinary course of business and payable in accordance with industry practices,
or other accrued liabilities arising in the ordinary course of business which
are not overdue or which are being contested in good faith); (e) every Capital
Lease Obligation of such Person; (f) every net obligation under interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements of such Person; (g) every obligation of the type referred to in
clauses (a) through (f) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable for, directly or indirectly, as obligor, guarantor or
otherwise; and (h) any and all Refinancing of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a) through (g) above. Indebtedness (i) shall never be calculated taking
into account any cash and cash equivalents held by such Person; (ii) shall not
include obligations of any Person (x) arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business, provided that such obligations are extinguished within two Business
Days of their incurrence unless covered by an overdraft line, (y) resulting from
the endorsement of negotiable instruments for collection in the ordinary course
of business and consistent with past business practices and (z) under stand-by
letters of credit or guarantees to the extent collateralized by cash or Cash
Equivalents; (iii) which provides that an amount less than the principal amount
thereof shall be due upon any declaration of acceleration thereof shall be
deemed to be Incurred or outstanding in an amount equal to the accreted value
thereof at the date of determination determined in accordance with GAAP; and
(iv) shall include the liquidation preference and any mandatory redemption
payment obligations in respect of any Disqualified Equity Interests of the
Company or any Preferred Equity Interests of any Restricted Subsidiary.
"Independent Financial Advisor" means a recognized, accounting, appraisal,
investment banking firm or consultant with experience in a Telecommunications
Business (i) which does not, and whose directors, officers
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and employees or Affiliates do not, have a material direct or indirect financial
interest in the Company and (ii) which, in the judgment of the Board of
Directors of the Company, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"interest" means, with respect to the Notes, the sum of any cash interest
and any Additional Interest on the Notes.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
loan, advance, guarantee or other extension of credit or capital contribution to
(by means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. The amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, and minus the amount of any portion of such Investment
repaid to such Person in cash as a repayment of principal or a return of
capital, as the case may be, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment. In determining the amount of any investment involving a transfer of
any property or asset other than cash, such property shall be valued at its Fair
Market Value at the time of such transfer. "Investments" shall exclude
extensions of trade credit in the ordinary course of business in accordance with
normal trade practices.
"Investment Grade Person" means a corporation, partnership, limited
liability company or limited liability partnership (i) whose outstanding
unsecured debt securities are assigned ratings by both Rating Agencies equal to
or higher than "A", or the equivalents thereof, (ii) with a total market
capitalization at such time of at least $10 billion and (iii) that is primarily
engaged in a Telecommunications Business.
"Issue Date" means the original issue date of the Notes.
"Latest Balance Sheet" means, of any Person, the latest consolidated
balance sheet of such Person reported on by a recognized firm of independent
accountants without qualification as to scope.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Maturity Date" means the date, which is set forth on the face of the
Notes, on which the Notes will mature.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Company or any Restricted Subsidiary in respect
of any Asset Sale, including all cash or Cash Equivalents received upon any
sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of (a) the direct costs relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets which are the subject of
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve); and (e)
with respect to Asset Sales by Subsidiaries, the portion of such cash payments
attributable to Persons holding a minority interest in such Subsidiary.
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"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) constitutes the
lender; and
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than Indebtedness incurred under clause (i) of
the definition of Qualified Subsidiary Indebtedness) of the Company or any
of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
"Obligations" means any principal, interest (including, without limitation,
post-petition interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer to Purchase."
"Offer to Purchase" means a written offer (the "Offer") sent by or on
behalf of the Company by first-class mail, postage prepaid, to each holder at
his address appearing in the register for the Notes due 2006 or the Notes due
2009, as the case may be, on the date of the Offer offering to purchase up to
the principal amount of such Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture governing such
Notes). Unless otherwise required by applicable law, the Offer shall specify an
expiration date (the "Expiration Date") of the Offer to Purchase, which shall be
not less than 20 Business Days nor more than 90 days after the date of such
Offer, and a settlement date (the "Purchase Date") for purchase of such Notes to
occur no later than five Business Days after the Expiration Date. The Company
shall notify the Trustee at least 15 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall contain all the information required by
applicable law to be included therein. The Offer shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture governing such Notes pursuant to
which the Offer to Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes due 2006
or Notes due 2009 offered to be purchased by the Company pursuant to the
Offer to Purchase (including, if less than 100%, the manner by which such
amount has been determined pursuant to the Section of the Indenture
requiring the Offer to Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each E1,000
aggregate principal amount of Notes due 2006 accepted for payment or for
each E1,000 aggregate principal amount of Notes due 2009 accepted for
payment (as specified pursuant to the applicable Indenture) (the "Purchase
Price");
(5) that the holder may tender all or any portion of Notes due 2006 or
Notes due 2009 registered in the name of such holder and that any portion
of a Note tendered must be tendered in an integral multiple of E1,000
aggregate principal amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
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(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note
at the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Note being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or any of its Paying Agents) receives, not
later than the close of business on the fifth Business Day next preceding
the Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of the Note the
holder tendered, the certificate number of the Note the holder tendered and
a statement that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of E1,000 aggregate
principal amount or integral multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only in
part, the Company shall execute and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"Permitted Holders" means GTS or any of its Affiliates.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans and
advances to employees made in the ordinary course of business not to exceed
$10,000,000 in the aggregate at any one time outstanding; (d) Interest Rate
Protection Obligations and Currency Agreements permitted under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness"; (e) bonds, notes,
debentures or other securities received as a result of Asset Sales permitted
under "-- Certain Covenants -- Limitation on Asset Sales"; (f) transactions with
officers, directors and employees of the Company or any Restricted Subsidiary
entered into in the ordinary course of business (including compensation or
employee benefit arrangements with any such director or employee) and consistent
with past business practices; (g) Investments made in the ordinary course of
business and on ordinary business terms as partial payment for constructing a
network relating principally to a Telecommunications Business; (h) Investments
in any Restricted Subsidiary; (i) intercompany Indebtedness to the extent
permitted under paragraph (b)(v) of "-- Certain Covenants -- Limitation on
Incurrence of Indebtedness"; (j) Investments by the Company or any Restricted
Subsidiary in another Person, if as a result of such Investment (x) such other
Person becomes a Restricted Subsidiary or (y) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to, the Company or a Restricted Subsidiary; (k) Investments in
evidences of Indebtedness, securities or other property received from another
Person by the Company or any Restricted Subsidiary in connection with any
bankruptcy proceeding or by reason of a composition or readjustment of debt or a
reorganization of such Person or as a result of foreclosure, perfection or
enforcement of any Lien in exchange for evidences of Indebtedness, securities or
other property of such Person held by the Company or any Restricted Subsidiary,
or for other liabilities or obligations of such other Person to the Company or
any Restricted Subsidiary that were created in accordance with the terms of the
Indenture; (l) Investments in
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Permitted ISPs made after the date of the Indentures pursuant to Capacity Swaps
if the Board of Directors determines prior thereto that such Investment is on
terms that are fair and reasonable to the Company; provided, however, that the
amount of network capacity contributed or transferred to any Permitted ISP in
connection with all Capacity Swaps in effect on any date of determination shall
not exceed 25% of the Company's aggregate network capacity on such date
(determined on the basis of the dense wavelength division multiplexing and other
equipment then in use on the Company's network and without giving effect to
anticipated upgrades or replacements thereof); (m) Permitted Project Finance
Investments; and (n) an Investment in any Person the primary business of which
is a Telecommunications Business in an amount outstanding at any one time not to
exceed 25% of the Company's Cumulative Operating Cash Flow.
"Permitted ISP" means any Person engaged in the provision or sale of
Internet services, as determined in good faith by the Board of Directors (whose
determination shall be conclusive if evidenced by a Board Resolution).
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary and Liens securing Acquired Indebtedness; provided,
however, that such Liens were in existence prior to the contemplation of such
merger or consolidation or Incurrence of such Acquired Indebtedness and do not
secure any property or assets of the Company or any Restricted Subsidiary other
than the property or assets subject to the Liens prior to such merger or
consolidation or Incurrence of such Acquired Indebtedness; (b) Liens existing on
the Issue Date; (c) Liens securing Indebtedness consisting of Capitalized Lease
Obligations, mortgage financings, industrial revenue bonds or other monetary
obligations, in each case incurred solely for the purpose of financing all or
any part of the purchase price or cost of construction or installation of
Telecommunications Assets used in the business of the Company or any Restricted
Subsidiary, or repairs, additions or improvements to such assets; provided,
however, that (I) such Liens secure Indebtedness in an amount not in excess of
the original purchase price or the original cost of any such assets or repair,
addition or improvement thereto (plus an amount equal to the reasonable fees and
expenses in connection with the Incurrence of such Indebtedness), (II) such
Liens do not extend to any other assets of the Company or any Restricted
Subsidiary (and, in the case of repair, addition or improvements to any such
assets, such Lien extends only to the assets (and improvements thereto or
thereon) repaired, added to or improved), (III) the Incurrence of such
Indebtedness is permitted by "-- Certain Covenants -- Limitation on Incurrence
of Indebtedness" and (IV) such Liens attach within 90 days of such purchase,
construction, installation, repair, addition or improvement; (d) Liens to secure
any Refinancings, in whole or in part, of any Indebtedness secured by Liens
referred to in the clauses above so long as such Lien does not extend to any
other property (other than improvements thereto); (e) Liens securing letters of
credit or guarantees entered into in the ordinary course of business and
consistent with past business practice; (f) Liens on and pledges of the capital
stock of any Person (other than a Restricted Subsidiary) securing any
Indebtedness of such Person; provided, however, that the Investment in such
Person constitutes a Permitted Investment; (g) Liens on any property or assets
of a Restricted Subsidiary granted in favor of and held by the Company or any
Restricted Subsidiary; (h) Liens on any property or assets of the Company or any
Restricted Subsidiary securing on a pari passu basis all of the Notes (whether
or not the Existing Notes are also so secured); (i) Liens securing surety,
appeal and performance bonds; (j) Liens securing Qualified Subsidiary
Indebtedness or facilities which upon drawing will constitute Qualified
Subsidiary Indebtedness, to the extent permitted to be Incurred under
"-- Certain Covenants -- Limitation on Incurrence of Indebtedness"; and
(k) Liens securing Indebtedness under Interest Rate Protection Obligations or
Indebtedness under Currency Agreements to the extent permitted to be Incurred
under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness".
"Permitted Project Financing Investment" means an Investment by the Company
or any Restricted Subsidiary in any Unrestricted Subsidiary for the purpose of
facilitating the incurrence by such Unrestricted Subsidiary of Non-Recourse Debt
for the purpose of financing a portion of the cost of design, construction,
engineering, acquisition, installation, development by such Unrestricted
Subsidiary of the telecommunications network of the Company; provided, however,
that the amount of any such Investment shall not exceed 60% of the total initial
capitalization of any such Unrestricted Subsidiary.
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"Permitted Refinancing" means, with respect to any Indebtedness,
Indebtedness to the extent representing a Refinancing of such Indebtedness;
provided, however, that (1) the Refinancing Indebtedness shall not exceed the
sum of the amount of the Indebtedness being Refinanced, plus the amount of
accrued interest or dividends thereon, the amount of any reasonably determined
prepayment premium necessary to accomplish such Refinancing and reasonable fees
and expenses incurred in connection therewith; (2) the Refinancing Indebtedness
shall have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced and shall
not permit redemption or other retirement (including pursuant to any required
offer to purchase to be made by the Company or any Restricted Subsidiary) of
such Indebtedness at the option of the holder thereof prior to the final stated
maturity of the Indebtedness being Refinanced, other than a redemption or other
retirement at the option of the holder of such Indebtedness (including pursuant
to a required offer to purchase made by the Company or a Restricted Subsidiary)
upon a change of control of the Company pursuant to provisions substantially
similar to those contained in the Indenture described under "-- Change of
Control"; (3) Indebtedness that ranks pari passu with the Notes may be
Refinanced only with Indebtedness that is made pari passu with or subordinate in
right of payment to the Notes, and Indebtedness that is subordinated in right of
payment to the Notes may be Refinanced only with Indebtedness that is
subordinate in right of payment to the Notes on terms no less favorable to the
Holders than those contained in the Indebtedness being Refinanced; and (4) if
the Indebtedness being Refinanced is Indebtedness of the Company, the
Refinancing Indebtedness is incurred by the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
partnership, limited partnership, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"principal" of a debt security means the principal of the security plus,
when appropriate, the premium, if any, on the security.
"Public Equity Offering" means an underwritten public offering of common
Equity Interests of the Company pursuant to an effective registration statement
filed under the Securities Act (excluding registration statements filed on Form
S-8).
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase."
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase."
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase."
"Qualified Equity Interest" means any Equity Interest of the Company other
than any Disqualified Equity Interest.
"Qualified Subsidiary Indebtedness" means (i) Indebtedness of Restricted
Subsidiaries under one or more senior credit agreements, senior loan agreements
or similar senior facilities, secured or unsecured or senior guarantees of any
such agreements or facilities entered into from time to time, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith or (ii) Indebtedness of Restricted Subsidiaries
in an aggregate principal amount not to exceed $100.0 million in the aggregate
at any time outstanding.
"Refinance" means refinance, renew, extend, replace, defease or refund; and
"Refinancing" and "Refinanced" have correlative meanings.
"Replacement Assets" means (x) properties and assets (other than cash or
any Equity Interests or other security) that will be used in a
Telecommunications Business of the Company and the Restricted Subsidiaries or
(y) Equity Interests of any Person engaged primarily in a Telecommunications
Business, which Person will
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become on the date of acquisition thereof a Restricted Subsidiary as a result of
the Company's acquiring such Equity Interests.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of the
Board of Directors of the Company delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to "-- Certain Covenants -- Designation of Unrestricted
Subsidiaries." Any such designation may be revoked by a resolution of the Board
of Directors of the Company delivered to the Trustee, subject to the provisions
of such covenant.
"SEC" means the Securities and Exchange Commission.
"Share Capital" shall mean, at any time of determination, the stated
capital of the Equity Interests (other than Disqualified Stock) and additional
paid-in capital of the Company at such time, all as determined in accordance
with GAAP plus any amount pursuant to an acquisition that otherwise would have
been considered as additional paid-in-capital except for the Company's decision
to record such acquisition as a "pooling of interests," as determined in
accordance with GAAP.
"Significant Restricted Subsidiary" means, at any date of determination,
(a) any Restricted Subsidiary that, together with its Subsidiaries that
constitute Restricted Subsidiaries (i) for the most recent fiscal year of the
Company accounted for more than 10.0% of the consolidated revenues of the
Company and the Restricted Subsidiaries or (ii) as of the end of such fiscal
year, owned more than 10.0% of the consolidated assets of the Company and the
Restricted Subsidiaries, all as set forth on the consolidated financial
statements of the Company and the Restricted Subsidiaries for such year prepared
in conformity with GAAP, and (b) any Restricted Subsidiary which, when
aggregated with all other Restricted Subsidiaries that are not otherwise
Significant Restricted Subsidiaries and as to which any event described in
clause (h) of "-- Events of Default" has occurred and is continuing, would
constitute a Significant Restricted Subsidiary under clause (a) of this
definition.
"Stated Maturity", when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investments" means the issuance and sale of Qualified
Equity Interests to a Person that has an equity market capitalization, a net
asset value or annual revenues of at least $1.5 billion and owns and operates
business primarily in a Telecommunications Business.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Subsidiary Debt to Annualized Operating Cash Flow Ratio" means the ratio
of (a) the Total Consolidated Subsidiary Indebtedness as of the Determination
Date to (b) two times the Consolidated Operating Cash Flow for the Measurement
Period. The Subsidiary Debt to Annualized Operating Cash Flow Ratio shall
otherwise be calculated in the same manner as the Debt to Annualized Operating
Cash Flow Ratio.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Tax" shall mean any tax, duty, levy, impost, assessment or other
governmental charge (including penalties, interest and any other liabilities
related thereto).
"Taxing Authority" shall mean any government or political subdivision or
territory or possession of any government or any authority or agency therein or
thereof having power to tax.
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"Telecommunications Acquisition" means an Acquisition of properties or
assets to be used in a Telecommunications Business or of the Equity Interests of
any Person that becomes a Restricted Subsidiary; provided, however, that such
Person's properties and assets shall consist principally of properties or assets
that will be used in a Telecommunications Business.
"Telecommunications Assets" means all assets, rights, (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business and the Equity Interests of
a person engaged principally in a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) constructing, creating, developing
or marketing communications related network equipment, products, software,
services and other devices for use in a communications business, and (iii)
evaluating, participating in or pursuing any other activity or opportunity that
is a reasonably related, ancillary or complementary to the activities identified
in clause (i) or (ii) above.
"Total Consolidated Indebtedness" means, as at any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
the Restricted Subsidiaries, on a consolidated basis, outstanding as of such
date of determination, after giving effect to any Incurrence of Indebtedness and
the application of the proceeds therefrom giving rise to such determination.
"Total Consolidated Subsidiary Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Restricted Subsidiaries, on a consolidated basis, outstanding as of such
date of determination, after giving effect to any Incurrence of Indebtedness and
the application of the proceeds therefrom giving rise to such determination.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
EXCHANGE OFFER; REGISTRATION RIGHTS; ADDITIONAL INTEREST
EXCHANGE OFFER
Holders of Exchange Notes are not entitled to any registration rights with
respect to the Exchange Notes. The Company has agreed to file with the
Commission on or before the Filing Date, offers to exchange (the "Exchange
Offer") any and all of the Registrable Securities for a like aggregate principal
amount of senior debt securities of the Company which are identical to the
Outstanding Notes due 2006 and the Outstanding Notes due 2009 (the "Exchange
Securities") (and which are entitled to the benefits of the Indentures governing
such Outstanding Notes or a trust indenture which is substantially identical to
such Indenture (other than such changes as are necessary to comply with any
requirements of the Commission to effect or maintain the qualification of such
trust indenture under the Trust Indenture Act (the "TIA")) and which has been
qualified under the TIA), except that the Exchange Securities shall have been
registered pursuant to an effective Registration Statement under the Securities
Act and shall contain no restrictive legend thereon. The Exchange Offer will be
registered under the Securities Act on the appropriate form (the "Exchange Offer
Registration Statement") and will comply with all applicable tender offer rules
and regulations under the Exchange Act. The Company agrees to use its reasonable
best efforts to (i) cause the Exchange Offer Registration Statement to become
effective and commence the Exchange Offer on or prior to the Effectiveness Date,
(ii) keep the Exchange Offer open for 30 days (or longer if required by
applicable law) (the last day of such period, the "Expiration Date") and (iii)
exchange Exchange Securities for all Notes validly
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tendered and not withdrawn pursuant to the Exchange Offer on or prior to the
fifth day following the Expiration Date. The Company will provide written notice
of the terms and effectiveness of the Exchange Offer Registration Statement as
well as the results of the Exchange Offer and will cause a copy of any such
notices to be published in a daily newspaper with general circulation in
Luxembourg (which is expected to be the Luxemburger Wort). In addition, the
Company will notify the Luxembourg Stock Exchange of its intention to commence
the Exchange Offer and will also notify the Luxembourg Stock Exchange of the
results of the Exchange Offer. In the event that definitive Notes are issued to
the Holders, copies of the Exchange Offer documentation will be available to the
Holders at the specified offices of the applicable Paying and Transfer Agent in
Luxembourg. Furthermore, in the event that definitive Notes are issued to the
Holders, the Company will appoint an exchange agent in Luxembourg where the
holders of the definitive Notes will be able to tender for exchange their
definitive Notes. Any such Exchange Offer will be conducted in accordance with
the terms and procedures set forth in the corresponding Exchange Offer
documentation to be provided to the Holders of the Notes at the time of such
Exchange Offer.
The Company shall use its reasonable best efforts to keep both of the
Exchange Offer Registration Statement effective and to amend and supplement the
prospectuses contained therein in order to permit such prospectuses to be
lawfully delivered by all persons subject to the prospectus delivery
requirements of the Securities Act, whether as a result of market-making
activities or other trading activities or otherwise; for at least 180 days
following the first bona fide offering of securities under the Registration
Statement (or such shorter time as such persons must comply with such
requirements in order to resell the Exchange Securities) (the "Applicable
Period").
If, (i) because of any change in law or in currently prevailing
interpretations of the Staff of the Commission, the Company is not permitted to
effect the Exchange Offer, (ii) the Exchange Offer is not commenced on or prior
to the Effectiveness Date, (iii) the Exchange Offer is not, for any reason,
consummated on or prior to the 180th day after the Issue Date, (iv) any Holder
of Private Exchange Securities (as defined in the Registration Rights Agreement)
so requests or (v) in the case of any Holder that participates in the Exchange
Offer, such Holder does not receive Exchange Securities on the date of the
exchange that may be sold without restriction under state and federal securities
laws (the occurrence of any such event, a "Shelf Registration Event"), then, in
the case of each of clauses (i) to and including (v) of this sentence, the
Company shall promptly deliver to the Holders of such Notes and the Trustee
notice thereof (a "Shelf Notice") and shall thereafter file an Initial Shelf
Registration Statement pursuant to the terms of the Registration Rights
Agreement.
Application will be made to list the Exchange Securities on the Luxembourg
Stock Exchange and the Company intends to comply with the rules and regulations
of the Luxembourg Stock Exchange in connection therewith. In the event of an
Exchange Offer, the Company will prepare a new Offering Memorandum. The
Luxembourg Stock Exchange will be notified in the case of any increase in the
rate of interest on the Notes, and a notice regarding any increase in the rate
of interest on the Notes will be published in a daily newspaper of general
circulation in Luxembourg (which is expected to be the Luxemburger Wort).
SHELF REGISTRATION
If a Shelf Registration Event with respect to the Outstanding Notes has
occurred (and whether or not an Exchange Offer Registration Statement with
respect to such Outstanding Notes has been filed with the Commission or has
become effective, or the Exchange Offer with respect to such Outstanding Notes
has been consummated), then:
Initial Shelf Registration Statement. The Company shall promptly
prepare and file with the Commission a Registration Statement for an
offering to be made on a continuous basis pursuant to Rule 415 covering all
of the Registrable Securities affected thereby (an "Initial Shelf
Registration Statement"). The Company shall file with the Commission such
Initial Shelf Registration Statement on or prior to the applicable Filing
Date. The applicable Initial Shelf Registration Statement shall be on Form
S-1 or another appropriate form if available, permitting registration of
such Registrable Securities for resale by such holders in the manner
designated by them (including, without limitation, in one or more
underwritten offerings). The Company shall not permit any securities other
than the Registrable
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Securities to be included in the applicable Initial Shelf Registration
Statement or any Subsequent Shelf Registration Statement. The Company shall
use its reasonable best efforts to cause such Initial Shelf Registration
Statement to be declared effective under the Securities Act on or prior to
the Effectiveness Date, and to keep such Initial Shelf Registration
Statement continuously effective under the Securities Act for so long as
any Notes or Exchange Securities are outstanding and any Initial Purchasers
or any affiliate thereof (as defined under the Securities Act) is required
to deliver a prospectus in connection with sales of Notes or Exchange
Securities (such period, the "Effectiveness Period").
Subsequent Shelf Registration Statements. If any Initial Shelf
Registration Statement or any Subsequent Shelf Registration Statement
ceases to be effective for any reason at any time during the Effectiveness
Period (other than because of the sale of all of the securities registered
thereunder), the Company shall use its reasonable best efforts to obtain
the prompt withdrawal of any order suspending the effectiveness thereof,
and in any event the Company shall within 45 days of such cessation of
effectiveness amend such Shelf Registration Statement in a manner
reasonably expected to obtain the withdrawal of the order suspending the
effectiveness thereof, or file an additional "shelf" Registration Statement
pursuant to Rule 415 covering all of the Registrable Securities (a
"Subsequent Shelf Registration Statement"). If a Subsequent Shelf
Registration Statement is filed, the Company shall use its reasonable best
efforts to cause such Subsequent Shelf Registration Statement to be
declared effective as soon as reasonably practicable after such filing and
to keep such Registration Statement continuously effective until the end of
the Effectiveness Period. As used herein the term "Shelf Registration
Statement" means any Initial Shelf Registration Statement and any
Subsequent Shelf Registration Statement.
Supplements and Amendments. The Company shall promptly supplement and
amend a Shelf Registration Statement if required by the rules, regulations
or instructions applicable to the registration form used for such Shelf
Registration Statement, if required by the Securities Act, or if reasonably
requested by the Holders of a majority in aggregate principal amount of the
Registrable Securities covered by such Registration Statement or by any
underwriter of such Registrable Securities.
ADDITIONAL INTEREST
The Company agrees to pay, as liquidated damages, additional interest on
the Notes ("Additional Interest") under the circumstances and to the extent set
forth below (each of which shall be given independent effect):
(i) if either the Exchange Offer Registration Statement or the Initial
Shelf Registration Statement with respect to such Notes has not been filed
on or prior to the Filing Date (unless, with respect to the Exchange Offer
Registration Statement, a Shelf Event described in clause (i) of the third
paragraph under " -- Exchange Offer" above shall have occurred prior to the
Filing Date), Additional Interest shall accrue on such Outstanding Notes
over and above the stated interest on the principal at a rate equal to 50
basis points for the first 90 days (or any part thereof), immediately
following such date, such Additional Interest increasing by an additional
50 basis points for each subsequent 90-day period (or any part thereof);
(ii) if either the Exchange Offer Registration Statement or the
Initial Shelf Registration Statement with respect to such Outstanding Notes
is not declared effective by the Commission on or prior to the
Effectiveness Date (unless, with respect to the Exchange Offer Registration
Statement, a Shelf Registration Event described in clause (i) of the third
paragraph under " -- Exchange Offer" above shall have occurred), Additional
Interest shall accrue on the Outstanding Notes included or which should
have been included in such Registration Statement over and above the stated
interest on the principal at a rate equal to 50 basis points for the first
90 days (or any part thereof), immediately following the day after such
date, such Additional Interest rate increasing by an additional 50 basis
points for each subsequent 90-day period (or any part thereof); and
(iii) if (A) the Company has not exchanged Exchange Securities for all
Outstanding Notes validly tendered and not withdrawn in accordance with the
terms of the Exchange Offer with respect to such Notes on or prior to the
fifth day after the Expiration Date, or (B) the Exchange Offer Registration
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Statement with respect to such Notes ceases to be effective at any time
prior to the Expiration Date, or (C) if applicable, any Shelf Registration
Statement with respect to such Notes has been declared effective and such
Shelf Registration Statement ceases to be effective at any time during the
Effectiveness Period, then Additional Interest shall accrue on such
Outstanding Notes (over and above any interest otherwise payable on
principal of the Outstanding Notes) at a rate equal to 50 basis points for
the first 90 days (or any part thereof) commencing on the (x) sixth day
after the Expiration Date, in the case of (A) above, or (y) the day the
Exchange Offer Registration Statement ceases to be effective in the case of
(B) above, or (z) the day such Shelf Registration Statement ceases to be
effective in the case of (C) above, such Additional Interest increasing by
an additional 50 basis points at the beginning of each such subsequent
90-day period (or any part thereof); provided, however, that the Additional
Interest rate on the Notes may not exceed at any one time in the aggregate
150 basis points, provided, further, that (1) upon the filing of the
Exchange Offer Registration Statement or a Shelf Registration Statement
with respect to Notes due 2006 or Notes due 2009 as required hereunder (in
the case of clause (i) of this paragraph), (2) upon the effectiveness of
the Exchange Offer Registration Statement or the Shelf Registration
Statement as required hereunder with respect to Outstanding Notes due 2006
or Outstanding Notes due 2009 (in the case of clause (ii) of this
paragraph) or (3) upon the exchange of Exchange Securities for all
Outstanding Notes validly tendered and not withdrawn (in the case of clause
(iii)(A) of this paragraph), or upon the effectiveness of the Exchange
Offer Registration Statement which had ceased to remain effective (in the
case of (iii)(B) of this paragraph), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
(iii)(C) of paragraph), Additional Interest on the Outstanding Notes as a
result of such clause (or the relevant subclause thereof), as the case may
be, shall cease to accrue (but any accrued amount shall be payable).
DEFINITIONS
As used in this section, the following terms shall have the following
meanings:
Effectiveness Date: The 150th day after the Issue Date; provided, however,
that, with respect to the Initial Shelf Registration Statement, (i) if the
Filing Date in respect thereof is fewer than 60 days prior to the 150th day
after the Issue Date, then the Effectiveness Date in respect thereof shall be
the 60th day after such Filing Date and (ii) if the Filing Date is after the
filing of the Exchange Offer Registration Statement with the Commission, then
the Effectiveness Date in respect thereof shall be the 60th day after such
Filing Date.
Filing Date: The 90th day after the Issue Date; provided, however, that,
with respect to the Initial Shelf Registration Statement, (i) if a Shelf
Registration Event shall have occurred fewer than 30 days prior to the 90th day
after the Issue Date, then the Filing Date in respect thereof shall be the 30th
day after such Shelf Registration Event and (ii) if a Shelf Registration Event
shall have occurred after the filing of the Exchange Offer Registration
Statement with the Commission, then the Filing Date in respect thereof shall be
the 30th day after such Shelf Registration Event.
Registrable Securities: The Outstanding Notes upon original issuance
thereof and at all times subsequent thereto, each Exchange Security as to which
clause (v) of the third paragraph under "-- Exchange Offer" above is applicable
upon original issuance and at all times subsequent thereto and, if issued, the
Private Exchange Securities, until in the case of any such Outstanding Notes,
Exchange Securities or Private Exchange Securities, as the case may be, (i) a
Registration Statement (other than, with respect to any Exchange Security as to
which clause (v) of the third paragraph under "-- Exchange Offer" above is
applicable, the Exchange Offer Registration Statement) covering such Outstanding
Notes, Exchange Securities or Private Exchange Securities has been declared
effective by the Commission and such Outstanding Notes, Exchange Securities or
Private Exchange Securities, as the case may be, have been disposed of in
accordance with such effective Registration Statement, (ii) such Outstanding
Notes, Exchange Securities or Private Exchange Securities, as the case may be,
are sold in compliance with Rule 144 under the Securities Act, (iii) such
Outstanding Note has been exchanged for an Exchange Note pursuant to the
Exchange Offer and clause (v) of paragraph (b) of "-- Exchange Offer" above is
not applicable thereto, or (iv) such Outstanding Notes, Exchange Securities or
Private Exchange Securities, as the case may be, cease to be outstanding.
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REPLACEMENT NOTES
If a mutilated Note is surrendered to the Trustee or if the holder of a
Note claims that the Note has been lost, destroyed or wrongfully taken, the
Company shall issue and the Trustee shall authenticate a replacement Note if the
Trustee's requirements for replacement of Notes are met. Such holder must
provide an indemnity bond or other indemnity, sufficient in the judgment of both
the Company and the Trustee, to protect the Company, the Trustee and any Agent
from any loss which any of them may suffer if a Note is replaced and evidence to
their satisfaction of the apparent loss, destruction or theft of such Note. The
Company may charge such holder for its reasonable out-of-pocket expenses in
replacing a Note, including reasonable fees and expenses of counsel.
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CERTAIN TAX CONSIDERATIONS
The following is a summary of the principal Netherlands and United States
federal tax consequences relevant to the acquisition, ownership and disposition
of Exchange Notes to initial U.S. Holders (as defined below). This discussion is
not exhaustive of all the possible tax considerations and potential investors
are advised to consult their own tax advisors in order to determine the final
tax consequences of the acquisition, ownership and disposition of Exchange Notes
in their own particular circumstances.
THE NETHERLANDS
This summary is based on the tax laws of the Netherlands, as well as the
Convention between the United States of America and the Kingdom of the
Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income (the "Treaty"), to the extent they were
published and effective on November 1, 1999. Changes made to these laws after
that date may have retroactive effect, and may affect the tax consequences
described herein.
The outline below is based on the assumption that the U.S. Holder is not,
and has not been for at least five years, a resident of the Netherlands for
purposes of Dutch tax legislation and is not engaged in a trade or business
through a branch or agency in the Netherlands and does not have a permanent
establishment therein (a "Non-Resident Holder"). In addition, it is assumed that
holders who are individuals do not own, either alone or together with related
individuals, 5% or more of any class of shares of GTS Europe. Finally it is
assumed that the limitation on benefits provision in the Treaty cannot be
invoked against the holder.
GENERAL APPLICATION OF DUTCH TAX LAW
A Non-Resident Holder of Exchange Notes is liable for Corporate or
Individual Income Tax ("CIT" or "IIT"), according to Dutch Law, if he/she
receives interest with respect to the Exchange Notes provided that either (i) he
or she has, directly or indirectly, a substantial interest or a deemed
substantial interest (as defined below) in GTS Europe which does not form part
of his or her business equity or (ii) such interest is attributable to a Dutch
enterprise. Similarly, the capital gains realized upon sale of the Exchange
Notes are only taxable if the Exchange Notes are (deemed to be) part of such
"substantial" interest, or if the Exchange Notes are attributable to a Dutch
enterprise.
A substantial interest is deemed to exist if the Non-Resident Holder,
either alone or together with related individuals, owns at least five percent of
the share capital in any class of shares issued by GTS Europe or if he/she holds
an option to buy at least 5% in any class of shares in the capital of GTS
Europe.
INTEREST -- WITHHOLDING TAX AND TAX TREATY LIMITATIONS
According to article 12 of the Treaty, interest can only be subject to
CIT/IIT in the country of residence of the recipient of the interest. As a
result, no Dutch CIT or IIT will be due on interest received on the Exchange
Notes.
In addition, the Netherlands does not levy any withholding taxes on the
payment of interest, provided that these payments do not depend and/or are not
deemed to be dependent on the profits realized and/or distributed by the company
paying the interest. If such link can be established, payments are likely to be
reclassified as payments of dividends. Although amounts reclassified as
dividends generally would be subject to Dutch withholding tax when paid to a
Non-Resident Holder, it does not appear that any substantial basis exists for
such reclassification. The forced reduction under the Treaty of the maximum
withholding tax to zero in such a case would, however, be irrelevant.
CAPITAL GAINS
As a result of article 14 of the Treaty, the Dutch intention to impose CIT
or IIT on capital gains realized upon disposal of any or all of the Exchange
Notes by a Non-Resident Holder can only be effectuated, if the Exchange Notes
are participating or deemed to be participating in the profits of the Company,
where a Holder who is an individual, who has been a resident of the Netherlands
at any time during the five year period preceding the alienation, and who, at
the time of the alienation, owns, either alone or together with related
individuals, at least 5% of any class of shares of the Company, or if the
Exchange Notes form part of a
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permanent establishment of the holder in The Netherlands, or a fixed base
available to the holder in the Netherlands for the purpose of performing
independent personal services.
THE UNITED STATES
The following is a summary of the principal U.S. federal income tax
considerations relevant to the acquisition, ownership and disposition of the
Exchange Notes by U.S. holders (as defined below). This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations, revenue rulings, administrative interpretations and
judicial decisions (all as currently in effect and all of which are subject to
change, possibly with retroactive effect). Except as specifically set forth in
this summary, this summary deals only with Exchange Notes held as capital assets
within the meaning of Section 1221 of the Code. This summary does not discuss
all of the tax consequences that may be relevant to holders in light of their
particular circumstances (including, without limitation, the possible imposition
of U.S. federal alternative minimum tax) or to holders subject to special tax
rules, such as insurance companies, dealers in securities or foreign currencies,
tax-exempt investors, persons holding the Exchange Notes as part of a hedging
transaction, "straddle," conversion transaction, or other integrated
transaction, traders that elect mark to market treatment, U.S. holders whose
functional currency (as defined in Section 985 of the Code) is not the U.S.
dollar, or persons who hold the Exchange Notes through partnerships or other
passthrough entities.
Persons considering the acquisition of the Exchange Notes should consult
with their own tax advisors with regard to the application of the U.S. federal
income tax laws to their particular situations as well as any tax consequences
arising under the laws of any state, local or foreign jurisdiction.
As used herein, the term "U.S. holder" means a beneficial owner of an
Exchange Note who or that is for U.S. federal income tax purposes (i) a citizen
or individual resident of the United States, (ii) a corporation or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or (iv) a trust if both: (A) a
U.S. court is able to exercise primary supervision over the administration of
the trust, and (B) one or more U.S. persons have the authority to control all
substantial decisions of the trust.
EXCHANGE OFFER
An exchange of Notes for Exchange Notes pursuant to the Exchange Offer will
not be a taxable event for U.S. federal income tax purposes and a U.S. holder
will have the same tax basis and holding period in the Exchange Notes as the
holder had in the Notes. Further, in the event that a U.S. holder acquired Notes
at a market discount or at a premium, such market discount or premium generally
will carry over to the Exchange Notes.
INTEREST
Interest on the Exchange Notes and Additional Amounts, if any, paid in
respect of withholding taxes imposed on payments on the Exchange Notes (as
described in "Description of the Exchange Notes -- Additional Amounts")
generally will be taxable to a U.S. holder as ordinary interest income at the
time the interest accrues or is received, in accordance with such U.S. holder's
method of accounting for U.S. federal income tax purposes. The amount of
interest required to be included in income by a U.S. holder will include the
amount of such taxes, if any, withheld by the Company in respect thereof. Thus,
in the event of such withholding, a U.S. holder would be required to report
gross income in an amount greater than the cash it receives in respect of
payments on its Exchange Note. However, a U.S. holder could be eligible, subject
to certain limitations, to claim such withholding taxes as a credit or deduction
for purposes of computing the amount of its U.S. federal income tax liability,
notwithstanding that the payment of such taxes will be made by the Company.
Interest income on the Exchange Notes will constitute foreign source income and
generally will be considered "passive" income (or "high withholding tax
interest" if the applicable withholding tax is imposed at a rate of 5% or more)
or "financial services" income for U.S. foreign tax credit purposes. The rules
relating to foreign tax credits and the timing thereof are extremely complex and
U.S. holders should consult with their own tax advisors with regard to the
availability of a foreign tax credit and the application of the foreign tax
credit limitations to their particular situations.
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A cash basis U.S. holder receiving an interest payment in Euro will be
required to include in income the U.S. dollar value of such payment (determined
using the spot rate in effect on the date such payment is received) regardless
of whether such payment is subsequently converted into U.S. dollars. No exchange
gain or loss will be recognized by such holder if the Euro are converted to U.S.
dollars on the date received. The U.S. federal income tax consequences of the
conversion of Euro into U.S. dollars is described below. See "Transaction in
Euro."
An accrual basis U.S. holder will be required to include in income the U.S.
dollar value of the amount of U.S. interest income that has accrued on an
Exchange Note in a taxable year, determined by translating such income at the
average rate of exchange for the relevant interest accrual period or, with
respect to an interest accrual period that spans two taxable years, at the
average rate for the portion of such interest accrual period within the taxable
year. The average rate of exchange for an interest accrual period (or portion
thereof) is the simple average of the spot exchange rates for each business day
of such period (or such other average that is reasonably derived and
consistently applied). An accrual basis holder may elect to translate interest
income on an Exchange Note using the spot rate in effect on the last day of an
interest accrual period (or the last day of the taxable year for the portion of
such period within the taxable year). In addition, a holder may elect to use the
spot rate in effect on the date of receipt (or payment) for such purpose if such
date is within five business days of the last date of an interest accrual
period. The election must be made in a statement filed with the taxpayer's
return, and is applicable to all debt instruments for such year and thereafter
unless changed with the consent of the Internal Revenue Service (the "IRS").
Upon receipt of an interest payment on an Exchange Note, an accrual basis
U.S. holder will recognize ordinary gain or loss with respect to accrued
interest income in an amount equal to the difference between the U.S. dollar
value of the payment received (determined using the spot rate in effect on the
date such payment is received) in respect of such interest accrual period and
the U.S. dollar value of the interest income that has accrued during such
interest accrual period (as determined in the preceding paragraph). Any such
gain or loss will be treated as ordinary income or loss but generally will not
be treated as interest income or expense, except to the extent provided by
future regulations or administrative pronouncements of the IRS. The U.S. federal
income tax consequences of the conversion of Euro into U.S. dollars is described
below. See "Transactions in Euro."
A U.S. Holder who purchased a Note for less than its principal amount
(determined in Euro) will also be subject to the market discount rules of the
Code with respect to an Exchange Note received in exchange for such Note.
Further, a U.S. Holder who purchased a Note for an amount greater than the
principal amount payable on a Note may elect, subject to applicable limitations,
to amortize such premium under the amortizable bond premium rules of the Code.
DISPOSITIONS
Upon the sale, exchange or retirement of an Exchange Note, a U.S. holder
generally will recognize taxable gain or loss equal to the difference between
the amount realized on the sale, exchange or retirement and such holder's
adjusted tax basis in an Exchange Note (as increased by any market discount
previously includible in income by the U.S. holder and decreased by amortized
premium with respect to the Exchange Note). Upon the sale, exchange or
redemption of an Exchange Note, a holder generally will recognize gain or loss
equal to the difference between the amount realized on the sale, exchange or
redemption (or, if it is realized in other than U.S. dollars, the U.S. dollar
value of the amount using the spot rate in effect on the date of such sale,
exchange or redemption) and the holder's tax basis in such Exchange Note. For
these purposes, the amount realized on the sale, exchange or retirement of an
Exchange Note does not include any amount attributable to accrued but unpaid
interest, which will be taxable as ordinary income unless previously taken into
account. Except with respect to gains or losses attributable to changes in
currency exchange rates, as described below, such gain or loss will be capital
gain or loss. Such gain will generally be treated as U.S. source gain and such
loss should generally be treated as U.S. source loss.
Gain or loss recognized by a U.S. holder on the sale, exchange or
retirement of an Exchange Note that is attributable to changes in the rate of
exchange between the U.S. dollar and the Euro will be treated as ordinary income
or loss and generally will not be treated as interest income or expense except
to the extent
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provided by future regulations or administrative pronouncements of the IRS. Such
foreign currency gain or loss is recognized on the sale or retirement of an
Exchange Note only to the extent of total gain or loss recognized on such sale
or retirement.
As a result of certain limitations on the U.S. foreign tax credit under the
Code, a U.S. holder may not be able to claim a U.S. foreign tax credit for
Netherlands withholding taxes, if any, imposed on the proceeds received upon the
sale, exchange or redemption by the Company or other disposition of Exchange
Notes. Prospective investors should consult their own tax advisors concerning
the application of the U.S. foreign tax credit rules to their particular
situations.
For certain non-corporate U.S. Holders (including individuals), the rate of
taxation of capital gains will depend upon (i) the holder's holding period in
the capital asset (with a preferential rate available for capital assets held
for more than one year) and (ii) the holder's marginal tax rate for ordinary
income. The deductibility of capital losses is subject to limitations.
TRANSACTIONS IN EURO
Euro received as interest on, or on the sale, exchange or retirement of, an
Exchange Note will have a tax basis equal to their U.S. dollar value at the time
such interest is received or at the time payment is received in consideration of
such sale, exchange or retirement. The amount of gain or loss recognized on a
sale or other disposition of such Euro will be equal to the difference between
(i) the amount of U.S. dollars, or the fair market value in U.S. dollars of the
other currency or property received in such sale or other disposition and (ii)
the tax basis of such Euro.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments on an
Exchange Note and to the proceeds of the sale of an Exchange Note made to U.S.
holders other than certain exempt recipients (such as corporations). A 31%
backup withholding tax will apply to such payments if the U.S. holder fails to
provide a taxpayer identification number or certification of other exempt status
or fails to report in full dividend and interest income.
Any amounts withhold under the backup withholding rules will be credited
toward such holder's United States federal income tax liability, if any. To the
extent that the amounts withheld exceed the Holder's tax liability, the excess
may be refunded to the holder provided the required information is furnished to
the IRS. In addition to providing the necessary information, the holder must
file a United States tax return in order to obtain a refund of the excess
withholding.
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PLAN OF DISTRIBUTION
Based on positions taken by the staff of the Commission set forth in
no-action letters issued to Exxon Capital Holdings Corp. and Morgan Stanley &
Co. Inc., among others, we believe that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Exchange Notes directly from
us, or (iii) broker-dealers who acquired Exchange Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions for the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes, provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the staff of the Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Outstanding Notes to the Initial
Purchasers thereof) with the prospectus contained in the Registration Statement.
Pursuant to the Registration Rights Agreement, we have agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this prospectus in connection with the
resale of such Exchange Notes. We have agreed that, for a period of 180 days
after the Exchange Offer has been consummated, we will make this prospectus, and
any amendment or supplement to this prospectus, available to any broker-dealer
that requests such documents in the letter of transmittal.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to us as set forth in "The Exchange Offer". In addition, each
holder who is a broker-dealer and who receives Exchange Notes for its own
account in exchange for Outstanding Notes that were acquired by it as a result
of market-making activities or other trading activities, will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such Exchange Notes.
Holders who tender Outstanding Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes may not rely
upon the Exxon Capital Holdings Corp., the Morgan Stanley & Co. Inc. or similar
no-action letters.
We will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the Exchange Offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the Outstanding Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
LEGAL MATTERS
Dutch company law matters in connection with the validity of the Exchange
Notes will be passed upon by Allen & Overy, Amsterdam, the Netherlands. Certain
legal matters in connection with the validity of the Exchange Notes offered
hereby and the U.S. federal income tax consequences of the Exchange Offer will
be passed upon for the Company by Shearman & Sterling, New York, New York.
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EXPERTS
The financial statements of Hermes Europe Railtel B.V. (which was the name
of our company prior to our name change to Global TeleSystems Europe B.V.) as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been audited by Ernst & Young
Reviseurs d'Entreprises S.C.C., independent auditors, as set forth in their
report appearing elsewhere in the prospectus and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
GENERAL LISTING INFORMATION
LISTING
The Notes are listed on the Luxembourg Stock Exchange. The Exchange Notes
are expected to be listed on the Luxembourg Stock Exchange upon the expiration
of the Exchange Offer. The Articles of Association of the Company and the legal
notice relating to the issue of the Exchange Notes will be deposited prior to
the listing of the Exchange Notes with the Registrar of the District Court in
Luxembourg (Greffier en Chef du Tribunal d' Arrondissement a Luxembourg), where
such documents are available for inspection and where copies thereof can be
obtained upon request. As long as the Exchange Notes are listed on the
Luxembourg Stock Exchange, an Agent for making payments on, and transfers of,
Exchange Notes will be maintained in Luxembourg.
COMMENTS
We have obtained all necessary consents, approvals and authorizations in
connection with the issue of the Exchange Notes. The issue of the Notes and the
Exchange Notes was authorized by resolutions of the Board of Supervisory
Directors of the Company passed on November 18, 1999.
NO MATERIAL CHANGE
Except as disclosed in this prospectus, there has been no material change
in the financial position of the Company and its subsidiaries since September
30, 1999 and no material adverse change in the financial position or prospects
of the Company and its subsidiaries since September 30, 1999.
LITIGATION
Neither the Company nor any of its subsidiaries or affiliates is involved
in any litigation or arbitration proceedings which relate to claims or amounts
which are material in the context of the issue of the Notes or that may have, or
have had during the 12 months preceding the date of this prospectus, a material
adverse effect on the financial position of the Company, nor, so far as any of
them is aware, is any such proceeding pending or threatened.
AUDITORS
The consolidated accounts of the Company as of December 31, 1998 and 1997
and for the three years ended December 31, 1998 have been prepared in accordance
with United States generally accepted accounting principles ("U.S. GAAP") and
have been audited by Ernst & Young Reviseurs d'Entreprises S.C.C. in accordance
with United States generally accepted auditing standards. The unaudited
consolidated interim accounts for the nine months ended September 30, 1999 and
1998 were prepared in accordance with U.S. GAAP. Ernst & Young Reviseurs
d'Entreprises S.C.C. have given and not withdrawn their written consent to the
issue of this prospectus with the inclusion in it of their report in the form
and context in which it is included.
DOCUMENTS
Copies of the following documents may be inspected at the specified offices
of the Paying and Transfer Agents in Luxembourg.
- Articles of Association of the Company;
- the Purchase Agreement and Registration Rights Agreement relating to the
Exchange Notes; and
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- the Indentures relating to the Exchange Notes (which include the forms of
the respective Exchange Note certificates).
In addition, copies of the most recent consolidated financial statements of
the Company for the preceding financial year, and any interim quarterly
financial statements published by the Company, will be available at the
specified offices of the Paying and Transfer Agents in Luxembourg for so long as
the Exchange Notes are listed on the Luxembourg Stock Exchange. The Company
publishes only consolidated financial statements.
CLEARING SYSTEMS
The Exchange Notes distributed pursuant to Regulation S and represented by
the Regulation S Global Certificate have been accepted for clearance through the
facilities of Euroclear and Clearstream, Luxembourg. Relevant trading
information is set forth below.
<TABLE>
<CAPTION>
ISIN COMMON CODE
------------ -----------
<S> <C> <C>
Notes due 2006
144A......................................... XS0104704555 010470455
Regulation S................................. XS0104703821 010470382
Notes due 2009
144A......................................... XS0104706766 010470676
Regulation S................................. XS0104705446 010470544
</TABLE>
NOTICES
All notices shall be deemed to have been given upon (i) the mailing by
first class mail, postage prepaid, of such notices to Holders of the Exchange
Notes at their registered addresses as recorded in the Register; and (ii) so
long as the Exchange Notes are listed on the Luxembourg Stock Exchange and it is
required by the rules of the Luxembourg Stock Exchange, publication of such
notice to the Holders of the Exchange Notes in English in a leading newspaper
having general circulation in Luxembourg (which is expected to be the
Luxemburger Wort) or, if such publication is not practicable, in one other
leading English language daily newspaper with general circulation in Europe,
such newspaper being published on each business day in morning editions, whether
or not it shall be published in Saturday, Sunday or holiday editions.
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GLOSSARY
Asynchronous Transfer Mode (ATM). A switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard fifty-three
bit-long packet or cell. ATM-based packet transport was specifically developed
to allow switching and transmission of mixed voice, data and video at varying
rates. The ATM format can be used by many different information systems,
including LANs.
Backbone. The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth. The range of frequencies that can be passed through a medium,
such as glass fibers, without distortion. The greater the bandwidth, the greater
the information-carrying capacity of such medium. For fiber optic transmission,
electronic transmitting devices determine the bandwidth, not the fibers
themselves. Bandwidth is measured in Hertz (analog) or Bits Per Second
(digital).
Capacity. Refers to transmission.
Carrier. A provider of communications transmission services by fiber, wire
or radio.
City Enterprise Network. Name given to our intracity fiber optic networks,
connecting different points of presence in such city, including, points of
presence of our network in such city, points of presence of our affiliates in
such city, telehouses, Internet protocol exchange points and, where economically
feasible, points of presence of our existing customers in such city.
Co-location. When an end-user or competing local telecommunications
service provider locates network equipment at the building that houses switches
belonging to another telephone carrier, the user or competitor provider in said
to be "co-located" with the other telephone carrier. The advantage for the co-
locating party is that it can make a direct connection to local and long
distance facilities and substantially reduce access costs.
Dark Fiber. Fiber that lacks the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
Dedicated. Refers to telecommunications lines dedicated to or reserved for
use by particular customers along predetermined routes (in contrast to
telecommunications lines within the local telephone company's public switched
network).
Dense Wavelength Division Multiplexing (DWDM). A multiplexing technique
allowing a large number of different signals to be carried simultaneously on a
fiber by allocating resources according to frequency on non-overlapping
frequency bands.
Digital. Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission/switching technologies
employ a sequence of discrete, distinct pulses to represent information, as
opposed to the continuously variable analog signal.
Enhanced Network Services. Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, ATM, or digital
interexchange private line facilities. Enhanced network services also include
applications on such networks, including Internet access and other Internet
services.
Frame Relay. A wide area transport technology that organizes data into
units called frames instead of providing fixed bandwidth as with private lines.
A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access speeds
ranging from 56 kilobits per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not presently well suited
for voice and video applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on modern fiber optic
networks.
Incumbent Telecommunications Operator. A licensed telecommunications
common carrier.
Interconnect. Connection of a telecommunications device or service to the
public switched telecommunications network.
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Internet protocol. Refers to network protocols that allow computers with
different architectures and operating system software to communicate with other
computers on the Internet.
Internet Service Providers. Companies formed to provide access to the
Internet to consumers and business customers via local networks.
Local Area Network (LAN). The interconnection of computers for the purpose
of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
Multiplexing. An electronic or optical process that combines a large
number of lower speed transmission lines into one high speed line by splitting
the total available bandwidth into narrower bands (frequency division), or by
allotting a common channel to several different transmitting devices one at a
time in sequence (time division).
Nodes. Locations within the network housing electronic equipment and/or
switches which serve as intermediate connection points to send and receive
transmission signals.
Points of Presence. Locations where a carrier has installed transmission
equipment in a service area that serves as, or relays calls to, a network
switching center of that carrier.
STM-16. Data transmission rate of approximately 2,488 megabits per second.
Switch. A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnection circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
Synchronous Digital Hierarchy (SDH). SDH is a set of standards for optical
communications transmission systems that define optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed in
optical communications transmission systems. SDH facilitates the
interoperability of dissimilar vendors' equipment and benefits customers by
minimizing the equipment necessary for telecommunications applications. SDH also
improves the reliability of the local loop connecting customers' premises to the
local exchange provider, historically one of the weakest links in the service
delivery.
Trunk. A telephone circuit with a switch at both ends.
117
<PAGE> 125
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young Reviseurs d'Entreprises S.C.C.,
Independent Auditors........................................ F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996........... F-6
Notes to Consolidated Financial Statements.................. F-7
THIRD QUARTER FINANCIAL STATEMENTS (UNAUDITED)
Condensed, Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998................................ F-19
Condensed, Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998... F-20
Condensed, Consolidated Statements of Cash Flows for the
three and nine months ended September 30, 1999 and 1998... F-21
Notes to the Condensed, Consolidated Financial Statements... F-22
</TABLE>
F-1
<PAGE> 126
REPORT OF ERNST & YOUNG REVISEURS D'ENTREPRISES S.C.C.
INDEPENDENT AUDITORS
To the Board of Directors and the Shareholders of
Hermes Europe Railtel B.V.
We have audited the accompanying consolidated balance sheets of Hermes
Europe Railtel B.V. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hermes Europe
Railtel B.V. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles
in the United States.
Ernst & Young Reviseurs d'Entreprises S.C.C.
Represented by
M. Guns
Partner
Brussels, Belgium
February 26, 1999, except for Notes 1 and 2 as to which the date is November 1,
1999
F-2
<PAGE> 127
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 130,081 $204,327
Restricted cash........................................... 30,062 29,539
Accounts receivable, net of allowance for doubtful account
of $887 at December 31, 1998........................... 48,034 2,129
Due from affiliated companies............................. 2,164 49
Other assets.............................................. 29,810 13,281
--------- --------
Total current assets.............................. 240,151 249,325
Property and equipment, net................................. 438,984 204,944
Goodwill and intangible assets, net of accumulated
amortization of $10,645 and $3,320 at December 31, 1998
and 1997, respectively.................................... 50,519 22,128
Restricted cash............................................. -- 28,271
Other non-current assets.................................... 14,456 --
--------- --------
TOTAL ASSETS...................................... $ 744,110 $504,668
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 84,047 $ 37,457
Due to affiliated companies............................... 15,976 1,311
Deferred income........................................... 32,255 1,436
Current portion of capital lease obligations.............. 37,135 21,540
--------- --------
Total current liabilities......................... 169,413 61,744
Long-term debt.............................................. 265,353 265,383
Long-term capital leases.................................... 190,378 117,645
Deferred income............................................. 34,000 --
Other non-current liabilities............................... 29,259 236
--------- --------
TOTAL LIABILITIES................................. 688,403 445,008
Commitments and contingencies
Minority interest........................................... 27,759 --
SHAREHOLDERS' EQUITY
Common stock, 1000 guilders par value; 297,000 shares
authorized; 196,716 and 190,468 shares issued and
outstanding at December 31, 1998 and 1997, respectively... 100,110 96,757
Additional paid-in capital.................................. 33,334 21,829
Accumulated other comprehensive loss........................ (1,300) (3,665)
Accumulated deficit......................................... (104,196) (55,261)
--------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 27,948 59,660
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 744,110 $504,668
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 128
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- ------------
<S> <C> <C> <C>
Revenues.................................................. $ 85,251 $ 5,373 $ 48
-------- -------- ------------
Operating costs and expenses:
Telecommunication Services.............................. 41,848 6,842 4,694
Selling, general and administrative..................... 28,273 17,868 9,894
Depreciation and amortization........................... 28,638 5,229 1,266
-------- -------- ------------
98,759 29,939 15,854
-------- -------- ------------
Loss from operations...................................... (13,508) (24,566) (15,806)
Other income/(expense):
Interest expense........................................ (30,852) (12,826) (153)
Foreign currency losses................................. (11,308) (367) (1,126)
Other, net.............................................. 9,076 6,596 508
-------- -------- ------------
(33,084) (6,597) (771)
-------- -------- ------------
Net loss before income taxes.............................. (46,592) (31,163) (16,577)
Income taxes.............................................. 2,343 -- --
-------- -------- ------------
Net loss.................................................. $(48,935) $(31,163) $ (16,577)
======== ======== ============
Net loss per share........................................ $(255.15) $(346.42) $(207,212.50)
======== ======== ============
Weighted average common shares outstanding................ 191,790 89,957 80
======== ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 129
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $ (48,935) $ (31,163) $(16,577)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 29,921 5,731 1,291
Fair value adjustment for foreign currency instruments... 28,650 -- --
Other.................................................... 2,362 2,651 130
Changes in assets and liabilities:
Accounts receivable................................... (37,543) (2,116) (87)
Deposits.............................................. 5,537 (9,807) (627)
Accounts payable and accrued expenses................. 28,737 30,991 4,336
Other changes in assets and liabilities............... 36,228 (704) (6)
--------- --------- --------
Net cash provided by (used in) operating
activities..................................... 44,957 (4,417) (11,540)
INVESTING ACTIVITIES
Purchases of property and equipment...................... (131,866) (51,830) (16,807)
Acquisitions -- cash acquired............................ 13,352 -- --
Restricted cash.......................................... 27,774 (55,636) (3,974)
Other investing activities............................... (2,018) -- --
--------- --------- --------
Net cash used in investing activities............ (92,758) (107,466) (20,781)
FINANCING ACTIVITIES
Proceeds from debt......................................... -- 268,678 564
Repayments of debt......................................... (32,523) -- --
Payment of debt issue costs................................ (825) (14,139) --
Net proceeds from exercise of stock options and issuance of
common stock............................................. 600 50,993 --
Proceeds from shareholders' loans.......................... -- 13,205 27,358
Due to affiliated companies, net........................... 11,285 (1,237) 1,002
--------- --------- --------
Net cash (used in) provided by financing
activities..................................... (21,463) 317,500 28,924
Effect of exchange rate changes on cash and cash
equivalents.............................................. (4,982) (3,303) (374)
--------- --------- --------
Net (decrease) increase in cash and cash equivalents....... (74,246) 202,314 (3,771)
Cash and cash equivalents at beginning of year............. 204,327 2,013 5,784
--------- --------- --------
Cash and cash equivalents at end of year................... $ 130,081 $ 204,327 $ 2,013
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 130
HERMES EUROPE RAILTEL B.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL LOSS DEFICIT EQUITY
------- -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995..................... 80 $ 45 $ 5,926 $ (254) $ (7,521) $ (1,804)
Translation adjustment... -- -- -- 570 -- 570
Net loss................. -- -- -- -- (16,577) (16,577)
------- -------- ------- ------- --------- --------
Comprehensive loss....... (16,007)
--------
BALANCE AT DECEMBER 31,
1996................... 80 $ 45 $ 5,926 $ 316 $ (24,098) $(17,811)
Recapitalization, net of
tax.................... 190,388 96,712 4,633 -- -- 101,345
Compensatory stock
options................ -- -- 2,613 -- -- 2,613
Pushdown accounting
adjustment............. -- -- 8,657 -- -- 8,657
Translation adjustment... -- -- -- (3,981) -- (3,981)
Net loss................. -- -- -- -- (31,163) (31,163)
------- -------- ------- ------- --------- --------
Comprehensive loss....... (35,144)
--------
BALANCE AT DECEMBER 31,
1997................... 190,468 $ 96,757 $21,829 $(3,665) $ (55,261) $ 59,660
Proceeds from exercise of
stock options.......... 6,248 3,353 (2,753) -- -- 600
Compensatory stock
options................ -- -- 1,060 -- -- 1,060
Pushdown accounting
adjustment............. -- -- 13,198 -- -- 13,198
Translation adjustment... -- -- -- 2,365 -- 2,365
Net loss................. -- -- -- -- (48,935) (48,935)
------- -------- ------- ------- --------- --------
Comprehensive loss....... (46,570)
--------
BALANCE AT DECEMBER 31,
1998................... 196,716 $100,110 $33,334 $(1,300) $(104,196) $ 27,948
======= ======== ======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 131
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS OPERATIONS
Hermes Europe Railtel B.V. ("the Company") is a provider of centrally
managed telecommunications transmission capacity across national borders in
Europe and to the United States to telecommunications companies including
traditional public telecommunications operators and new entrants, such as
alternative carriers, global consortia of telecommunications operators,
international carriers, Internet backbone networks, resellers, value-added
networks and other service providers. The Company began commercial operations in
November 1996 and as of December 31, 1998 operated in Belgium, the Netherlands,
the United Kingdom, France, Germany, Switzerland, Italy, Denmark and Sweden. As
of December 31, 1998 the high capacity fiber optic network ("the Network")
linked the cities of Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris,
Frankfurt, Strasbourg, Zurich, Geneva, Stuttgart, Dusseldorf, Munich, Milan,
Berlin, Copenhagen and Stockholm. The Company intends to continue to build the
Network using an accessible and cost-efficient infrastructure of railways,
motorways, pipeline companies, waterways and power companies.
The Company was formed on July 6, 1993 and is 89.9% owned by GTS Carrier
Services, Inc. (formerly GTS-Hermes, Inc.), a wholly owned subsidiary of Global
TeleSystems Group, Inc. ("GTS"), a leading independent provider of
telecommunications services to businesses, other high usage customers and
telecommunications carriers in Europe, Russia and the Commonwealth of
Independent States.
On June 24, 1998, the Company completed the acquisition of a 75% interest
in Ebone A/S ("Ebone") for ECU 90 million (approximately $99.5 million). See
Note 11, "Acquisition."
Subsequent to year-end, the Company issued aggregate principal amount $200
million of 10.375% senior notes due 2009 and Euro 85 million (approximately $100
million) of 10.375% senior notes due 2006 (together, the "New Senior Notes").
See Note 13, "Subsequent Events."
A notarial deed amending the Company's Articles of Association to change
the Company's name to Global TeleSystems Europe B.V. was executed on October 22,
1999. The change in the Company's legal name will become effective upon the
issuance by the Dutch Ministry of Justice of a declaration of non-objection,
which is expected on or about November 18, 1999.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Hermes Europe
Railtel B.V., all wholly-owned subsidiaries and its majority-owned subsidiary
where the Company has unilateral operating and financial control. All
significant intercompany accounts and transactions are eliminated upon
consolidation.
For financial reporting purposes, the Company has reflected the accounting
acquisition effect of the incremental purchases by GTS Carrier Services, Inc.,
from 1993 through 1998, of the Company's common shares, that were held by
non-affiliated entities of GTS. Accordingly, the Company's consolidated
financial statements have been retroactively restated for all periods presented
to reflect the acquisition accounting effect, a process generally referred to as
"push down" accounting. The cumulative effect, through December 31, 1998, of the
allocation of the purchase price paid by GTS Carrier Services, Inc. has resulted
in goodwill of approximately $24.9 million, which is being amortized on a
straight line basis over five years. In June and October 1999, GTS Carrier
Services, Inc. entered into two additional incremental purchases which resulted
in additional goodwill of approximately $203.9 million. Goodwill resulting from
the 1999 transactions will be amortized over a period of twenty years.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements in order to conform to the 1998 presentation.
F-7
<PAGE> 132
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $30.1 million and $57.8
million of restricted cash at December 31, 1998 and 1997, respectively. The
restricted cash is primarily related to cash held in escrow for interest
payments (see Note 4, "Debt Obligations").
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation, which includes the
amortization of assets recorded under capital leases, is calculated on a
straight-line basis over the lesser of the estimated lives ranging from five to
ten years for telecommunications equipment and five to ten years for furniture,
fixtures and equipment and other property, or their contractual term. A
substantial part of the property and equipment balance is construction in
process, which is currently related to the configuration and buildout of the
network. These costs are transferred to telecommunications equipment in service
as construction is completed and/or equipment is placed in service. Depreciation
is recorded commencing with the first full month that assets are placed into
service. Maintenance and repairs are charged to expense as incurred.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, "Capitalization of Interest Costs," the Company capitalizes material
interest costs associated with the construction of capital assets for business
operations and amortizes the costs over the assets' useful lives. The Company
capitalized $4.9 million of interest costs in 1998. The Company did not
capitalize any interest in 1997.
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 the estimated useful life of five years. Effective
January 1, 1999, all newly created goodwill will be amortized over a period of
20 years. Intangible assets, primarily deferred financing costs and licenses are
amortized on a straight-line basis over the lesser of their estimated useful
lives or their contractual term, generally three to ten years. In accordance
with APB 17, "Intangible Assets," the Company continues to evaluate the
amortization period to determine whether events or circumstances warrant revised
amortization periods. Additionally, the Company considers whether the carrying
value of such assets should be reduced based on the future benefits of its
deferred financing costs.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, long-lived assets to be held and used by
the Company are reviewed to determine whether any events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. For long-lived assets to be held and used, the Company bases its
evaluation on such impairment indicators as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors exist that
indicate that the carrying amount of the asset may not be recoverable, the
Company determines whether an impairment has occurred through the use of an
undiscounted cash flow analysis of assets at the lowest level for which
identifiable cash flows exist. If an impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured using
quoted market prices or, in the absence of quoted market prices, fair value is
based on an estimate of discounted cash flow analysis. Based on its analysis for
the years ended December 31, 1998 and 1997, the Company determined that there
was not an impairment of its long-lived assets.
F-8
<PAGE> 133
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements.
FOREIGN CURRENCY TRANSLATION
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). The functional currency for the Company has been
determined to be the Belgian franc. In most instances, either the local currency
or the ECU is considered the functional currency for the Company's subsidiaries.
The accounting records of the subsidiaries are remeasured into Belgian franc
equivalents, consolidated and then translated into U.S. dollars for the purpose
of preparing the accompanying financial statements in accordance with accounting
principles generally accepted in the United States. Assets and liabilities are
translated at the rates of exchange at the balance sheet date. Income and
expense accounts are translated at average monthly rates of exchange. The
resultant translation adjustments are included in accumulated other
comprehensive loss, a separate component of shareholders' equity. Gains and
losses from foreign currency transactions are included in operations.
REVENUE RECOGNITION
The Company's revenue is associated with its customers' right to use the
network and is recognized on a straight-line basis over the terms of the
customer contracts. Billings received in advance of service being performed are
deferred and recognized as revenue as the service is performed.
NET LOSS PER SHARE
Basic and diluted loss per share is calculated in accordance with SFAS No.
128, "Earnings Per Share." The Company's net loss per share calculation (basic
and diluted) is based upon the weighted average common shares issued. There are
no reconciling items in the numerator or denominator of the Company's net loss
per share calculation. Employee stock options (see Note 5, "Employee Benefits")
have been excluded from the net loss per share calculation because their effect
would be anti-dilutive.
The net loss per share data presented in the consolidated statements of
operations reflect the restatement of the Company's net loss per share amounts
that were disclosed in the financial statements of the Company's previous
filings. This restatement is necessary to correct an error in our previously
reported amounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable, and
accrued liabilities approximate their fair value. The fair value of the
long-term debt is determined based on quoted market rates. At December 31, 1998,
the fair value of the $265.0 million 11.5% Senior Notes, due 2007, was $285.5
million.
OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. At December 31, 1998 and 1997, the Company maintained most of its
cash and cash equivalents in high quality U.S. and European financial
institutions. The Company extends credit to various customers and establishes an
allowance for doubtful accounts for specific customers that it determines to
have significant credit risk.
F-9
<PAGE> 134
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk and periodically evaluates the
materiality of foreign exchange exposures in different countries and the
financial instruments available to mitigate this exposure. The Company finds it
impractical to hedge all foreign currency exposures and as a result, will
continue to experience foreign currency gains and losses.
The Company currently accounts for its existing derivative under SFAS No.
52, "Foreign Currency Translation." In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
expects to adopt the new statement effective January 1, 2000. The statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the statement will
have a significant effect on its results of operations or financial position.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." The Company has elected
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and presents pro forma disclosures of net loss as if the fair value
method had been adopted.
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE> 135
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Other assets consists of:
VAT receivable............................................ $ 15,841 $ 1,184
Deposit................................................... 4,858 9,577
Other assets.............................................. 9,111 2,520
-------- --------
Total other assets.......................................... $ 29,810 $ 13,281
======== ========
Property and equipment, net consists of:
Telecommunications equipment in service................... $374,959 $198,723
Furniture, fixtures and equipment......................... 7,085 3,409
Leasehold improvements.................................... 1,319 840
Construction in process................................... 84,168 6,255
-------- --------
467,531 209,227
Less: accumulated depreciation....................... 28,547 4,283
-------- --------
Total property and equipment, net................. $438,984 $204,944
======== ========
Accounts payable and accrued expenses consists of:
Trade accounts payable.................................... $ 57,587 $ 19,678
Accrued interest.......................................... 11,435 11,621
Other accrued expenses.................................... 15,025 6,158
-------- --------
Total accounts payable and accrued expenses....... $ 84,047 $ 37,457
======== ========
</TABLE>
NOTE 4: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior notes, due August 15, 2007 at 11.5% interest payable
semiannually................................................ $265,000 $265,000
Other financing agreements.................................. 410 433
-------- --------
Total debt outstanding...................................... 265,410 265,433
Less: debt maturing within one year......................... 57 50
-------- --------
Total long-term debt.............................. $265,353 $265,383
======== ========
</TABLE>
On August 15, 1997, the Company issued aggregate principal amount $265.0
million of senior notes due August 15, 2007 (the "Senior Notes"). The Senior
Notes are general unsecured obligations of the Company, with interest payable
semiannually at a rate of 11.5%. Approximately $56.6 million of the net proceeds
of the offering was placed in escrow for the first four semiannual interest
payments commencing on February 15, 1998. The Company may redeem the Senior
Notes, in whole or in part, any time on or after August 15, 2002 at specific
redemption prices. The Company may also redeem the Senior Notes at a price equal
to 111.5% of the principal amount prior to August 15, 2000 with net cash
proceeds of a public equity offering with gross proceeds of at least $75.0
million or in certain other circumstances specified in the indenture for the
Senior Notes, provided, however, that at least two-thirds of the principal
amount of the Senior Notes originally issued remain outstanding after each such
redemption.
F-11
<PAGE> 136
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of long-term debt, as of December 31, 1998, are as
follows: 1999 -- $0.06 million, 2000 -- $0.06 million, 2001 -- $0.06 million,
2002 -- $0.07 million, 2003 -- $0.07 million, and $265.1 million thereafter.
NOTE 5: EMPLOYEE BENEFITS
The Company established a defined benefit pension plan in 1995 that covers
substantially all of its employees upon twenty-five years of age and at least
one year of service. The benefits are based on years of service and the
employee's compensation. The Company has entered into an arrangement, an
investment contract, with an insurance company for the provision of a group
insurance policy ("the Policy"). Premium payments for the Policy are partly paid
by the employee, based on specified terms that consider the employee's annual
salary, with the remaining premium paid by the employer. The Company's pension
costs for 1998, 1997 and 1996 were $1.0 million, $0.7 million and $0.4 million,
respectively.
In the fourth quarter of 1997, the Company implemented a stock option plan
for its key officers and employees (the "Stock Option Plan"). The ownership
dilution caused by the Stock Option Plan will be approximately 13%. As a result
of issuing options under the Stock Option Plan, the Company incurred a non-cash
charge of approximately $3.7 million, of which $2.6 million was recorded during
the fourth quarter of 1997 and the remaining $1.1 million was recognized over
1998.
The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the year ended December 31, 1998 and 1997, respectively would have been
approximately $49.1 million and $31.4 million. The fair value of options granted
during 1997 was estimated between $51.80 and $456.63 per share using the
Black-Scholes option pricing with the following assumptions: expected volatility
of .50, dividend yield 0%, risk free interest rate of 5.79% and an expected life
of five years.
The Company maintains the Stock Option Plan, with the maximum number of
shares of common stock available for grant under the Stock Option Plan of
24,760. All options granted under the Stock Option Plan were at exercise prices
that were at least equal to the fair market value of common stock at the date of
grant. Generally, all options granted under the Stock Option Plan vest over a
three-year period from the date of grant and expire ten years from the date of
grant. There were a few exceptions in which the granting of options had
instantaneous vesting rights.
Additional information with respect to stock option activity is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................. 10,166 $379.92 -- $ --
Options granted.................................. -- -- 10,166 379.92
Options exercised................................ (6,248) 107.20 -- --
Options canceled or expired...................... -- -- -- --
------ ------
Outstanding at end of year....................... 3,918 815.68 10,166 379.92
====== ======
Options exercisable at year end.................. 2,967 $421.01 6,244 $107.20
</TABLE>
F-12
<PAGE> 137
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding:
<TABLE>
<CAPTION>
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICE AT NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
DECEMBER 31, 1998: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$83.12............................ 1,603 7 $ 83.12 1,603 $ 83.12
$100.00 to $191.31................ 729 7 117.64 729 117.64
$378.43 to $2,887.62.............. 1,586 8 1,876.21 635 1,622.55
----- -----
3,918 7 $ 815.68 2,967 $ 421.01
===== =====
</TABLE>
In June 1998, certain employees of the Company received an aggregated
restricted stock award of 30,000 shares of GTS common stock, which vest annually
over two years. The Company will incur a non-cash charge of $1.3 million based
on the market price of the GTS common stock of $43.50 at date of grant, of which
$0.4 million was recognized in 1998 and the remaining $0.9 million will be
recognized in 1999 and 2000.
During the fourth quarter of 1998, the Company established the Ebone Value
Creation Plan (the "Ebone Plan"), in order to allow the employees of Ebone to
benefit from any increase in the fair value of Ebone. Under terms of the Ebone
Plan, an aggregate 15,000 units, whose maximum value is $1,000 per unit, may be
allocated to the employees over the term of the plan, which is through July 1,
2001. The units will be valued on July 1, 1999, 2000 and 2001 based on the fair
value of Ebone as determined by a third-party investment bank. Payout to the
employees will be made in two equal payments within sixty days of July 1, 2001
and July 1, 2002 and will either be in cash or in shares of GTS common stock at
the discretion of the Company and with the approval of GTS. As of December 31,
1998, 1,375 units had been allocated to the employees and a compensation charge
of $1.0 million was recognized for the year ended December 31, 1998.
NOTE 6: INCOME TAXES
The components of loss before income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax loss:
Domestic (the Netherlands)......................... $(32,617) $ (8,628) $ (1,216)
Foreign............................................ (13,054) (22,535) (15,361)
-------- -------- --------
$(45,671) $(31,163) $(16,577)
======== ======== ========
</TABLE>
A deferred tax asset is recorded on temporary differences between earnings
as reported in the financial statements and earnings for income tax purposes.
The following table summarizes major components of the Company's deferred tax
assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 32,600 $ 16,918
-------- --------
Total deferred tax asset.......................... 32,600 16,918
Less: valuation allowance................................. (32,600) (16,918)
-------- --------
Total............................................. $ -- $ --
======== ========
</TABLE>
F-13
<PAGE> 138
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, the Company had net operating loss carry forwards
for Belgian, Dutch and Irish income tax purposes of approximately $117.4
million, which are recoverable from profits for an unlimited period of time.
NOTE 7: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the years ended December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Capitalization of leases.................................... $120,556 $139,135
Transfer of shareholders' loans to equity................... -- 48,491
Contribution of fiber optic cable lease..................... -- 1,989
</TABLE>
There were no significant non-cash activities in 1996.
The Company paid interest of $36.0 million, $1.2 million and $0.01 million
in 1998, 1997 and 1996, respectively. The Company paid income taxes of $2.8
million in 1998. The Company did not pay taxes in 1997 and 1996.
NOTE 8: COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has various operating leases for office space, equipment and
car rental. The obligations extend through 2022. Beginning in 2002, certain of
the leases have options to cancel upon payment of certain penalties.
Rental expense aggregated approximately $2.0 million, $1.0 million and $0.7
million for the years ended December 31, 1998, 1997 and 1996, respectively.
CAPITAL LEASES
Assets and liabilities under capital leases are included in the
consolidated balance sheets as follows :
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications equipment in service..................... $271,343 $150,787
Less: accumulated amortization.............................. 9,837 482
-------- --------
$261,506 $150,305
======== ========
</TABLE>
F-14
<PAGE> 139
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments, by year and in the aggregate, under the capital
leases and other non-cancelable operating leases with initial or remaining terms
in excess of one year as of December 31, 1998 were as follows :
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1999....................................... $ 51,907 $ 2,981
2000.................................... 25,836 3,713
2001.................................... 27,077 3,394
2002.................................... 27,253 3,058
2003.................................... 27,231 1,870
Thereafter.............................................. 230,618 9,012
-------- -------
Total minimum lease payments............................ 389,922 $24,028
=======
Less amount representing interest....................... 162,409
--------
Present value of net minimum lease payments............. 227,513
Less current portion of capital lease obligations....... 37,135
--------
Long-term portion of capital lease obligations.......... $190,378
========
</TABLE>
MAJOR CUSTOMERS
In 1998 the Company had two major customers, representing $9.5 million and
$9.3 million or 11.1% and 10.9% of revenue, respectively. In 1997, the Company
had two major customers, representing $1.8 million and $1.2 million or 34.2% and
21.7% of revenue, respectively. There were no major customers in 1996.
OTHER MATTERS
In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
regulatory environments in which the Company currently operates or intends to
operate. In the opinion of management, the Company's liability, if any, in all
pending litigation, or other legal proceeding or other matter other than what is
discussed above, will not have a material effect upon the financial condition,
results of operations or liquidity of the Company.
NOTE 9: RELATED PARTY TRANSACTIONS
On October 31, 1998, GTS Carrier Services, Inc. acquired AB Swed Carrier's
ownership interest of 6,551 common shares in the Company for approximately $5.8
million. In connection with this purchase, GTS Carriers Services, Inc. paid
approximately $5.3 million to a company, which is affiliated with a board member
for negotiating with AB Swed Carrier and SNCB/NMBS on behalf of GTS Carrier
Services, Inc. to purchase their respective ownership interest in the Company.
For the year ended December 31, 1998, the Company, through Ebone, earned
$6.8 million from and incurred $5.1 million of costs to individual members of
the association that owns the minority interest in Ebone (see note 11,
"Acquisition").
NOTE 10: FOREIGN CURRENCY TRANSACTIONS
On April 19, 1998, the Company entered into a foreign currency swap
transaction agreement (the "Swap") with Rabobank International in order to
minimize the foreign currency exposure resulting from issuance in August 1997 of
the Senior Notes (see Note 4, "Debt Obligations"). The Company has marked the
Swap to its fair value as of December 31, 1998 and the resulting adverse change
in the fair value of $27.8 million has been recorded as an Other Non-Current
Liability on the balance sheet and recognized as a
F-15
<PAGE> 140
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
foreign currency loss in the statement of operations. The foreign currency loss
recognized on marking the Swap to its fair value has been offset in the
statement of operations by a $15.3 million gain on the remeasurement of the
Senior Notes.
NOTE 11: ACQUISITION
On June 24, 1998, the Company completed the acquisition for ECU 90 million
(approximately $99.5 million) of a 75% interest in Ebone. The Company funded the
acquisition with proceeds of a short-term bank loan, which has been repaid.
Ebone is a Tier 1 Internet backbone provider, principally serving as a carriers'
carrier for European Internet service providers. As part of the transaction,
Ebone will purchase, under a transmission capacity agreement, long-term capacity
rights on the Company's network valued at ECU 90 million. In addition to the
majority interest held by the Company, Ebone's new ownership structure will
continue to include many of Ebone's existing customers, which own the balance of
Ebone's shares through an association. The members of the association were
offered the right to buy shares of Ebone in the third quarter of 1998; however,
the Company's ownership interest in Ebone was not reduced as a result of the
acceptances of this offer.
The acquisition has been accounted for using the purchase method of
accounting. The excess purchase price over the fair value of assets acquired of
$19.7 million was allocated to goodwill and is being amortized over 5 years. The
results of Ebone have been included in the accompanying consolidated financial
statements from the date of acquisition.
The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on January 1 of each year:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS,
EXCEPT LOSS PER SHARE)
<S> <C> <C>
Revenues.................................................... $ 95,634 $ 26,504
Net loss.................................................... (47,940) (32,301)
Net loss per share.......................................... (249.96) (359.07)
</TABLE>
The pro forma results include amortization of the goodwill, elimination of
intercompany revenue and costs of revenues on transactions between the Company
and Ebone and the recording of the 25% minority interest. The pro forma data is
for informational purposes only and does not purport to be necessarily
indicative of the results that would have been obtained had this acquisition
actually occurred at the beginning of the periods presented, nor is it intended
to be a projection of the results which may be achieved in the future.
NOTE 12: CERTAIN GEOGRAPHICAL DATA
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for fiscal years beginning after
December 31, 1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise" SFAS No. 131 changes current practice under
SFAS No. 14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information.
The Company operates in one segment, Carrier Services, which is used by
management to measure profitability of the business. The Company markets its
services to telecommunications companies throughout Europe and in the United
States.
F-16
<PAGE> 141
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes revenue and gross long-lived asset
information by geographic area.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN)THOUSANDS
<S> <C> <C>
Revenue
United Kingdom............................................ $ 19,619 $ 739
The Netherlands........................................... 17,065 3,947
Switzerland............................................... 11,555 --
Belgium................................................... 8,609 314
Other..................................................... 28,403 373
-------- --------
Total............................................. $ 85,251 $ 5,373
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN)THOUSANDS
<S> <C> <C>
Long-lived assets
France.................................................... $ 94,609 $ 41,393
Germany................................................... 89,177 46,966
Switzerland............................................... 49,678 42,588
Belgium................................................... 40,995 21,090
Other..................................................... 193,072 57,190
-------- --------
Total............................................. $467,531 $209,227
======== ========
</TABLE>
Revenue was attributed to individual countries based on customer billing
location.
NOTE 13: SUBSEQUENT EVENTS
In January, 1999 the Company issued, through a private placement, the New
Senior Notes comprised of aggregate principal amount $200 million of senior
notes due January 15, 2009 (the "Dollar Notes") and E85 million (approximately
$100 million) of senior notes due January 15, 2006 (the "Euro Notes"). The New
Senior Notes are general unsecured obligations of the Company, with interest
payable semiannually at a rate of 10.375%. The Company may redeem the Dollar
Notes in whole or in part, any time on or after January 15, 2004 at specific
redemption prices. The Company may redeem the Euro Notes, in whole or in part,
any time on or after January 15, 2003 at specific redemption prices. The Company
may also redeem the Dollar Notes and the Euro Notes at a price equal to 110.375%
of the principal amounts prior to January 15, 2002 with net cash proceeds of a
public equity offering with gross proceeds of at least $75 million or in certain
other circumstances specified in the indentures for the Dollar Notes and the
Euro Notes provided, however that at least two-third of the principal amount of
the Dollar Notes and the Euro Notes originally issued remain outstanding after
each such redemption. Net proceeds from the issuance of the New Senior Notes was
approximately $289.7 million. The Company filed an S-4 registration statement
with the Securities and Exchange Commission to exchange registered senior notes,
with the same terms and conditions as the New Senior Notes, for the New Senior
Notes, which became effective in February 1999.
On a pro-forma basis, assuming the New Senior Notes had been outstanding as
of January 1, 1998, the Company's net loss would have been $81.3 million for
1998, as a result of interest expense of $31.1 million and amortization expense
of $1.2 million related to amortizing $10.1 million of deferred financing fees
over the terms of the New Senior Notes.
F-17
<PAGE> 142
HERMES EUROPE RAILTEL B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1998, the Company further entered into
contractual commitments to lease fibre pairs, including facilities and
maintenance and utilizing the partial routes for laying fiber optic cable. Based
on the contract provisions, these commitments are currently estimated to
aggregate approximately $32.4 million. The commitments have expected lease terms
of ten to fifteen years.
On March 4, 1999, GTS acquired substantially all of the outstanding
ordinary shares and American Depository Shares of Esprit Telecom Group plc
("Esprit"). In conjunction with this business combination the Company may incur
significant charges resulting from shutdowns due to duplication in the capacity
requirements of the combined networks of the Company and Esprit.
On January 1, 1999, the Company adopted the Euro as its functional
currency.
F-18
<PAGE> 143
HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 309,590 $130,081
Restricted cash........................................... -- 30,062
Accounts receivable, net.................................. 78,744 48,034
Due from affiliated companies............................. 30,950 2,164
Other assets.............................................. 56,889 29,810
---------- --------
Total current assets.............................. 476,173 240,151
Property and equipment, net................................. 528,487 438,984
Goodwill and intangible assets, net......................... 126,438 50,519
Other non-current assets.................................... 11,705 14,456
---------- --------
TOTAL ASSETS...................................... $1,142,803 $744,110
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 69,724 $ 84,047
Due to affiliated companies............................... 23,661 15,976
Deferred income........................................... 63,090 32,255
Current portion of capital lease obligations.............. 20,333 37,135
---------- --------
Total current liabilities......................... 176,808 169,413
Long-term debt............................................ 555,780 265,353
Long term capital leases.................................. 187,898 190,378
Deferred income........................................... 100,907 34,000
Other non-current liabilities............................. 1,405 29,259
---------- --------
TOTAL LIABILITIES................................. 1,022,798 688,403
Commitments and contingencies...............................
Minority interest........................................... -- 27,759
SHAREHOLDERS' EQUITY
Common stock, 1000 guilders par value (297,000 shares
authorized; 199,683 and 196,716 shares issued and
outstanding at September 30, 1999 and December 31, 1998
respectively........................................... 101,518 100,110
Additional paid-in capital................................ 104,180 33,334
Accumulated other comprehensive loss...................... (3,559) (1,300)
Accumulated deficit....................................... (82,134) (104,196)
---------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 120,005 27,948
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $1,142,803 $744,110
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 144
HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.......................................... $ 90,143 $ 26,997 $213,012 $ 42,933
-------- -------- -------- ---------
Operating costs and expenses:
Telecommunications services..................... 26,149 13,227 64,913 22,259
Selling, general and administrative............. 14,536 6,655 35,940 16,747
Depreciation and amortization................... 18,781 8,725 45,152 18,642
-------- -------- -------- ---------
59,466 28,607 146,005 57,648
-------- -------- -------- ---------
Income (loss) from operations..................... 30,677 (1,610) 67,007 (14,715)
Other income/(expense):
Interest expense................................ (20,195) (7,898) (54,181) (23,419)
Foreign currency losses......................... (653) (2,561) (1,183) (5,227)
Other, net...................................... 7,536 1,368 15,068 7,240
-------- -------- -------- ---------
(13,312) (9,091) (40,296) (21,406)
-------- -------- -------- ---------
Net income (loss) before income taxes............. 17,365 (10,701) 26,711 (36,121)
Income taxes...................................... 979 1,819 4,649 1,819
-------- -------- -------- ---------
Net income (loss)................................. $ 16,386 $(12,520) $ 22,062 $ (37,940)
======== ======== ======== =========
Net income (loss) per share:
Basic........................................... $ 82.06 $ (65.73) $ 111.47 $ (199.19)
======== ======== ======== =========
Diluted......................................... $ 81.75 $ (65.73) $ 110.12 $ (199.19)
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 145
HERMES EUROPE RAILTEL B.V.
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................... $ 16,386 $(12,520) $ 22,062 $(37,940)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 19,394 9,128 47,888 19,666
Change in value of foreign currency
instruments................................ 7,485 18,016 (25,351) 21,240
Minority interest............................ -- 564 468 604
Non-cash compensation........................ 468 214 996
Changes in assets and liabilities:
Accounts receivable........................ (3,570) (3,647) (68,179) (15,477)
Deposits................................... (2,729) (2,644) (5,108) (2,831)
Accounts payable and accrued expenses...... (10,067) 26,817 (10,576) 28,815
Other changes in assets and liabilities.... (7,854) (2,646) 57,809 5,454
-------- -------- --------- --------
Net cash provided by operating
activities............................ 19,045 33,536 19,227 20,527
INVESTING ACTIVITIES
Purchases of property and equipment............. (48,304) (45,102) (111,443) (75,946)
Acquisition, net of cash acquired............... -- -- (15,667) 13,352
Other investing activities...................... -- (314) (446) (314)
Restricted cash................................. 15,078 14,755 30,751 28,367
-------- -------- --------- --------
Net cash used in investing activities... (33,226) (30,661) (96,805) (34,541)
FINANCING ACTIVITIES
Proceeds from debt.............................. -- -- 302,450 --
Repayments of debt.............................. (9,630) (2,231) (26,106) (12,952)
Payment of debt issue costs..................... -- -- (10,164) (825)
Net Proceeds from issuance of common stock...... -- -- 1,249 --
Due to affiliated companies, net.................. (3,794) 14,769 (21,576) 14,270
-------- -------- --------- --------
Net cash (used in) provided by financing
activities............................ (13,424) 12,538 245,853 493
Effect of exchange rate changes on cash and cash
equivalents..................................... (4,623) (5,713) 11,234 (5,772)
-------- -------- --------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (32,228) 9,700 179,509 (19,293)
Cash and cash equivalents at beginning of
period.......................................... 341,818 175,334 130,081 204,327
-------- -------- --------- --------
Cash and cash equivalents at end of period........ $309,590 $185,034 $ 309,590 $185,034
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 146
HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL PRESENTATION
The financial statements of Hermes Europe Railtel B.V. (the "Company")
included herein are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Material intercompany account
transactions have been eliminated. In the opinion of management, the financial
statements reflect all adjustments of a normal and recurring nature necessary to
present fairly the Company's financial position, results of operations and cash
flows for the interim periods. These financial statements should be read in
conjunction with the Company's 1998 audited consolidated financial statements
and the notes related thereto. The results of operations for the three and nine
months ended September 30, 1999 may not be indicative of the operating results
for the full year.
The Company is one of the leading European providers of managed bandwidth
services and related telecommunications services to telecommunications carriers,
Internet service providers and other bandwidth-intensive customers. As of
September 30, 1999, the Company operates a centrally managed fiber optic network
(the "Network") in Europe over approximately 15,300 kilometers connecting 24
cities in 10 European countries, with service to the United States provided
through capacity leased on transatlantic cables. In addition, the Company
operates a Tier 1 Internet backbone network that connects European service
providers to the Internet.
The Company was formed on July 6, 1993 and as of September 30, 1999 was
95.4% owned by GTS Carrier Services, Inc., a wholly owned subsidiary of Global
TeleSystems Group, Inc. ("GTS"), a leading independent provider of
telecommunications services to businesses, other high usage customers and
telecommunications carriers in Europe, Russia and the Commonwealth of
Independent States.
For financial reporting purposes, the Company has reflected the accounting
acquisition effect of the incremental purchases, by GTS Carrier Services, Inc.,
from 1993 through 1999, of the Company's common shares, that were held by
nonaffiliated entities of GTS. Accordingly, the Company's consolidated financial
statements have been retroactively restated for all periods presented to reflect
the acquisition accounting effect, a process generally referred to as "push
down" accounting. The cumulative effect, through September 30, 1999, of the
allocation of the purchase price paid by GTS Carrier Services, Inc. has resulted
in goodwill of approximately $95.8 million, which is being amortized on a
straight line basis. Goodwill resulting from transactions occurring prior to
December 31, 1998, of $24.9 million, is being amortized over five years.
Goodwill resulting from transactions occurring in 1999, of $70.9 million, is
being amortized over twenty years.
2. POLICIES AND PROCEDURES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", comprehensive income was $16.6 million
and $19.8 million for the three and nine months ended September 30, 1999,
respectively, and was comprised of net income of $16.4 million and $22.1 million
and a foreign currency translation gain and loss of $0.2 million and $2.3
million, respectively, for the three and nine months ended September 30, 1999,
respectively. Comprehensive loss was $10.7 million and $36.7 million for the
three and nine months ended September 30, 1998, respectively, and was comprised
of net losses of $12.5 million and $37.9 million and foreign currency
translation income of $1.8 million and $1.2 million for the three and nine
months ended September 30, 1998, respectively.
The Company's net income (loss) per share calculation (basic and diluted)
is based upon the weighted average common shares issued. There are no
reconciling items in the numerator of the Company's net income
F-22
<PAGE> 147
HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(loss) per share calculation. The following is a reconciliation of the
denominator of the Company's net income (loss) per share calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding................ 199,683 190,468 197,911 190,468
Common Stock Equivalents........................... 747 -- 2,436 --
-------- -------- -------- --------
Diluted Shares Outstanding......................... 200,430 190,468 200,347 190,468
======== ======== ======== ========
</TABLE>
As of January 1, 1999, the Company adopted the Euro as its functional
currency.
Certain reclassifications have been made to the September 1998 condensed,
consolidated financial statements in order to conform to the 1999 presentation.
3. ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On May 25, 1999, the Company purchased the remaining 25% minority interest
in Ebone A/S ("Ebone") from the Ebone Holding Association ("EHA") for a purchase
price of Euro 35 million. The purchase price was comprised of cash of Euro 15
million and the issuance to EHA of capacity rights on the Network valued at Euro
20 million (the "Rights"). Rights may be applied by members of EHA, in lieu of
cash, to the payment of future invoices related to services provided by the
Company or Ebone on contracts for services entered into through May 31, 2003.
EHA assigned these Rights among its members by October 1, 1999 and once
assigned, the Rights are non-transferable.
The excess of the purchase price over the fair value of the assets acquired
of $9.2 million was allocated to goodwill and is being amortized over twenty
years.
4. DEBT OBLIGATIONS
In January, 1999 the Company issued, through a private placement, aggregate
principal amount $200 million of senior notes due January 15, 2009 (the "Dollar
Notes") and Euro 85 million (approximately $100 million) of senior notes due
January 15, 2006 (the "Euro Notes" and together with the Dollar Notes, the "New
Senior Notes"). The New Senior Notes are general unsecured obligations of the
Company, with interest payable semiannually at a rate of 10.375%. The Company
may redeem the Dollar Notes in whole or in part, any time on or after January
15, 2004 at specific redemption prices. The Company may redeem the Euro Notes,
in whole or in part, any time on or after January 15, 2003 at specific
redemption prices. The Company may also redeem the Dollar Notes and the Euro
Notes at a price equal to 110.375% of the principal amounts prior to January 15,
2002 with net cash proceeds of a public equity offering with gross proceeds of
at least $75 million or in certain other circumstances specified in the
indentures for the Dollar Notes and the Euro Notes provided, however that at
least two-thirds of the principal amount of the Dollar Notes and the Euro Notes
originally issued remain outstanding after each such redemption. Net proceeds
from the issuance of the New Senior Notes was approximately $289.3 million. The
Company filed an S-4 registration statement with the Securities and Exchange
Commission to exchange registered senior notes, with the same terms and
conditions as the New Senior Notes, for the New Senior Notes, which registration
statement became effective in February 1999. The exchange of registered notes
for the New Senior Notes was completed on March 24, 1999.
5. CAPITAL LEASE OBLIGATIONS
During the nine months ended September 30, 1999, in order to expand the
Network, the Company entered into contractual commitments to lease fiber pairs,
including facilities and maintenance. Based on the
F-23
<PAGE> 148
HERMES EUROPE RAILTEL B.V.
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contract provisions, these commitments are currently estimated to aggregate
approximately $51.1 million. The commitments have expected lease terms of ten to
eighteen years.
6. RELATED PARTY TRANSACTIONS
Included in revenues for the three and nine months ended September 30,
1999, respectively, is $12.9 million and $15.4 million of revenue from GTS
affiliates. Included in revenues for the three and nine months ended September
30, 1998, respectively, is $0.2 million and $0.5 million of revenue from GTS
affiliates.
7. SUBSEQUENT EVENTS
On October 15, 1999, GTS entered into an exchange agreement with all of the
minority interest holders of the Company's common shares and grantees of stock
options to purchase common shares of the Company that provides for the
acquisition by GTS of their equity interest in the Company. Specifically, the
agreement provides that GTS will acquire the respective minority interest
holders' common shares in the Company that have been held by them for a period
greater than six months based on the current fair market value of the Company on
the date of the exchange, as determined by a globally-recognized investment
banking firm that is mutually acceptable to the parties to the agreement. The
agreement also provides that GTS would issue its common shares to the Company's
minority interest holders based on the fair market value, as defined in the
exchange agreement, of GTS common shares on the date of the exchange.
Pursuant to this agreement and effective October 15, 1999, GTS exchanged
5,985,930 of its common shares for 6,565 of the Company's common shares. This
transaction resulted in aggregate purchase consideration of approximately $134.2
million and as a result the Company will reflect incremental goodwill of
approximately $133.0 million in the fourth quarter of 1999.
Further, minority interest holders of the Company have additional
beneficial ownership rights in the Company's common shares and stock options to
purchase common shares, totaling 3,601 common shares. As stated previously, GTS
intends to acquire these Company common shares in the future; however, future
acquisitions will be based on future market values of the Company and GTS.
The Company is currently negotiating a Euro 35 million credit facility with
a bank (the "Facility"). The Facility would be structured in three tranches with
varying maturities of up to five years. Advances under the Facility would be
used to finance the purchase of network assets and equipment and for the
issuance of performance or payment guarantees in the ordinary course of
business.
The Company is engaged in an offering to issue approximately Euro 300
million of general unsecured senior notes pursuant to Rule 144A and Regulation S
of the Securities Act of 1933. GTS is making a $50.0 million capital
contribution to the Company in connection with this offering. The net proceeds
of this offering, together with the $50.0 million capital contribution from GTS
and existing cash balances, will be applied to purchase a dedicated fiber pair
on the FLAG Atlantic-1 transatlantic cable system and related equipment to
upgrade its transmission capacity, build intracity fiber networks and data- and
Web-hosting centers, expand our network, pursue business development
opportunities and for other general corporate purposes.
A notarial deed amending the Company's articles of association to change
the Company's name to Global TeleSystems Europe B.V. was executed on October 22,
1999. The change in the Company's legal name will become effective upon the
issuance by the Dutch Ministry of Justice of a declaration of non-objection,
which is expected on or about November 18, 1999.
F-24
<PAGE> 149
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GLOBAL TELESYSTEMS EUROPE LOGO]
GLOBAL TELESYSTEMS EUROPE
Offer To Exchange
10 1/2% Senior Notes due 2006
for all Outstanding
10 1/2% Senior Notes due 2006
and
11% Senior Notes due 2009
for all Outstanding
11% Senior Notes due 2009
--------------------
PROSPECTUS
--------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this Exchange
Offer other than those contained in this prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than those to which it
relates, nor does it constitute an offer to sell or a solicitation of an offer
to buy the notes in any jurisdiction where, or to any person to whom, it is
unlawful to make such an offer or solicitation. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any time
subsequent to the date hereof.
FEBRUARY 7, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 150
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Netherlands law, there are no statutory provisions or case law with
regard to the validity and enforceability of indemnities by a corporation,
whether contained in the articles or in a contract between the corporation and
the director. Indemnity clauses are rare because of their limited effectiveness.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
3.1 -- Deed of Incorporation and Articles of Association of the
Company (incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form S-4 (File No. 333-37719),
filed on October 10, 1997)
3.2* -- Amendment to Articles of Association executed on October
22, 1999
4.1* -- Form of Outstanding Note for the Registrant's 10 1/2%
Senior Notes due 2006 (contained in Indenture filed as
Exhibit 4.5)
4.2* -- Form of Outstanding Note for the Registrant's 11% Senior
Notes due 2009 (contained in Indenture filed as Exhibit
4.6)
4.3* -- Form of Exchange Note for the Registrant's 10 1/2% Senior
Notes due 2006 (contained in Indenture filed as Exhibit
4.5)
4.4* -- Form of Exchange Note for the Registrant's 11% Senior
Notes due 2009 (contained in Indenture filed as Exhibit
4.6)
4.5* -- Indenture relating to the 10 1/2% Senior Notes due 2006,
dated as of November 24, 1999, between the Company and
United States Trust Company of New York, as Trustee
4.6* -- Indenture relating to the 11% Senior Notes due 2009,
dated as of November 24, 1999, between the Company and
United States Trust Company of New York, as Trustee
4.7* -- Registration Rights Agreement, dated as of November 24,
1999, between the Company and Initial Purchasers
5.1** -- Opinion of Shearman & Sterling regarding the legality of
the securities being registered
5.2** -- Opinion of Allen & Overy regarding the legality of the
securities being registered
8.1** -- Opinion of Shearman & Sterling regarding tax matters
10.1 -- Indenture, dated August 19, 1997, among Hermes Europe
Railtel B.V., as Issuer, Global TeleSystems Group, Inc.
and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.3 to our Registration Statement on
Form S-4 (File No. 333-37719), filed on October 10, 1997)
10.2 -- Dollar Indenture, dated as of January 4, 1999, between
Hermes Europe Railtel B.V., as Issuer, and The Bank of
New York, as Trustee, relating to the 10 3/8% Senior
Notes due 2009 (incorporated by reference to Exhibit 4.5
to our Registration Statement on Form S-4 (File No.
333-70723), filed on January 15, 1999)
10.3 -- Euro Indenture, dated as of January 4, 1999, between
Hermes Europe Railtel B.V., as Issuer, and The Bank of
New York, as Trustee, relating to the 10 3/8% Senior
Notes due 2006 (incorporated by reference to Exhibit 4.6
to our Registration Statement on Form S-4 (File No.
333-70723), filed on January 15, 1999)
10.4 -- Employment Agreement, dated as of September 26, 1995,
between the Company and J.A. Shearing (incorporated by
reference to Exhibit 10.6 to our Registration Statement
on Form S-4 (File No. 333-77719), filed on October 10,
1997)
</TABLE>
II-1
<PAGE> 151
<TABLE>
<C> <S>
10.5* -- Employment Agreement, dated as of February 10, 1998,
between the Company and Jan De Wispelaere
10.6 -- Agreement relating to purchase of fiber pairs, dated
April 1, 1997, between Eastern Group Telecoms Limited and
the Company (incorporated by reference to Exhibit 10.11
to our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.7 -- Fiber Agreement, dated January 16, 1997, between
SNCB/NMBS and the Company (incorporated by reference to
Exhibit 10.12 to our Registration Statement on Form S-4
(File No. 333-37719), filed on October 10, 1997)
10.8 -- Agreement relating to purchase of black optical fibers,
dated February 3, 1997, between SANEF and the Company
(incorporated by reference to Exhibit 10.13 to our
Registration Statement on Form S-4 (File No. 333-37719),
filed on October 10, 1997)
10.9 -- Agreement, dated November 24, 1997, between COLT and the
Company (incorporated by reference to Exhibit 10.15 to
our Registration Statement on Form S-4 (File No.
333-70723), filed on January 15, 1999)
10.10 -- Agreement, dated November 3, 1998, between Cable &
Wireless and the Company (incorporated by reference to
Exhibit 10.18 to our Registration Statement on Form S-4
(File No. 333-70723), filed on January 15, 1999)
10.11 -- License, dated December 18, 1996, granted by the
Secretary of State for Trade and Industry relating to the
United Kingdom (incorporated by reference to Exhibit 10.7
to our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.12 -- Registration, dated July 26, 1996, granted by IBPT
relating to Belgium (incorporated by reference to Exhibit
10.8 to our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.13 -- Authorization Letter, dated August 1, 1996, granted by
Hoofdirectie Telecommunicate & Post relating to the
Netherlands (incorporated by reference to Exhibit 10.9 to
our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.14 -- License, dated May 28, 1997, granted by BMPT relating to
Germany (incorporated by reference to Exhibit 10.10 to
our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.15 -- License, dated October 22, 1997, granted by Secretary of
State of Industry relating to France (incorporated by
reference to Exhibit 10.13 to our Registration Statement
on Form S-4 (File No. 333-70723), filed on January 15,
1999)
10.16 -- Authorization Letter, dated March 16, 1998, granted by
the Deputy Director of Federal Communication Office
relating to Switzerland (incorporated by reference to
Exhibit 10.16 to our Registration Statement on Form S-4
(File No. 333-70723), filed on January 15, 1999)
10.17 -- Global 214 License to provide global facilities-based and
global resale reservices, granted on October 23, 1998 by
the U.S. Federal Communications Commission
10.18 -- 214 authorization by public notice to operate as a
facilities-based carrier and to provide service between
the United States and Hungary, Poland, Czech Republic,
Romania, Monaco, Ukraine, Kazakhstan, Uzbekistan,
Azerbaijan, China and India, granted on October 13, 1999
by the U.S. Federal Communications Commission
12.1* -- Statements re Computation of Deficiency of Earnings to
Fixed Charges
21.1* -- List of subsidiaries
23.1** -- Consent of Shearman & Sterling (included as part of
Exhibit 5.1)
23.2** -- Consent of Ernst & Young Reviseurs d'Entreprises S.C.C.,
Independent Auditors
23.3** -- Consent of Allen & Overy (included as part of Exhibit
5.2)
24.1 -- Power of Attorney (included on the signature pages of
this Registration Statement)
</TABLE>
II-2
<PAGE> 152
<TABLE>
<C> <S>
25.1* -- Statement of Eligibility of United States Trust Company
of New York, Trustee
27.1 -- Financial Data Schedule for the fiscal year ended
December 31, 1998 (incorporated by reference to Exhibit
27.1 to our annual report on Form 10-K (File No. 333-
37719), filed on March 31, 1999)
27.2 -- Financial Data Schedule for the nine months ended
September 30, 1999 (incorporated by reference to Exhibit
27.1 to our quarterly report on Form 10-Q (File No.
333-37719), filed on November 3, 1999)
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
(2) Schedules
The financial statement schedules of the Company have been omitted because
the information required to be set forth therein is not applicable or is shown
in the Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers for sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the registration statement is on Form S-3, Form S-8 or Form
F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 153
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statement required by sec. 210.3-19 of this chapter at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or sec. 210.3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The undersigned registrant hereby undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirement of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes: (i) to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means; and (ii) to arrange or provide for a facility in the
U.S. for the purpose of responding to such requests. The undertaking in
subparagraph (i) above includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification arising under the Securities Act of 1933 may be
permitted to directors, officers, or persons controlling the registrant pursuant
to the foregoing provisions, the registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 154
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing a Form S-4 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Amsterdam, The Netherlands, on the 1st day of
February, 2000.
GLOBAL TELESYSTEMS EUROPE B.V.
By: /s/ JIM REYNOLDS
----------------------------------
Jim Reynolds
Managing Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities indicated on the 1st day of February, 2000. Each person whose
signature appears below hereby authorizes Jim Reynolds and Mikel Williams, and
each of them, with full power of substitution, to execute in the name and on
behalf of such person any amendment or any post-effective amendment to this
Registration Statement and to file the same, with any exhibits thereto and other
documents in connection therewith, making such changes in this Registration
Statement as the Registrant deems appropriate, and appoints each of Jim Reynolds
and Mikel Williams, and each of them, with full power of substitution,
attorney-in-fact to sign any amendment and any post-effective amendment to this
Registration Statement and to file the same, with any exhibits thereto and other
documents in connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JIM REYNOLDS President and Managing Director (principal
- ----------------------------------------------------- executive officer)
Jim Reynolds
/s/ MIKEL WILLIAMS Acting Vice President -- Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Mikel Williams officer) and Supervisory Director
/s/ ROBERT AMMAN Supervisory Director
- -----------------------------------------------------
Robert Amman
/s/ GERARD J. CACCAPPOLO Managing Director
- -----------------------------------------------------
Gerard J. Caccappolo
</TABLE>
II-5
<PAGE> 155
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Deed of Incorporation and Articles of Association of the
Company (incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form S-4 (File No. 333-37719),
filed on October 10, 1997)
3.2* -- Amendment to Articles of Association executed on October
22, 1999
4.1* -- Form of Outstanding Note for the Registrant's 10 1/2%
Senior Notes due 2006 (contained in Indenture filed as
Exhibit 4.5)
4.2* -- Form of Outstanding Note for the Registrant's 11% Senior
Notes due 2009 (contained in Indenture filed as Exhibit
4.6)
4.3* -- Form of Exchange Note for the Registrant's 10 1/2% Senior
Notes due 2006 (contained in Indenture filed as Exhibit
4.5)
4.4* -- Form of Exchange Note for the Registrant's 11% Senior
Notes due 2009 (contained in Indenture filed as Exhibit
4.6)
4.5* -- Indenture relating to the 10 1/2% Senior Notes due 2006,
dated as of November 24, 1999, between the Company and
United States Trust Company of New York, as Trustee
4.6* -- Indenture relating to the 11% Senior Notes due 2009,
dated as of November 24, 1999, between the Company and
United States Trust Company of New York, as Trustee
4.7* -- Registration Rights Agreement, dated as of November 24,
1999, between the Company and Initial Purchasers
5.1** -- Opinion of Shearman & Sterling regarding the legality of
the securities being registered
5.2** -- Opinion of Allen & Overy regarding the legality of the
securities being registered
8.1** -- Opinion of Shearman & Sterling regarding tax matters
10.1 -- Indenture, dated August 19, 1997, among Hermes Europe
Railtel B.V., as Issuer, Global TeleSystems Group, Inc.
and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.3 to our Registration Statement on
Form S-4 (File No. 333-37719), filed on October 10, 1997)
10.2 -- Dollar Indenture, dated as of January 4, 1999, between
Hermes Europe Railtel B.V., as Issuer, and The Bank of
New York, as Trustee, relating to the 10 3/8% Senior
Notes due 2009 (incorporated by reference to Exhibit 4.5
to our Registration Statement on Form S-4 (File No.
333-70723), filed on January 15, 1999)
10.3 -- Euro Indenture, dated as of January 4, 1999, between
Hermes Europe Railtel B.V., as Issuer, and The Bank of
New York, as Trustee, relating to the 10 3/8% Senior
Notes due 2006 (incorporated by reference to Exhibit 4.6
to our Registration Statement on Form S-4 (File No.
333-70723), filed on January 15, 1999)
10.4 -- Employment Agreement, dated as of September 26, 1995,
between the Company and J.A. Shearing (incorporated by
reference to Exhibit 10.6 to our Registration Statement
on Form S-4 (File No. 333-77719), filed on October 10,
1997)
10.5* -- Employment Agreement, dated as of February 10, 1998,
between the Company and Jan De Wispelaere
</TABLE>
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6 -- Agreement relating to purchase of fiber pairs, dated
April 1, 1997, between Eastern Group Telecoms Limited and
the Company (incorporated by reference to Exhibit 10.11
to our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.7 -- Fiber Agreement, dated January 16, 1997, between
SNCB/NMBS and the Company (incorporated by reference to
Exhibit 10.12 to our Registration Statement on Form S-4
(File No. 333-37719), filed on October 10, 1997)
10.8 -- Agreement relating to purchase of black optical fibers,
dated February 3, 1997, between SANEF and the Company
(incorporated by reference to Exhibit 10.13 to our
Registration Statement on Form S-4 (File No. 333-37719),
filed on October 10, 1997)
10.9 -- Agreement, dated November 24, 1997, between COLT and the
Company (incorporated by reference to Exhibit 10.15 to
our Registration Statement on Form S-4 (File No.
333-70723), filed on January 15, 1999)
10.10 -- Agreement, dated November 3, 1998, between Cable &
Wireless and the Company (incorporated by reference to
Exhibit 10.18 to our Registration Statement on Form S-4
(File No. 333-70723), filed on January 15, 1999)
10.11 -- License, dated December 18, 1996, granted by the
Secretary of State for Trade and Industry relating to the
United Kingdom (incorporated by reference to Exhibit 10.7
to our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.12 -- Registration, dated July 26, 1996, granted by IBPT
relating to Belgium (incorporated by reference to Exhibit
10.8 to our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.13 -- Authorization Letter, dated August 1, 1996, granted by
Hoofdirectie Telecommunicate & Post relating to the
Netherlands (incorporated by reference to Exhibit 10.9 to
our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.14 -- License, dated May 28, 1997, granted by BMPT relating to
Germany (incorporated by reference to Exhibit 10.10 to
our Registration Statement on Form S-4 (File No.
333-37719), filed on October 10, 1997)
10.15 -- License, dated October 22, 1997, granted by Secretary of
State of Industry relating to France (incorporated by
reference to Exhibit 10.13 to our Registration Statement
on Form S-4 (File No. 333-70723), filed on January 15,
1999)
10.16 -- Authorization Letter, dated March 16, 1998, granted by
the Deputy Director of Federal Communication Office
relating to Switzerland (incorporated by reference to
Exhibit 10.16 to our Registration Statement on Form S-4
(File No. 333-70723), filed on January 15, 1999)
10.17 -- Global 214 License to provide global facilities-based and
global resale reservices, granted on October 23, 1998 by
the U.S. Federal Communications Commission
10.18 -- 214 authorization by public notice to operate as a
facilities-based carrier and to provide service between
the United States and Hungary, Poland, Czech Republic,
Romania, Monaco, Ukraine, Kazakhstan, Uzbekistan,
Azerbaijan, China and India, granted on October 13, 1999
by the U.S. Federal Communications Commission
12.1* -- Statements re Computation of Deficiency of Earnings to
Fixed Charges
21.1* -- List of subsidiaries
23.1** -- Consent of Shearman & Sterling (included as part of
Exhibit 5.1)
</TABLE>
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.2** -- Consent of Ernst & Young Reviseurs d'Entreprises S.C.C.,
Independent Auditors
23.3** -- Consent of Allen & Overy (included as part of Exhibit
5.2)
24.1 -- Power of Attorney (included on the signature pages of
this Registration Statement)
25.1* -- Statement of Eligibility of United States Trust Company
of New York, Trustee
27.1 -- Financial Data Schedule for the fiscal year ended
December 31, 1998 (incorporated by reference to Exhibit
27.1 to our annual report on Form 10-K (File No. 333-
37719), filed on March 31, 1999)
27.2 -- Financial Data Schedule for the nine months ended
September 30, 1999 (incorporated by reference to Exhibit
27.1 to our quarterly report on Form 10-Q (File No.
333-37719), filed on November 3, 1999)
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 5.1
February 2, 2000
Global TeleSystems Europe B.V.
World Trade Center
Strawinskylaan 425
1077 XX Amsterdam
The Netherlands
Ladies and Gentlemen:
We have acted as special United States counsel to Global TeleSystems Europe
B.V., a Netherlands company (the "Company"), in connection with the filing by
the Company under the Securities Act of 1933, as amended (the "Act") of a
registration statement on Form S-4 (the "Registration Statement") with the
United States Securities and Exchange Commission (the "Commission"). Pursuant to
the Registration Statement, up to Euro 225,000,000 aggregate principal amount
of the Company's outstanding 10 1/2% Senior Notes due 2006 (the "Outstanding
Notes due 2006") and Euro 275,000,000 aggregate principal amount of the
Company's outstanding 11% Senior Notes due 2009 (the "Outstanding Notes due
2009") and, together with the Outstanding Notes due 2006, the "Outstanding
Notes") are exchangeable for up to a like principal amount of the Company's
10 1/2% Senior Notes due 2006 (the "Exchange Notes due 2006") and the Company's
11% Senior Notes due 2009 (the "Exchange Notes due 2009"), respectively
(collectively, the "Exchange Notes"). The Outstanding Notes due 2006 were, and
the Exchange Notes due 2006 will be, issued pursuant to an Indenture dated as of
November 24, 1999 relating to the Notes due 2006 (the "Notes due 2006
Indenture") between the Company and United States Trust Company of New York as
trustee, registrar, paying agent and transfer agent (the "Trustee"). The
Outstanding Notes due 2009 were, and the Exchange Notes due 2009 will be, issued
pursuant to an Indenture dated as of November 24, 1999 relating to the Notes due
2009 (the "Notes due 2009 Indenture" and, together with the Notes due 2006
Indenture, the "Indentures") between the Company and the Trustee. The Exchange
Notes and the Outstanding Notes are collectively referred to herein as the
"Notes."
In our capacity as special United States counsel to the Company, we
have examined the Registration Statement, the Indentures filed as Exhibit 4.5
and Exhibit 4.6 to the Registration Statement, the Outstanding Notes, forms of
the Exchange Note due 2006 and the Exchange Note due 2009 contained in such
Indentures and originals or copies certified or otherwise identified to our
satisfaction of such documents as we have deemed necessary or appropriate to
enable us to render the opinions expressed below.
<PAGE> 2
2
Based upon the foregoing, it is our opinion that when the Exchange
Notes are exchanged for the Outstanding Notes as contemplated in the
Registration Statement, assuming they have been duly authorized, executed,
issued and delivered by the Company under the laws of the Netherlands and have
been duly authenticated on behalf of the Trustee in accordance with the
Indentures, the Notes will be duly authenticated and will constitute legal,
valid and binding obligations of the Company under the laws of the State of New
York, enforceable against the Company in accordance with their terms.
The opinion set forth in the above paragraph is qualified to the extent
that we have assumed the due authorization, execution and delivery of the
Indentures by the Trustee and the Company. The opinion set forth in the
foregoing paragraph is subject to the following additional qualifications:
(a) Our opinion as to the enforceability of the Indentures is
subject to the effect of (i) any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, (ii) general principles
of equity, including, without limitation, concepts of
materiality, good faith and fair dealing (regardless of
whether enforcement is considered in a proceeding in equity or
at law) and (iii) possible judicial action giving effect to
foreign governmental actions or foreign laws affecting
creditors' rights;
(b) Our opinion as to the enforceability of the Indentures is
subject to the qualification that the payment of a premium
upon the occurrence of an Event of Default (as defined in the
Indentures) may not be enforceable under the federal law of
the United States or the law of the State of New York;
(c) We express no opinion as to Section 10.15 of the Indentures.
In addition, with your approval, we express no approval with respect to
the laws, rules or regulations (whether at a federal, state or local level)
pertaining to United States telecommunications law.
We are attorneys admitted to practice law in the State of New York and
we do not express herein any opinion as to any matters governed by or involving
conclusions under the laws of any other jurisdiction other than the federal law
of the United States of America.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the prospectus which is included in the Registration
Statement.
Very truly yours,
/s/ Shearman & Sterling
<PAGE> 1
EXHIBIT 5.2
[ALLEN & OVERY LETTERHEAD]
Global TeleSystems Europe B.V.
Strawinskylaan 425
1077 XX Amsterdam
The Netherlands
Amsterdam, 2 February 2000
Dear Madam, Sir,
Re: Euro 225 million 10 1/2% Senior Notes due 2006 and Euro 275 million 11%
Senior Notes due 2009 Exchange Offer by Global TeleSystems Europe B.V.
We have been requested to issue this opinion letter as your special counsel on
matters of Dutch law in connection with the filing by Global TeleSystems Europe
B.V. (the "Company") of a registration statement with the United States
Securities and Exchange Commission (the "Registration Statement"). Pursuant to
the Registration Statement, the abovementioned Senior Notes (the "Outstanding
Notes") are exchangeable for up to a like principal amount of the Company's
Notes (the "Exchange Notes"). The exchange of the Exchange Notes will be made
pursuant to the Euro Notes Indentures (together the "Indentures") each dated
November 24, 1999 among the Company and the Trustee as defined therein.
In rendering this opinion, we have examined and relied upon the following
documents:
(1) an executed copy of the Purchase Agreement (the "Purchase Agreement") dated
November 18, 1999 among Donaldson, Lufkin & Jenrette International, Merrill
Lynch International, Deutsche Bank AG, Lehman Brothers International
(Europe), Dresdner Bank AG as Initial Purchasers and the Company;
(2) an execution copy of the Indentures;
(3) an executed copy of the Registration Rights Agreement (the "Registration
Rights Agreement"), dated November 24, 1999 between the Company and the
Initial Purchasers;
<PAGE> 2
ALLEN & OVERY
(4) a copy of the Offering Memorandum (the "Offering Memorandum") in relation
to the issue of the Outstanding Notes, dated November 18, 1999;
(5) a form of the Outstanding Notes and of the Exchange Notes of the Company
as attached as exhibit to the Indentures (the "Notes");
(6) an excerpt dated November 23, 1999 of the registration of the Company in
the Trade Register of the Chamber of Commerce of Amsterdam, the
Netherlands, confirmed by telephone to be correct as of the date hereof
(the "Excerpt");
(7) the articles of association (statuten) of the Company as, according to
the Excerpt, deposited with the Trade Register as being in force on the
date hereof (the "Articles");
(8) a copy of the Deed of Incorporation of the Company (the "Deed of
Incorporation"), executed on 6 July 1993, before Mr. R.J.F. Blokhuis,
civil-law notary, officiating in Amsterdam, the Netherlands;
(9) copies of the resolutions of (i) the supervisory board of the Company
dated November 18, 1999 and (ii) of the management board of the Company
dated November 18, 1999 respectively, pertaining to, inter alia, the
approval of the entering into by the Company of the Agreements (as
defined below);
and such other documents and such treaties, laws, rules, regulations, and the
like, as we have deemed necessary as a basis for the opinions hereinafter
expressed.
The documents referred to under (1) through (4) above shall hereinafter
collectively be referred to as: the "Agreements".
We have assumed:
(i) the genuineness of all signatures;
(ii) the authenticity of all agreements, certificates, instruments, and other
documents submitted to us as originals;
(iii) the conformity to the originals of all documents submitted to us as
copies;
(iv) that the deed of incorporation of the Company dated 6 July 1993, of which
we received a copy from civil-law notary R.J.F. Blokhuis, is a valid
notarial deed
<PAGE> 3
ALLEN & OVERY
(authentieke akte), that the contents thereof are correct and
complete, and that there were no defects in the incorporation (not
appearing on the face of the deed of incorporation) on the basis of
which a court might dissolve the Company. No defects in the
incorporation appear on the face of the Deed of Incorporation;
(v) that the Company has not been dissolved (ontbonden), granted a
suspension of payments (surseance verleend), or declared bankrupt
(failliet verklaard); although not constituting conclusive evidence
thereof, our assumption is supported by (a) the contents of the
Excerpt; and (b) information obtained by telephone today from the
bankruptcy clerk's office' (faillissementsgriffie) of the District
Court of Amsterdam;
(vi) that the Articles are the articles of association (statuten) of the
Company as in force on the date hereof. Although not constituting
conclusive evidence thereof, our assumption is supported by the
contents of the Excerpt;
(vii) that the resolutions referred to above under (9), (a) correctly
reflect and are the only resolutions made by the management and
supervisory board respectively of the Company in respect of the
entering into of the Agreements by the Company, and (b) have not been
and will not be amended or revoked or declared null and void by a
competent court;
(viii) that the Agreements and the Notes constitute the legal, valid and
binding obligations of the parties thereto, and are enforceable
against those parties in accordance with their terms under the laws of
the United States by which the Agreements and the Notes are expressed
to be governed and under the laws of any other relevant jurisdiction
(other than the laws of the Netherlands);
(ix) that the Agreements have not been supplemented, terminated,
rescinded or declared null and void by a court;
(x) that the selling restrictions as set forth on page (iii) - (v) of the
Offering Memorandum, in the Purchase Agreement and in the
Registration Statement, will be complied with.
Based on the foregoing and subject to any factual matters or documents not
disclosed to us in the course of our investigation, and subject to the
qualifications and limitations stated hereafter, we are of the opinion that:
<PAGE> 4
ALLEN & OVERY
A. The Company has been duly incorporated and is validly existing as a
"besloten vennootschap met beperkte aansprakelijkheid" (private company
with limited liability) under the laws of the Netherlands.
B. The choice of New York law as the law governing the Exchange Notes is valid
and binding under the laws of the Netherlands, except (i) to the extent
that any term thereof or any provision of New York law applicable
thereto is manifestly incompatible with the public policy (ordre public)
of the Netherlands, and except (ii) that a Dutch court may give effect to
mandatory rules of the laws of another jurisdiction with which the
situation has a close connection, if and insofar as, under the laws of that
other jurisdiction those rules must be applied, whatever the chosen law.
C. The Exchange Notes, to be exchanged for the Outstanding Notes as
contemplated in the Registration Statement, have been duly authorised and,
provided that the choice of the laws of New York as the laws governing the
Exchange Notes will be held valid and binding upon the Company as
discussed in B. above, will, when duly executed, authenticated, issued and
delivered in accordance with the provisions of the Indentures, constitute
the legal, valid, binding and enforceable obligations of the Company.
This opinion is subject to the following qualifications:
a. The opinions expressed herein may be affected or limited by applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws of general application now or hereafter in effect
relating to or affecting the enforcement or protection of creditor's
rights.
b. In the absence of an applicable treaty between the United States and the
Netherlands, a judgement rendered by a United States court will not be
enforced by the courts in the Netherlands. In order to obtain a judgement
which is enforceable in the Netherlands the claim must be relitigated
before a competent Dutch court.
c. The enforcement on the Netherlands of the Exchange Notes will be subject to
the rules of civil procedures as applied by Dutch courts. Specific
performance may not always be available under Dutch law.
We express no opinion on any law other than the law of the Netherlands as it
currently stands and has been interpreted in published case law of the courts of
the Netherlands as per the date hereof. We express no opinion on any laws of the
European Communities
4
<PAGE> 5
ALLEN & OVERY
(insofar as not implemented in the Netherlands in statutes or other regulations
of general application) or on any anti-trust laws (other than anti-trust laws
of the Netherlands).
In this opinion Dutch legal concepts are expressed in English terms and not in
their original Dutch terms. The concepts concerned may not be identical to the
concepts described by the same English term as they exist under the laws of
other jurisdictions. This opinion may, therefore, only be relied upon under the
express condition that any issues of interpretation or liability arising
hereunder will be governed by Netherlands law and be brought before a Dutch
court.
This opinion is strictly limited to the matters stated herein and may not be
read as extending by implication to any matters not specifically referred to.
Nothing in this opinion should be taken as expressing an opinion in respect of
any representations or warranties, or other information, or any other document
examined in connection with this opinion except as expressly confirmed herein.
This opinion is addressed to you and may only be relied upon by you in
connection with the transactions to which the Exchange Offer relates, and may
not be relied upon by, or (except as required by applicable law) be transmitted
to, or filed with any other person, firm, company, or institution without our
prior written consent. We hereby consent to the use of this opinion as Exhibit
5.2 to the Registration Statement and to the mentioning of our name under the
caption "Legal Matters" in the Registration Statement.
Yours sincerely,
/s/ Allen & Overy
Allen & Overy
<PAGE> 1
EXHIBIT 8.1
February 2, 2000
Global TeleSystems Europe B.V.
World Trade Center
Strawinskylaan 425
1077 XX Amsterdam
The Netherlands
Ladies and Gentlemen:
We have acted as special United States tax counsel for Global TeleSystems
Europe B.V., a Netherlands company (the "Company"), in connection with the
preparation and filing by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), of a registration statement on Form S-4 (the "Registration Statement")
and the prospectus included therein. Pursuant to the Registration Statement, up
to Euro 225,000,000 aggregate principal amount of the Company's outstanding 10
1/2% Senior Notes due 2006 and Euro 275,000,000 aggregate principal amount of
the Company's outstanding 11% 1/2% Senior Notes due 2009 (the "Outstanding
Notes") are exchangeable for up to Euro 225,000,000 aggregate principal amount
of the Company's 10 1/2% Senior Notes due 2006 and up to Euro 275,000,000
aggregate principal amount of the Company's outstanding 11% Senior Notes due
2009 (the "Exchange Notes"; and the offer of the Company to exchange the
Exchange Notes for the Outstanding Notes, the "Exchange Offer"), respectively.
The Outstanding Notes were, and the Exchange Notes will be, issued pursuant to
an Indenture dated as of November 24, 1999 between the Company and United States
Trust Company of New York as trustee (the "Trustee"), registrar, paying agent
and transfer agent, and an Indenture dated as of November 24, 1999 between the
Company and the Trustee, registrar, paying agent and transfer agent.
TAX OPINION
Based upon and subject to the foregoing and consideration of applicable
law, we are of the opinion that, subject to the limitations set forth therein,
the discussion in the prospectus under the caption "Certain Tax
Considerations--The United States" accurately describes the material United
States federal income tax considerations relevant to the acquisition, ownership
and disposition of the Exchange Notes in general and in the context of the
Exchange Offer. The foregoing opinion is based upon the Internal Revenue Code of
1986, as amended, Treasury
<PAGE> 2
Regulations (including proposed Regulations and temporary Regulations)
promulgated thereunder, rulings, official pronouncements and judicial decisions,
all as in effect on the date hereof and all of which are subject to change,
possibly with retroactive effect.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to us in the Registration
Statement in connection with U.S. federal income tax considerations of the
exchange offer. In giving such consent, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the Act,
and the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Shearman & Sterling
<PAGE> 1
EXHIBIT 23.2
[ERNST & YOUNG LETTERHEAD]
CONSENT OF ERNST & YOUNG REVISEURS D'ENTERPRISES S.C.C.,
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 26, 1999, except for Notes 1 and 2 as to which
the date is November 1, 1999 (Hermes Europe Railtel B.V.), in Amendment 1 to
the Registration Statement (Form S-4) and related Prospectus of Global
TeleSystems Europe B.V. (formerly Hermes Europe Railtel B.V.), dated on or about
February 1, 2000.
February 1, 2000
Ernst & Young Reviseurs d'Enterprises S.C.C.
represented by
/s/ MARC GUNS
- --------------------------------------------
Marc Guns
Partner
